TE Connectivity Ltd

NYSE:TEL

Q4-2025 Earnings Call

[Operator]

Everyone, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter and Final Results Earnings Call for fiscal year 2025. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

[Sujal Shah, executive]

Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year results and outlook for our first quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts.

During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com.

Now please note that we are making a change in our non-GAAP reporting with the start of our fiscal 2026 year. The fourth quarter and full year fiscal 2025 financial results that we will discuss in today's call do not reflect this change. However, beginning in fiscal 2026 we will exclude amortization expense on intangible assets from certain of our non-GAAP financial measures, and this change is reflected in our Q1 guidance. We have recast the financial information of the quarters of 2025 and 2024 to ensure an apples-to-apples comparison of our results going forward and this is provided in the slide appendix and in an 8-K that was filed this morning.

Also, as a reminder, we will hold our Investor Day event on November 20 in Philadelphia with the product showcase the evening before. We're excited to convey opportunities for growth and further value creation for our owners and are looking forward to seeing many of you at the event. Note that we will also have a live webcast for those who are unable to attend in person.

And finally, during the Q&A portion of today's call due to the number of participants, we're asking everyone to limit themselves to 1 question and you may rejoin the queue if you have a second question.

Now let me turn the call over to Terrence for opening comments.

[Terrence Curtin, executive]

Thanks, Sujal, and thank you, everyone, for joining us today. Before I get into the details on the slides, I do want to reinforce a few key takeaways upfront. First off is that our strong momentum is continuing with quarterly and full year records for sales, earnings and free cash flow in what continues to be an uneven macro environment. We also continue to demonstrate the strategic positioning of our portfolio, benefiting from the secular growth trends in a number of our businesses, and we'll talk about these as we go through the discussion of our results today.

We also continue to demonstrate operational resilience with our global manufacturing strategy where we've invested heavily to ensure in-region support of our customers and we are set up for the strong performance to continue into fiscal 2026. We expect to continue executing on our long-term value creation model, and we'll click down and provide more details at our Investor Day next month.

So with that as a backdrop, I would like to get into the presentation, starting with Slide 3, and I'll discuss fiscal 2025 results and our guidance for the first quarter of fiscal 2026. Our fourth quarter sales were above our guidance of $4.75 billion, growing 17% on a reported basis and 11% organically year-over-year. Both segments contributed to our sales being above of guidance.

We also saw orders increase in both segments to $4.7 billion, and this was an increase of 22% year-over-year and it was up 5% sequentially. We delivered adjusted earnings per share of $2.44. That was above our guidance due to the strong execution by our teams and increased 25% versus the prior year. Adjusted operating margins were 20%, increasing 130 basis points year-over-year. And lastly, in the quarter, free cash flow performance continued the strong momentum that we've seen throughout the year and was $1.2 billion in the fourth quarter.

So let me transition to full year results. Full year sales were a record at $17.3 billion, growing 9% on a reported basis and 6% on an organic basis. In our Industrial segment, we saw 24% reported growth, benefiting from bolt-on acquisitions that we made this year. On an organic basis, segment growth was 18% and capitalized on the strong demand for artificial intelligence and energy infrastructure applications.

In transportation, we continue to demonstrate our strong global position with strength in Asia that drove content growth from increased data connectivity and growth of the electrified powertrain in that region. We achieved record earnings in fiscal 2025. Adjusted operating margins were essentially 20%, expanding 80 basis points year-over-year, and adjusted earnings per share was $8.76 increasing 16% versus the prior year, driven entirely by the strong sales and margin performance.

We continue to demonstrate the strength of our cash generation model. We delivered free cash flow of over $3 billion with conversion levels of well over 100%. This strong cash generation gave us the flexibility for record capital deployment with over $2 billion returned to shareholders and $2.6 billion used for bolt-on acquisitions during the year.

As we look forward, order levels support our outlook for double-digit growth in the first quarter. We are expecting our first quarter sales to be $4.5 billion, reflecting sequential seasonality that we typically see and increasing 17% year-over-year on a reported basis and up 11% organically. We expect adjusted earnings per share to be around $2.53 in the first quarter, and this will represent growth of 23% year-over-year.

Now if you could turn to Slide 4, let me get into order of details. In the quarter, we saw orders of $4.7 billion, with growth year-over-year and sequentially in both segments. On a year-over-year basis, we saw organic order growth across all regions. And on a sequential basis, growth was driven by automotive, digital data networks and energy.

Touching on the segment. Transportation orders increased 9% versus the prior year driven by auto growth in all regions. In the Industrial segment, orders increased 39% year-over-year reflecting ongoing momentum in DDN as well as our energy and AD&M businesses. Also one thing to highlight in our order is we did see order rates improve in the general industrial end markets. and we believe this indicates stability.

Now let me get into the segment quarterly results. And if you could turn to Slide 5, I'll start with transportation. Our auto sales grew 2% organically in the fourth quarter with growth in Asia of 11% being offset by declines in Western regions of 4%. Our growth over market reflects the ongoing regional dynamics that we've seen all year and have impacted our growth over market.

As we look forward, we expect global auto production to be 87 million to 88 million units in fiscal 2026 with content growth being driven by key wins for our leading-edge products and technology around data connectivity and electrification of the powertrain. We continue to benefit from our strong global position and localization strategy, which enables us to serve our global customer base.

Turning to Commercial Transportation. We reported 5% organic growth, and this was driven entirely by growth in Europe and in Asia which was offset by ongoing weakness that we see in North America. And in our Sensors business, we saw weakness in end markets in Western regions that were partially offset by growth in Asia. For the Transportation segment, the team delivered 20% adjusted operating margins for the full year as we expected, and the team did a good job of navigating an uneven global production environment.

So if you could, let me turn to Industrial Solutions segment, which is on Slide 6. And the segment grew 34% in the quarter overall as well as 24% organically. Digital Data Networks had another outstanding quarter, where the business grew 80% year-over-year. We continue to benefit from increasing ramps from hyperscaler platforms and for the full year, we generated over $900 million in AI revenue, tripling our AI sales versus the prior year, and this reflects our increased momentum.

In our Automation and Connected Living business, sales grew 11% organically year-over-year with 3% sequential improvement that we believe reflect stability in general industrial markets. In our Energy business, sales grew 83% and included the Richards acquisition, which enables us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our sales increased a strong 24% driven by continued increased investments by our customers and grid hardening as well as renewable applications.

In our Aerospace, Defense and Marine business, sales grew 7% organically, driven by growth across commercial aerospace as well as defense applications. And in these markets, we continue to see favorable demand trends coupled with ongoing supply chain improvement. And in our medical business, sales were roughly flat sequentially as we expected.

Turning to margins for the Industrial segment. Our adjusted operating margins expanded by nearly 300 basis points to over 20%, driven by the strong operational performance and benefits of higher volume. I am pleased with the progress our team has made this year, supporting the strong growth that we have in this segment.

Now let me turn it over to Heath to get into more details on the financials and our expectations going forward.

[Heath Mitts, executive]

Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $943 million with an adjusted operating margin of approximately 20%. GAAP operating income was $916 million and included $10 million of acquisition-related charges and $17 million of restructuring and other charges.

For the full year 2025, fiscal -- I'm sorry, for the fiscal '25, restructuring charges were $113 million, and I expect restructuring charges in fiscal '26 to be roughly at the $100 million level. Adjusted EPS was $2.44 and GAAP EPS was $2.23 for the quarter and included a tax charge of $0.10 related primarily to the increase in the valuation allowance for deferred tax assets. Additionally, we had restructuring, acquisition and other charges of $0.11. The adjusted effective tax rate was 21.4% in our fourth quarter and approximately 23% for the full year 2025.

Moving to fiscal '26. We expect our adjusted effective tax rate in the first quarter to be approximately 22%, with the full year being similar to last year at approximately 23%. And importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR.

Now if you can turn to Slide 8 for fiscal '25 performance. We set records in sales, operating -- adjusted operating margins, adjusted earnings per share and free cash flow. Relative to our business model, we are delivering on our targets for sales growth, margin performance, EPS growth and cash generation. Sales of $17.3 billion were up 9% on a reported basis and 6% on an organic basis year-over-year, with both organic and inorganic growth driven by our Industrial segment.

Adjusted operating margins were essentially 20% for fiscal '25 with margin expansion of 80 basis points year-over-year driven by strong operational performance. Both of our segments are running at the 20% level for adjusted operating margins, we would expect further margin expansion as volumes continue to grow. Adjusted earnings per share were $8.76, up 16% year-over-year, driven by sales growth and margin expansion.

Now turning to cash. We increased our free cash flow to $3.2 billion in fiscal '25, which was up 14% or $400 million year-over-year. Our free cash flow reflects 100% -- over 100% conversion to adjusted net income, and we remain committed to this going forward. And keep in mind that our strong cash flow generation and cash conversion in fiscal '25 also included us investing a couple of hundred million of increased capital investments to support the growth in our industrial segment. So a very good story there.

In fiscal '25, we returned roughly $2.2 billion to shareholders through share buybacks and dividends, and we deployed approximately $2.6 billion, aligned with our bolt-on acquisition strategy. Our cash generation and healthy balance sheet gives us continued optionality with uses of capital to support investments for future growth, both organically and through M&A.

Now as Sujal mentioned earlier, we are making a change to our non-GAAP reporting and going forward and beginning with the first quarter of fiscal '26, we will exclude intangible amortization expense from our non-GAAP financial measures and this change is reflected in our Q1 guidance. You will see the historical impact of the recast materials that we have provided for fiscal '25 and fiscal '24 in the appendix of our materials. And you can assume that amortization impact will be roughly $0.15 per quarter for fiscal '26.

Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments to deliver the record results you see for fiscal '25. We have positioned the company to deliver strong performance and value for our owners, and we expect our momentum to continue into fiscal '26 and beyond. We look forward to sharing more about our growth opportunities and our value creation model at our upcoming Investor Day on November 20.

Now let's open it up for questions.

[Sujal Shah, executive]

Thank you, Heath. Kate, could you please give the instructions for the Q&A session?

[Operator]

[Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research.

[Scott Davis, analyst]

Congrats on a great year. Guys, I got to lead in on the AI stuff because it's just a giant tailwind for you and you're doing a -- seem to be doing a great job of capturing those revenues. But last quarter, I think you were talking about $800 million, you did $900 million. I think last quarter, you said you thought maybe '26 was $1 billion, can we mark-to-market that forecast? And just as importantly, where are you on kind of the scale impact there where you can get 2 or above kind of company average margins?

[Terrence Curtin, executive]

Yes. So no, great question, Scott. And you're right on with where we've seen the momentum all year. And in many cases, our customers on the programs that we win continue to want more and they want it faster, which is a key element of how you win in this market. And so you are right, we generated over $900 million of AI sales in '25. And remember, in '24, that was $300 million. And this is really the products that we do that go into AI with the GPUs and so forth. So we tripled our revenue in this product set which I actually think shows the job the team has done to ramp to your question.

As we look into '26, the estimates out there is for hyperscale CapEx to grow about 20%. And let's face it, we have strong orders. We have the momentum, and we have the design win traction. So we grew $600 million this year alone in AI in dollars. I think that's probably the baseline you have going into next year. from a level of dollar growth that you should be thinking about right now.

The other thing I want to highlight is while we talk about AI, we also have a lot of growth that's happening outside of AI in our DDM business. And there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year. that doubled versus last year. And then we also -- that's also real momentum. And then outside of that, where we play in enterprise in telecom over the past 6 months, I would tell you we have seen increased momentum there where those applications are growing double digit for us.

So I know we spent a lot of time on AI and a lot of early thing with all the cloud CapEx went to AI, we've seen a broadening out of it, certainly nice growth in the cloud side as well. That is not AI, but also seeing those growth rates. And all of that comes together to be that nice 80% growth we had this quarter and we can see that growth momentum continuing.

[Operator]

Your next question comes from the line of Joe Spak with UBS.

[Joseph Spak, analyst]

Maybe just to follow on, I mean, you talked about some of the high-speed interconnect and data center, I was wondering if there's also -- or elements related to AI that's going to help you in '26? And then just for CapEx in '26, like you've been close to mid-5 sales this year to help build out that support? Should we expect similar levels next year to help support that continued growth? Or has most of that investment already been made?

[Terrence Curtin, executive]

Thanks, Joe. So first off, let me get into the product sets a little bit that when we talk about our DDM business. Clearly, the bigger driver is what you get around high-speed. But we have -- our growth has also been happening around what happens on the power interconnects certainly, what we do in helping that power be more efficient from liquid bus bars and things like that, that we do with our customers. And then also where we do cable connectivity that goes between racks and so forth.

So when the numbers I quoted to Scott include all of that in those categories, Joe. And we have momentum across all of them. because all of them are key building blocks of how this architecture comes together, where you need lower power, no latency, higher speed, all happening at once. So all of those products are there.

I don't think one in flex at a higher point than the other as we continue. I think you're just going to continue to get that good momentum that we've had this year with the ramps that we have going and the program wins that we have.

Heath, why don't you take the capital side of it.

[Heath Mitts, executive]

Sure. And Joe, just as a point of reference, and you have the material there, our capital was up a couple of hundred million from FY '24 to FY '25 and that growth was entirely for some of these AI and cloud programs that we've won both in the past as we're expanding and/or, in some cases, adding new capacity altogether for very program-specific reasons. There will be some pressure to increase that a little bit as we move from '25 into fiscal '26. We don't guide that number specifically, but I would expect it to be kind of in line, maybe just a little bit less than the dollar increase we saw in the prior year.

So I still think with the revenue growth and the growth that comes out of these programs, we'd still be at the TE average still in the -- a little over 5% range. And it kind of depends because sometimes these programs the revenue that comes out of these programs can lag a fiscal year or a lag when you make those investments. So I know where some of the things that the team is contemplating for this year is even investments that we'll make in '27 to support programs that we've won for -- I'm sorry, investments in late '26 for programs of oil kick into revenue for '27.

So there's a lot of great momentum there. The key is for us to get up, get operationalized things, so we can't -- we're not the ones holding our customers back.

[Operator]

Your next question comes from the line of Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

So could you help us better understand trends by end market beyond DDN, including how demand trends have changed over the last 90 days? And any early views you can share for fiscal '26.

[Terrence Curtin, executive]

No. Thanks, Mark. And like we've done already in the script, there's going to be some of this we're going to say, please come to Investor Day, but I'll tell you what we've seen and change over the past 90 days. Let's build on the orders that we talked about, and you can see the slide. I think one of the things that is a positive is you saw the order growth both year-over-year and sequentially in both segments. So I do think the environment does feel better than 90 days ago. But let me click down a little bit by the segments.

First of all, just taking transportation. Orders were up both year-over-year and sequentially in auto. And it is one of the things all in 2025, we dealt with the world where Asia production grew, Western production declined we do actually think what we're seeing is some stability that they're probably going to be more even between regions even though a lot of production is going to stay in that $87 million to $88 million unit range, which is flattish.

We also think we're going to continue to deliver content growth over market of 4 to 6 because when you think about what's happening with data needed in the car, what's happening with further creature comfort things that we all want that drives more electronification in the car as well as just the nonending growth of electrified powertrains in Asia, all of that continue to give us confidence on the 4% to 6%.

When you look at industrial transportation versus 90 days ago, Mark, honestly, there hasn't been much change, unfortunately. We continue to see Europe and Asia have growth. And North America still having declines in the truck and brass and the agricultural area. So I would say that's one that continues to be uneven that we're actually really looking for signs when can we get a little bit of a North America pickup but we are not seeing any trends that see that right now. So that's one unfortunately probably still feels modeled.

And then in the Industrial segment, I will jump over DDN like you asked, but you look across our end markets there, we're seeing consistent growth across them. In energy, we have -- you saw the organic growth this quarter of 20% and with where we position ourselves in North America and what's happening in grid investment in the T&D side by utilities is the hardening, getting it up to current trends and everything, that continues to be very good order momentum there, and we're also benefiting from utility scale renewables like solar.

AD&M just continues, I would say, the market continues to move along. You've seen air framers talk about where they're getting their build rates to and it feels the supply chain continuing to show improvement which is good signs. And then the one that I know we've been pretty hesitant on in our ACL business, which has general industrial has a little bit of things that touch the consumer. What I could tell you, the factory automation side, which is the bigger piece of it, we are seeing growth in orders across all regions.

The business grew sequentially. The areas where we see weakness is things where we have things that go into HVAC, things that go into appliances, that's where we see some weakness there. So it does feel the industrial piece of that the business side has improved. Certainly, the residential or consumer side has gotten a little weaker but we did have nice growth. You saw that, and we think the momentum on the more of the industrial side continues to get more traction.

So that's a little bit of going around the horn. As we think about entering '26. Certainly, you see that in our guide with 17% overall growth and 11% organic growth here in the first quarter. The Industrial segment is still in a very good momentum and it feels like we're getting some stability across the transportation segment and a couple of markets with questions.

[Operator]

Your next question comes from the line of Wamsi Mohan with Bank of America.

[Wamsi Mohan, analyst]

I was wondering if you could talk a little bit about margins in 2 ways. One is when you look at gross margins, just a few years ago, you were in the low 30s, you're squarely in the mid-30s now. How should we think about the potential for gross margins for you and for this industry to actually expand further from here? And if you could comment just on the new basis of accounting, how should we think about the adjusted operating margins for both your segments? And sorry, if I could, does this change in accounting imply any increased appetite around rate and pace of M&A as well?

[Heath Mitts, executive]

Okay. I will tackle -- I think you got 3 questions in 1 there, Wamsi.

[Terrence Curtin, executive]

Wamsi, you're ignoring Sujal's instructions...

[Heath Mitts, executive]

But no, I appreciate -- I do appreciate your questions and your interest. So let's talk about margins first. Margins for the year, we -- this is a bit of a journey that we've been on. I think we were very specific with our comments around transportation going back several years, getting them closer to their margin target of about 20%. Largely, they're there. You're going to have noise in a given quarter that's going to swing you another -- on both sides of that. But for the year, they're at 20%, and we expect good things margin-wise as we go into FY '26.

The Industrial business has been more of a story around. We're rooftop consolidations and so forth and taking advantage where we have scale opportunities, particularly when we have strong programs. like we have going on in the DDN business, and we're very pleased with their performance and their jump forward in -- from -- in FY '25.

Again, as we go into '26, we're going to be balanced with our investments. We think both of those segments will flow through on revenue growth of 30% or maybe a tad better dependent upon the mix. So I think as you do your modeling, again, what you want to put in there for the growth side, I think 30% is a good flow-through math on that piece of it for the organic growth.

In terms of gross margin, a lot of that flow through math does come to gross margins, and we do get some leverage on our OpEx expense as well. So we're running this past year at about 35% gross margins. The amortization change largely affects the gross margin line. So when we think about it at the TE level, it's about 100 basis points of of margin improvement, that flows through at the gross margin line. So at 35% in '25 would be kind of a recast of 36% and that's where some of that flow-through is going to occur.

If you think about the split by segment, which is another part of your question. It's in the schedule that we have in there for you that recast it and it shows the segments recasted by quarter going back to prior 8 quarters. So you can see that relative to what our actual results were. But it's heavier weighted towards the industrial segment. because obviously, the amortization expense load comes from at the acquisitions, and we've simply been more acquisitive on the acquisition front in the industrial segment over the past few years, inclusive of the Richards deal that we completed earlier this year.

In terms of your third or fourth question on M&A, listen, I think we've been trying to be -- we're going to talk more about it in our Investor Day here in about 3 weeks in terms of just overall capital deployment. So I don't want to -- but I'd say it's fair to say that we're excited about are bolt-on opportunities in front of us. Bolt-ons don't always mean small. They come in all shapes and sizes just as we completed and FY '25. We completed a Harvard deal that was a little bit smaller than with the Richards deal, which was much larger. And our appetite ranges depend on the business and the opportunity to create value there.

Certainly, the optionality that I commented on earlier about free cash flow and the optionality that, that provides gives us some confidence that in some ways, we can be a little more aggressive, but we're going to be smart with our -- with the investments that we make. So stay tuned, and I look forward to seeing you in a few weeks.

[Operator]

Your next question comes from the line of Mr. Amit Daryanani with Evercore ISI.

[Amit Daryanani, analyst]

I just had a couple of questions just on the DDN segment broadly. There is -- on the AI side, it sounds like $1.5 billion revenue run rate is sort of what you're comfortable with. I'd love to understand, do you see this growth coming more from end demand end units? Or is there a share gain narrative as well as some of these programs are starting to mature, perhaps the share is getting more in your favor. Let me just kind of understand the levers behind the growth you see.

And then on DDN ex AI, your growth over there actually been really impressive north of 40%, I think, in fiscal '25 which is much better than what the end markets are there. So what's driving this growth on DDN ex AI as well?

[Terrence Curtin, executive]

Yes. So twofold one, Amit, sorry. The one time, I guess you're adding the AI and the cloud piece together. So I just want to make sure where that comes from. And honestly, that's program ramp wins. Like we've always told you, we have a nice position with the hyperscalers. We have to play everywhere there, and these are ramps there. And I think our share has been pretty stable, but really benefiting from the technology and where we're co-designing with our hyperscale customers that, in some cases, have their own GPUs.

Outside of AI and cloud what I would tell you, what we saw and just if you take the past quarter, in enterprise and cloud, we grew about 15%. And on things around the edge and IoT, it was a similar number in the double digits. And what you see is I do think it's the bump down effect that's happening in CapEx our product set is very broad. When you deal with high-speed things, they do cascade down over time.

So I do think you sort of have lines do blur between AI and non AI. And the key thing is cloud CapEx, that the key element is that's the number we keep an eye on, which is growing 20%, I think is a bump effect that cascades down. And if you remember like a year ago, we all just thought all the cloud CapEx was only going to AI. We're seeing that broaden out.

And clearly, as you added some of my numbers together, you have those lines blurring, but it's really created that really strong growth that we've had that not only in the quarter, we grew 80%, but basically, we grew that for the year organically. And it was in the AI, the cloud that's non-AI as well as we're starting to see pickup here in the past couple of quarters. on the enterprise to telco as well as IoT and edge.

[Operator]

Your next question comes from the line of Luke Junk with Baird.

[Luke Junk, analyst]

Terrence, I wanted to circle back to transportation in the orders in particular. You had mentioned that you had seen order growth in all regions this quarter. I'm just wondering relative to auto outgrowth, especially that has been more weighted to Asia and China recently, would you say this might pretend a more balanced outgrowth algorithm? And I think you spoke to production being more balanced in the West, but what about some PE-specific dynamics as well.

[Terrence Curtin, executive]

No. Thanks, Luke. And first of all, so you are right in my comments, we've had this out balance of production this year, and that has created a little bit of a headwind because our mix -- I mean, our content per vehicle is higher in the West. You all know that. So that has created a little bit of pressure on where you've seen our content outperformance be a little bit lighter than our 4% to 6%.

But as we look forward, as we work through these Western declines and they become more flattish, I do view you're going to see content per growth in every region that contributes above that to get to the 4% to 6%. Certainly, there's different opportunities in different regions. The electrified powertrain is driven out of Asia, data connectivities in every region. Certainly, feature sets are different that drive electronics in the vehicle. But the key thing is -- different by region.

But the key thing you have to realize in every region, all of whom are increasing. It's just the rate of increase. So net-net, we do think you'll see content growth over market, be more even this year. But certainly, there'll be a little anomaly just due to the trends are very different in region.

[Operator]

Next question comes from the line of Samik Chatterjee with JPMorgan.

[Unknown Analyst]

This is [indiscernible] on for Samik Chatterjee. So I just wanted to ask on implied margin guidance for F 1Q. So based on my calculation, even after adjusting for the change in non-GAAP calculations, the implied margins are close to 21%, like -- which is a robust expansion relative to 4Q. Can you please highlight the drivers that are driving that margin expansion there?

[Terrence Curtin, executive]

Yes. Samik, I'm going to have Heath answer that question on where sequential margin go sequentially Q4 to Q1.

[Heath Mitts, executive]

Samik, first of all, well, as you know, we don't guide a specific margin target However, I think it's fair to say with the breadcrumbs that we've given you on various things with tax rate and -- so -- and implied what our EPS guide is and our revenue guide, you can you can assume that we're going to see an increase in margins modestly sequentially, probably more driven by transportation, which tends to have the highest auto production number in our calendar -- in our fiscal first quarter each year and neutral or maybe flattish in industrial. But I don't want to get into guiding margin rates, but I think that would be a fair assumption.

[Operator]

Your next question comes from the line of Guy Hardwick with Barclays.

[Guy Hardwick, analyst]

Terence, I know you kind of answer the question about the growth in DDM ex AI. But I think I heard you say the cloud business doubled to $500 million. Can you tell me what's driving that? I assume it's cloud companies pushing their on-premise customers to the cloud, and they seem to be growing at 20%. So just wondering how much visibility you have in this business because it potentially could be a multiyear runway. What sort of kind of growth assumptions should we assume sort of medium term.

[Terrence Curtin, executive]

Yes. So first off, Guy, you are right. The comments I made in -- to Scott's question really had to do with our cloud revenue, which is in non-AI applications was about $250 million in last year, and it was up to $500 million this year. And I do think it's about the infrastructure being upgraded and not everything has a GPU, but you do have cloud data center. There's other things going in it that are being upgraded, and we're benefiting from that.

So clearly, you have very high-end compute that's happening on the IN side, but on the high-end side, but you're going to have cascade down that we're benefiting from our broad product set. And I do think we're going to continue to benefit from that growth trend going forward, it may not have as much content as we have on AI is going to have a nice growth rate to it because certainly connecting GPU to GPU like we do today and that's more of the AI element. You don't have that product in there, but certainly, you have the high speeds needed in these next-gen servers that the cloud needs.

[Operator]

Your next question comes from the line of Colin Langan with Wells Fargo.

[Colin Langan, analyst]

Just to follow up on the outlook in autos to grow 4% to 6% over market, I mean any way to frame the challenge from EV adoption slowing down in developed markets. Is that sort of going to keep you at the lower end of that range or even below that range given some of the pushbacks in some of those products? Or is that kind of offset by other factors?

[Terrence Curtin, executive]

No. When you look at it, I think, clearly, when you have EV adoption, the biggest driver of it is Asia, and that's full steam ahead. Do you have less adoption elsewhere in the world where you have -- you're not going to full EVs, you might be going to a hybrid, which gives us a content increase but not the total content increase you have in a full electric.

The element that you have to remember is I need you to think about what's happened to content, not only in EV, but outside Think about the Ethernet connectivity that you need in a car for autonomy for the sensor suite for everything else that needs to happen in the car for software updates over the top. All of that's being put in, and we benefited from that had really nice growth this year on it. and that's going to be a key driver, almost just as important as what we've gotten out of EV.

And then the other thing that come into the safety features, the comfort features, everything else that's getting added to the vehicle also adds content. So we actually view it's going to be more balanced. And when we're at Investor Day here just next month, we'll spend more time on this to make sure everybody has a clear picture of how we see the content growth going forward.

[Sujal Shah, executive]

Your next question comes from the line of Asiya Merchant with Citi Group.

[Asiya Merchant, analyst]

Can you just talk a little bit about the book-to-bill, specifically, I think in Industrial, given the strong momentum you have, DDN and as well as some of the other segments that you talked about. Is book-to-bill below 1 here, I think I calculated it to be 0.96. Is that a metric that investors should focus on? And how we should think about that relative to your guide?

[Terrence Curtin, executive]

I would say you have to look at order levels and the one element you get always this time of the year is we do have sequential seasonality that's very normal. And especially in our industrial segment, you have factories that shut down around holidays in the western part of the world. So in many ways, and if you look back over time, you will always see we have a step down in quarter 4 to quarter 1 due to this factor. It's almost like we have 1 less week of business due to how people leverage their production planning.

And the element is $4.7 billion of orders in the fourth quarter against the $4.5 billion guide for the first quarter is very healthy. So I know the book-to-bill takes current quarter, but what's really nice is the trend you see going into a sequentially slower quarter just due to seasonality is really how you should look at it.

[Operator]

Your next question comes from the line of William Stein with Truist Securities.

[William Stein, analyst]

I want to first recognize very good results on revenue and earnings and the outlook in the same regard. So the question I'm going to ask is maybe is not quite as optimistic, but I do want to recognize the great results and outlook. On the margins, however, I have this lingering question, you're, again, beating on revenue. You're beating in this new partly from this new category of AI, which I would expect to carry better margins. The conversion margins are not bad, but I think they were a little bit below consensus.

And if you look to the out quarter, if you don't make that amort adjustment, I think it's the same story, [indiscernible] earnings fees, but margins are a little bit disappointing from a perspective. Is there something dragging on profitability today that you could clarify for us.

[Heath Mitts, executive]

Yes. Will, I'm not -- we've kind of been holding this roughly 30% flow-through here for a while. And so I think when you look at our -- and there are some bridges, I think, in the back when you look at our operational performance and you look at the fourth quarter or the full year '25, and our guide for '26 year-over-year or at least our first quarter guide, I think you would come back into a number that has a 3 in front of it. So certainly, amortization change was not done for any reason other than to just better represent kind of our cash profitability of the business.

And so you're always going to have a little bit of noise between segments and within the segment, maybe even some mix within a segment, but that noise goes both directions. And so I don't get too hung up on that quarter-to-quarter. But no, from a fundamental perspective, there's nothing that drags on us.

I would say in certain pieces of the business that are passing on a little bit more tariff pricing that tariff pricing and the revenue that comes from that does not include any margin behind it. So when we do see a spike in some of that tariff pricing, some of those businesses struggle a little bit because you might add revenue with no margin, but that's just more of a recovery mechanism. So that can create noise. But I'd say you look at the schedules that we provided for the quarter, for the full year and certainly for our guide, you'd see a 30% or so in there.

[Operator]

Your next question comes from the line of Shreyas Patil with Wolfe Research.

[Shreyas Patil, analyst]

On the AI piece, you're growing very rapidly, run rating at about $1.2 billion. You've talked in the past about this being a 3-player market. One of your competitors appears to be quite a bit ahead on revenue, maybe 3x the revenues that you're doing at the moment. So I guess, as we think ahead, how do you think about the market share dynamics in this space. Do you see an -- should we be thinking over the long run that this will eventually become a more balanced market share across the 3 big players? Or do you see -- tell as sort of a firm #2 over time?

[Terrence Curtin, executive]

I think what you have here and you said it well that when you look at the players, it is a concentrated player because what occurs is who can provide this technology. And when you look at how you have to co-design a ramp to the level that you've seen us do, it doesn't mean it's going to be a concentrated market. I think we have to continue to look for technology inflections and they are typically going to be the areas where you see opportunities to gain share. But we got to compete on technology, we got to compete on ramp with the customers and we have to compete plan on the ecosystem.

And I think what's really good is that we provide the technology that shows we can provide it, and we're going to compete every day to try to increase share.

[Operator]

Your next question comes from the line of Joseph Giordano with TD Cowen.

[Unknown Analyst]

This is Michael on for Joe. So previously, you mentioned strong content in bus bars and cabling and also previously other cores back plane content in particular. Are there any recent order wins you'd like to highlight there specifically? And then what types of customers are you seeing the most order activity with right now between GPUs, custom ASICs, hyperscale or stuff of that nature?

[Terrence Curtin, executive]

So first off being -- the wins that we have are across the product set. And in some cases, we're stronger with certain customers on one product set versus the other. You should assume you get one product set or all product sets with one customer. We compete individually on each one of those products that's what you sort of talked about. And that's just reality as we work the architecture real time.

The bulk of our wins when you see the revenue traction we have in the ramp were mainly with the hyperscalers. We have wins across the hyperscaler group as well as the semi players. But the element is the bigger driver of growth for us is the hyperscalers that have their custom TPUs and GPUs.

[Sujal Shah, executive]

Okay. Thank you, Mike. It looks like there's no further questions. So we appreciate all of you joining us this morning for the call. And if you have further questions, please contact Investor Relations at TE. Thanks, everyone, and have a nice day.

[Terrence Curtin, executive]

Thank you, everybody.

[Operator]

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, October 29, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. Thank you for participating. You may now disconnect.