TE Connectivity (TEL) Q3 2025: AI Revenue Surges 167% to $800M, Driving Margin Expansion
TE Connectivity’s industrial portfolio delivered broad-based growth and record margins, underpinned by a sharp acceleration in AI and energy applications. Strong execution and localization are offsetting regional transportation softness, while capital deployment and operational leverage position TEL for sustained earnings power into fiscal 2026. Investors should focus on the durability of AI-driven demand, the pace of industrial margin expansion, and the company’s capital allocation discipline as secular trends reshape end markets.
Summary
- AI Ramp Accelerates: Industrial AI revenue more than doubled, fueling segment outperformance and margin lift.
- Localization Shields Volatility: Regionalized manufacturing and supply chain agility are mitigating tariff and market shocks.
- Margin Expansion Momentum: Structural cost actions and volume leverage support further earnings growth into next year.
Performance Analysis
TE Connectivity’s Q3 delivered record sales, earnings, and free cash flow as secular growth in AI, energy, and data connectivity offset regional transportation headwinds. Industrial segment strength was the standout, with organic growth above 20 percent and total segment growth of 30 percent, powered by an 80 percent surge in digital data networks and a 70 percent jump in energy (including acquisitions). AI-related revenue, a key growth vector, expanded from $300 million last year to over $800 million expected this year, with management projecting a run-rate above $1 billion in fiscal 2026.
Adjusted operating margins reached a record 20 percent, up 60 basis points year over year, with industrial margins expanding nearly 400 basis points to cross 20 percent for the first time. Transportation grew modestly, with Asian strength offsetting Western softness, while commercial transportation and sensors remained mixed by geography. Free cash flow conversion remains robust, exceeding 100 percent year to date, supporting $1.5 billion in shareholder returns and $2.6 billion in industrial M&A deployment.
- AI Revenue Inflection: Artificial intelligence applications now account for nearly $800 million in annualized sales, up 167 percent year over year.
- Industrial Margin Breakout: Segment margin expansion of nearly 400 basis points reflects operational leverage and footprint consolidation.
- Order Momentum Broadens: Orders rose 8 percent year over year and 5 percent sequentially, with industrial orders up 12 percent, supporting near-term growth visibility.
The company’s ability to scale new growth vectors while maintaining operational discipline is translating to record profitability and cash generation, though transportation remains exposed to regional production shifts and macro volatility.
Executive Commentary
"A key driver of our success has been the strategic positioning of our portfolio and the investments that we've made to broaden our business to benefit from secular growth trends in both the transportation and industrial segments... We're capitalizing on the strong demand for artificial intelligence as well as growth in energy applications where our products need it."
Terrence Curtin, Chief Executive Officer
"We have set records in sales, adjusted operating margins, and adjusted earnings per share... Our cash generation and healthy balance sheet position us well and provides us optionality with uses of capital. So far this year, we have returned approximately $1.5 billion to shareholders and deployed $2.6 billion for acquisitions."
Heath Mitz, Chief Financial Officer
Strategic Positioning
1. AI and Data Connectivity as Growth Engines
The industrial segment’s explosive AI-related growth is redefining TEL’s opportunity set, with management highlighting a transition from $300 million to $800 million in AI revenue and expectations to exceed $1 billion next year. This growth is not concentrated in a single customer but is distributed across hyperscalers, chipmakers, and contract manufacturers, reflecting a diversified and defensible positioning within the AI ecosystem. The company’s ability to deliver high-speed, next-generation connectivity products is driving both top-line acceleration and above-segment margins.
2. Energy and Grid Hardening Portfolio Expansion
The acquisition of Richards and organic momentum in grid hardening and renewables have transformed TEL’s energy business, with North American sales growing even faster than the 20 percent organic segment average. The Richards deal has significantly increased exposure to grid infrastructure modernization, while management sees future cross-selling opportunities into renewables as capacity expands. These trends are underpinned by structural electricity demand growth and ongoing utility investment cycles.
3. Localization and Operational Leverage
Over 70 percent of production is now localized, which is enabling TEL to mitigate tariff impacts, currency swings, and supply chain disruptions. This localization strategy is a competitive differentiator, supporting customer relationships and operational resilience across volatile markets. The company’s ongoing restructuring and footprint consolidation, particularly in industrial, have reduced fixed costs and enabled volume-driven margin expansion.
4. Transportation Resilience Amid Regional Divergence
While global auto production is flat, TEL is outperforming in Asia (up 11 percent) but is pressured by Western declines. Content growth in electrification and data connectivity is supporting above-market performance, though the segment’s overall growth is currently muted by regional production mix. Commercial transportation and sensors remain mixed, with North America soft but signs of sequential order improvement globally.
5. Capital Allocation and M&A Discipline
Robust free cash flow and a healthy balance sheet are enabling both shareholder returns and targeted M&A, with a pipeline focused on bolt-on deals in fragmented industrial markets. Management is prioritizing investments that deepen exposure to secular trends, such as energy and automation, while maintaining flexibility to pursue opportunities of varying scale.
Key Considerations
This quarter marks a structural shift in TEL’s growth and margin profile, driven by secular demand in AI, energy, and connectivity. Investors should weigh the following:
Key Considerations:
- AI-Driven Margin Expansion: AI applications are delivering above-segment margins and are not yet fully scaled, suggesting further upside as programs ramp.
- Industrial Segment Sustainability: Recent margin gains are supported by both structural cost actions and volume leverage, but depend on continued demand across diversified end markets.
- Tariff and Currency Management: Localization and pricing actions are buffering external shocks, but ongoing policy shifts and material cost volatility require close monitoring.
- Transportation Regional Mix: Outperformance in Asia is offsetting Western weakness, but the segment remains sensitive to global production trends and EV adoption rates.
- Capital Deployment Optionality: Record cash flow provides flexibility for both organic investments and strategic M&A, with management signaling a robust pipeline of bolt-on targets.
Risks
Key risks include auto production volatility, particularly in Western markets, as well as the potential for AI demand normalization after rapid ramp. Tariff policy uncertainty and material cost swings (notably copper) could pressure margins or require further pricing actions. While industrial order momentum is broad-based, any cyclical downturn in factory automation or energy infrastructure could slow the pace of margin expansion. Investors should also watch for integration risk as recent acquisitions are absorbed.
Forward Outlook
For Q4 2025, TE Connectivity guided to:
- Sales of $4.55 billion, representing 12 percent reported and 6 percent organic growth year over year
- Adjusted EPS of $2.27, up 16 percent year over year
For full-year 2025, management expects:
- High single-digit sales growth and double-digit adjusted EPS growth
Management highlighted several factors that will drive results:
- Continued AI and energy momentum, with AI revenue expected to surpass $1 billion in 2026
- Further margin expansion from operational leverage and footprint optimization
Takeaways
TE Connectivity’s Q3 results signal a step-change in growth and profitability, anchored by secular tailwinds in AI, energy, and data connectivity. The company’s operational execution, localization strategy, and disciplined capital allocation are positioning TEL for sustained earnings power. Transportation remains a watchpoint, but industrial momentum and AI scaling provide strong visibility into 2026.
- AI and Energy Outperformance: These segments are now core drivers of both growth and margin, with further upside as investments ramp and secular trends persist.
- Margin Durability: Structural cost actions and volume leverage are translating to record profitability, with management targeting incremental flow-through of 30 percent or better on organic growth.
- Future Watchpoints: Investors should monitor the durability of AI-fueled demand, the pace of industrial margin expansion, and the company’s ability to absorb further M&A while maintaining operational discipline.
Conclusion
TE Connectivity’s Q3 marks a pivotal moment in its transformation, with AI, energy, and localization strategies converging to deliver record results. The company’s diversified growth engines and cash generation underpin a positive outlook, though vigilance is required around regional transportation and macro risks. The setup for fiscal 2026 is strong, with secular tailwinds and operational discipline supporting further upside.
Industry Read-Through
TE Connectivity’s results underscore the accelerating demand for high-speed connectivity and grid modernization, with broad implications for suppliers across the electronics, industrial automation, and energy infrastructure sectors. The AI hardware ramp is benefiting not only semiconductor firms but also component and interconnect providers with the scale and capability to serve hyperscalers and OEMs. Localization and supply chain agility are emerging as critical differentiators amid ongoing tariff and currency volatility, suggesting peers must invest in regional manufacturing and operational resilience to compete. The industrial M&A pipeline remains robust, reflecting continued fragmentation and consolidation opportunities in automation, energy, and connectivity markets.