TE Connectivity plc Q2 FY2026 Earnings Call

Everyone, thank you for being here and welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2026. As a reminder, today’s call is being recorded. I would now like to hand the conference over to our host, the Vice President of Investor Relations, Sujal Shah. Please proceed.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter results and outlook for our third 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. 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.

Thank you, Sujal. And also, once again, thank you, everyone, for joining us today. As I normally do, before I jump into the slides, I want to frame today's call around a few key messages. I want to go back to November when we did our Investor Day, where we outlined how our strategy and business model are driving a broadening of growth across our portfolio while positioning us to deliver sustained margin expansion and double-digit earnings growth. The strategy we laid out, we believe, will drive ongoing value creation for our owners. The backbone is how we capitalize on the proliferation of data and power by providing leading interconnect products and technologies across our target markets to meet the evolving next-generation architectures of our customers. The results we're going to get into today and talk about are further evidence that our strategy is working. Last year, we delivered $1.4 billion of growth as a company, and this year, we expect to deliver well over $2 billion of growth, with the majority of our businesses growing double digits year-over-year. As we look at our second quarter results, we delivered strong financial performance with sales growth of 15% year-over-year and continued outperformance versus our key end markets. We also delivered earnings growth of 24% in the quarter. When you underpin this performance, we continue to see strong order trends. In the second quarter, we had record orders of over $5 billion, which was growth of over $1 billion versus the prior year, with growth across both segments and in every business. As we expand sales, we continue to invest and scale the business to deliver consistent margin performance and earnings growth. The performance of our teams, combined with our global manufacturing strategy, is providing resiliency within a backdrop of an ongoing dynamic global environment, and this is reflected in the performance of both segments. We expect our strong performance will continue, and Heath will talk more about that when he gets into his section. If you're looking at the slides, I ask you to turn to Slide 3, and I'll get into our second quarter results as well as our outlook for the third quarter. Our second quarter sales were over $4.7 billion, with performance above guidance driven across our businesses. Sales grew 15% on a reported basis and 7% organically year-over-year. We saw orders increase to $5.3 billion, and I will provide more color on the order momentum on the next slide. We delivered record adjusted earnings per share of $2.73, which was above our guidance and increased 24% versus the prior year. Our operating margins on an adjusted basis were 22%, an increase of 130 basis points over last year due to the execution of our teams. We continue to demonstrate our strong cash generation model with free cash flow of $1.3 billion for the first half of this year, and year-to-date, we returned nearly 100% of our free cash flow to shareholders while continuing to support investments for future growth. Also, driven off this strong free cash flow, in the quarter we announced that our Board approved a 10% increase to our quarterly cash dividend. As we look to the third quarter, we are expecting third quarter sales to be $5 billion, which reflects an increase of 10% versus the prior year with year-over-year and sequential growth in both of our segments. We expect adjusted earnings per share to be up 17% year-over-year to around $2.83. I ask you to turn to Slide 4, and let me get into more details on the order trend momentum that we're seeing. As I mentioned, orders were $5.3 billion with a book-to-bill of 1.12. We saw order growth in every business and in all regions on a year-over-year basis. Our order trends support the broadening of growth I've already talked about. For the second quarter, over 70% of the company's order growth was in the Industrial segment. Versus the prior year, Industrial segment orders grew 40%, and essentially every business in the segment posted double-digit order growth. In addition to the ongoing momentum in digital data networks where our orders grew over 60% in the quarter, we also continue to see continued momentum in Energy, Aerospace and Defense, as well as Automated and Connected Living. Turning to our Transportation segment orders. Our orders increased 13% versus the prior year, with year-over-year and sequential growth in all three of our businesses. Our order trends are supporting our growth and content outlook for the automotive business in the second half of the year. In commercial transportation, we're seeing continued recovery in the global market with organic orders that grew year-over-year in every region. With that as an overview of orders, let me now discuss quarterly segment results, starting with the Industrial segment on Slide 5. Our sales in the Industrial Solutions segment grew 27% in the quarter and 17% on an organic basis year-over-year. We are benefiting from the secular growth trends in our digital data networks business as well as our energy business, where we continue to see significant demand tied to AI and energy grid investments along with ongoing growth in aerospace and defense and factory automation applications. In our digital data networks, we had another outstanding quarter where our business grew nearly 50% year-over-year and sales were as we expected. We continue to win new programs with customers, and the orders we have received are building backlog into 2027. We now expect our AI revenues in fiscal 2026 to be about $150 million higher than our view 90 days ago, and this entire increase will be in the second half of the year, reflecting the increased momentum that I talked about in orders. As we look out to the longer term, we are well-positioned to continue to generate strong growth from AI applications. With our broad portfolio of data and power connectivity solutions as well as our engagements with the key architects of this space. We expect the addressable market for our AI products to continue to grow, both near term and long term. We are innovating with our customers on their road maps and architectures and are making both organic and inorganic investments to strengthen our road map for both copper and the inflection point for optical solutions. During the quarter, we acquired a leading technology for passive optical connectivity solutions, strengthening our road map to offer customer solutions for both copper and optical connectivity in the future. We will continue to support our customers' architectures as they evolve. Now let me turn to the other businesses in the segment. Turning to Automation and Connected Living, we grew 8% organically year-over-year with growth in each region, and we continue to expect the momentum in the general and industrial markets to improve as we move through the year. In Energy, our sales grew 60%, including the Richards acquisition, where we're capitalizing on growth opportunities in the U.S. utility market. Organically, sales increased 11%, driven by year-over-year growth across three key application areas; the first being energy grid hardening, the second being data center, and the third being clean energy applications. We continue to see increasing investment by our customers in grid hardening as utilities upgrade aging infrastructure and improve resiliency to support more distributed and reliable networks. In the data center, load growth is driven by the significant build-out of power infrastructure to support AI, where our connectivity solutions enable higher power density as well as reliability. In clean energy applications, we continue to benefit from ongoing investment in utility-scale solar, along with the supporting grid infrastructure required to integrate these energy sources. In our Aerospace and Defense business, our sales grew 5% organically, driven by growth across both commercial aerospace and defense applications. In these markets, we continue to see favorable demand trends coupled with ongoing supply chain improvements. These trends are supported by increased global defense spending and ongoing modernization efforts requiring increased data connectivity and greater power requirements, along with ongoing production ramps in the commercial aerospace field. Lastly, in our metal business, sales grew sequentially as we expected, driven by the continued investment in growth in key therapeutic applications such as structural heart and electrophysiology. Turning to margins for this segment, Industrial segment adjusted operating margins expanded 260 basis points to nearly 22%, driven by the strong operational performance by our teams and the benefits of higher volume. If you could let me move over to Slide 6, I will get into the Transportation segment. Our sales in the Transportation segment grew 5% in the quarter and were down slightly organically. We are delivering growth over market in both automotive and commercial transportation, reflecting our leading global position and customer co-creation model. This results in continued content growth across vehicle platforms. Our auto sales grew 2% on a reported basis and declined 4% organically in the second quarter. Our market outperformance against declining auto production was driven by content growth in Asia and Europe. Year-to-date, we're averaging growth over market at the low end of our 4 to 6-point range and continue to expect content growth to be in this range for fiscal 2026, driven by our strong position and content opportunities across data connectivity in the vehicle, the electrification of the powertrain as well as the electronification of the vehicle. Turning to Commercial Transportation, we saw 21% growth on a reported basis and 17% organically. We are seeing continued improvement in demand trends across regions with growth in Europe and Asia and stabilization in North America. Against this backdrop, we are delivering growth significantly above the market, driven by continued share gains from new program wins and increasing content per vehicle. In our Sensors business, sales increased 2% on a reported basis and declined 3% organically, which was in line with our expectations. For the Transportation segment, the team delivered adjusted operating margins of nearly 22%, demonstrating our team's operational resiliency. With that as an overview of our segment performance, let me hand it over to Heath to get into more financial details and expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, we achieved adjusted operating income of over $1 billion and adjusted operating margins of 21.7%, driven by strong operational performance by our teams in both segments. GAAP operating income was $954 million and included $8 million of acquisition-related charges, $10 million of restructuring and other charges, and $57 million of amortization expense. I continue to expect restructuring charges in fiscal '26 to be roughly $100 million. Adjusted EPS was $2.73, and GAAP EPS was $2.90 for the quarter and included a $0.39 tax benefit primarily related to a settlement of prior period tax matters as well as restructuring, acquisition, and other charges of $0.06 and amortization expense of $0.15. The adjusted effective tax rate was approximately 21% in Q2. We expect Q3 to be around 23% and the full-year tax rate to be approximately 22%. Importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR. Now if you turn to Slide 8, this slide shows the growth and broadening that Terrence discussed along with the strength of our operating model with strong margin performance and double-digit earnings growth. Sales of $4.7 billion were up 15% on a reported basis and up 7% on an organic basis year-over-year. Adjusted operating margins were 21.7% in the second quarter, expanding 130 basis points year-over-year. Adjusted earnings per share were $2.73, up 24% year-over-year, driven by sales growth and margin expansion. We continue to operate in a dynamic environment. Versus 90 days ago, we are seeing increased inflationary pressures across certain input costs such as oil-based resins and freight charges driven by higher energy costs and broader geopolitical tensions. We are managing these impacts through our proven playbook, including optimization of our factory footprint, targeted pricing actions, and ongoing productivity initiatives. In addition, our localization strategy around the supply chain enhances resiliency by positioning us to manufacture close to our customers and respond quickly to changing conditions. Turning to cash flow, cash from operations was $947 million, and free cash flow was $680 million. Through the first half of the fiscal year, free cash flow was a record $1.3 billion. We continue to expect our free cash flow conversion to be 100% this year. Before I turn it over to questions, let me reinforce that performance reflects strong execution in both segments. The strength that we have in orders gives us confidence in the second half, and we expect to have over $2 billion of growth this year, which will be ahead of our through-cycle target. While we remain in a dynamic environment, we have established levers in place to expand operating margins and drive double-digit earnings growth per share. So with that, let's now open it up for questions.

Thank you, Heath. Eli, can you please give the instructions for the Q&A session?

Your first question comes from Scott Davis from Melius Research.

Can you talk about the $150 million bump up, when does that get shipped out?

Yes, sure. So let me talk about that, and I do hope you feel better from your allergies here, Scott. The $150 million, let's frame a little bit where our orders are in our DDN business, and we'll talk about that $150 million. Year-to-date in our DDN business, we have $2 billion of orders. As we've talked in the past few quarters, some of these orders are being scheduled out. And, like you're always going to have, when you have these programs, there'll be some lumpiness to them as programs ramp up and ramp down. With the momentum that we've seen in orders, Scott, the $150 million that I mentioned about in the statements are things that relate to the second half. Part of it is ramping of programs we have, and some of it is new ramps that are coming along, and it continues to show the momentum that we have in the space. We do think with this additional $150 million of AI revenue in the second half, that will put our DDN AI revenue, which runs about 70% of total DDN, approaching $2.4 billion, just a little bit below that, and the momentum continues. It will ramp in the second half, and like we said, about all the businesses, we do expect all of our businesses to grow from the second quarter to the third quarter. So just the story continues there, where we have good engagement, good program wins, and continue to have strong growth in the AI space.

Thank you, Scott. We have the next question, please.

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

Orders were strong again this quarter, a record high. You said it’s strength across all businesses, but I’m hoping you could speak more on whether you think the momentum can be sustained and also what TE saw with business trends so far in April, especially in light of the geopolitical and supply chain volatility?

Thanks, Mark, for the question. So a couple of things. Yes, you're right. When you look at this year, remember, we did $5 billion of orders in the first quarter and $5.3 billion in the second quarter. So we've stacked about $10 million of orders. So we built backlog, and in the first month since quarter end, the order momentum continues to be very strong. We have not seen any demand negative impacts due to orders at all since the conflict broke out. We continue to see that strong momentum. The broadening that I talked about in the script is really across the businesses. When you look at the growth we put up, which is 25% in this quarter, DDN was very strong at 60% order growth year-on-year. If you look at the rest of the Industrial segment, essentially every business unit put up double digits. We're continuing to have the strong momentum that we've had in energy that I mentioned, aerospace and defense continues to build backlog. And those lead times on those products are typically further out. So that's another one that's building backlog similar to what I talked about with AI. In the Industrial segment, probably a little bit later of an uptick is what we're seeing in factory automation in our automation control business. When you look at that business, and I mentioned it in the script, we had growth in every region. But when you're talking about growth in every region, you’re looking at both high double digits across every region. We continue to see momentum building up on that CapEx investment and certainly what we see with ISM being constructive, I also think is a good supporting factor. When you get to transportation, clearly, our view of production hasn't changed. We've told you since the beginning of the year, we expect auto production to be slightly down. We still have that same view, but our Transportation segment orders being up double digits, led by commercial transportation, which is up a very strong double digit. In automotive, our orders were up mid-single digit, showing the confidence we have around the growth in a production environment that I would say still isn't positive, just moving sideways, and we benefit from our global position. Order trends are broad, across regions and some of the businesses that a year ago might have still been cycling down have come back in and are really driving some of the growth you see. We expect it to continue, and the orders in quarter 3 to date through today are showing that.

Thank you, Mark. We have the next question, please.

Next question comes from Luke Junk of Baird.

Terrence, maybe clicking a little bigger picture. Just hoping you could provide some updated perspective from your point of view on the copper versus optical debate, especially interested in just where you're leaning into any related investments. You made the comment in the script about evolving with customers and also noticed you did an optical acquisition in March of RampPhotonics, if you could speak to that as well.

Okay. Thanks, Luke, for the question. We've had many discussions about this, but I want to start reiterating some things before I click down to where you asked to go. It's important to be where we play; we're very fortunate to have a bird's eye view that we work with our customers and what's happening in both the data chain and the powertrain regarding AI architecture. We work closely with our customers, and we're aligned with their road maps. Each customer has different architectures and different opinions about when things will be introduced, whether it's in the power chain or in the signal data chain. We work very closely to make sure we're going to hit the inflection points that they're telling us. Copper will continue to be the workhorse in the rack and in many applications due to the cost benefit, the power benefit, the reliability as well as where it's scaled today to meet their needs. We agree with that, and we hear it all the time. We have a view that it's not copper or optical; it's copper and optical, and how they play together in different structures. Optics will come in more into the scale out first; we are bigger in the scale up. What we do in the rack is the bigger driver of what we do and where we focus. You'll see more in scale-out, and we think you will continue to have a hybrid solution between copper and optical over time. As I said on the call, we view the TAM where we play and the product technology we have will grow as this occurs both near term and long term. We are innovating with our customers on their road maps and architectures and making both organic and inorganic investments to strengthen our road map for both copper and the inflection point for optical solutions. During the quarter, we acquired leading technology for passive optical connectivity solutions, strengthening our road map to offer customer solutions for both copper and optical connectivity in the future. We will continue to support our customers' architectures as they evolve. That should give you some flavor, Luke.

Thank you, Luke. May we have the next question, please?

Next question comes from Amit Daryanani from Evercore.

Thanks, good morning, everyone. Maybe I'll step away from the banister a bit. You hope to see less growth in energy and even the commercial transport segment. So I'm hoping, Terrence, if you could talk a little bit about energy, even excluding Richard's organic growth is double digits. What are the big segments you're involved in, and how durable do you think this growth can be long term? And maybe you can have a comparable discussion on the commercial transport side because I think both those segments are growing much faster than most folks would expect.

Thanks, Amit, and I appreciate you calling out some of the other markets. So first off, on energy, the investments we've made and where we're positioned is very important. It is focused around the majority of it in the U.S. energy market. Anything we're talking about benefiting from is things all of you are experiencing every day: increased utility investment related to capacity as well as hardening due to the low demand that you're going to get. About 60% or two-thirds of what we do is around utility and grid hardening, which is around the infrastructure side. Where we plan undergrounding with our technology and the intelligence we bring, that market is growing high single digits, and we're growing faster than that due to the efforts of our team. Another important area we do is what we call industrial, which is about 20% of the business, where energy is getting hooked up; could be a data center, could be into an industrial complex, from to be a semiconductor fab by bringing power in. That area is where we're seeing very strong growth there too, and we're growing double digits as well this year. The third area is really where we've positioned ourselves around clean energy and renewables. For a couple of years ago, that's what we talked a lot about. We're still growing high single digits, and certainly, there's been some policy elements that have slowed down some of that market. With all the levers we have, we get really excited about the growth there to exceed the market. Jumping over to commercial transportation, I want to mention this business is one that, unlike the previous discussion, is a truly global business. We're pretty even between North America, Europe, and Asia. What we've seen this quarter, last year, was strength coming out of Asia and Europe with truck and bus, ag, construction, improving outside the United States. Here, we're starting to see stabilization with our orders picking up as people react to stabilization and look forward to 2027, supporting the sales growth observed. You see the growth that was strong in the quarter. The market probably grew globally in the quarter about 4%. So that outperformance was very strong with us growing well into the double digits, coming from our position on next-generation vehicles as well as the trends we frequently discuss in automotive. We see data in the vehicle and talk about powertrain and emissions that electronification piece, and we're witnessing that. In Asia, where electrification of the powertrain is deepening into various types of vehicles, we see a content uplift. In some cases, that content uplift could reach as much as $2,000 on some vehicles with next-generation powertrains versus $400 today. We see that strength, and it's good to see the market stabilizing, which is evident in the orders that were significantly up as I mentioned. We believe there are going to be components that get back to the broadening of growth I talked about in my remarks.

All right. Thank you, Amit. Can we have the next question, please?

Next question comes from the line of Wamsi Mohan from Bank of America.

The content growth in the 4% to 6% range for the year indicates a meaningful acceleration from this past quarter. Maybe you can share some color on what you're seeing that's going to drive that acceleration? And if you could just clarify for us the quarter-on-quarter order trend in DDN, I think you noted 60% year-over-year increase in orders. Wondering if you can characterize the sequential change in orders there, too.

Sure. Let me get into auto a little bit. First off, I want to start with production because it's important. The headlines out there matter. When we think about production, how we saw it as we start the year hasn't changed. We expect there to be 88 million to 89 million units. At the start of the year, we thought every market would be down slightly. Europe is up a little. Asia and China are exactly where we expected; North America is a little worse. When you look year-to-date, and we ask you not to look at quarters, we're running at the 4-point outperformance above production. When you look at that, we're strong in China right off the bat, continuing to show that strong presence. Growth over market isn't where it was in North America due to some cancellations, but overall, we're still in range. Our results and orders indicate our confidence in the range. The production assumptions and orders continue to be very strong, focusing on the drivers we discussed. Strategies in Asia regarding electric vehicle adoption are maintaining, while we have EV pressures in North America, but net-net, we feel good about where we are in the 4% to 6% range at the lower end, and we expect to be there for the year. We do expect the first half versus second half, while production is going to be fairly flat, our automotive business will be up. On DDN, while I don't have all the quarters in front of me, I want to highlight that $2 billion is the first half orders I mentioned. There will be bumpiness. These are programs that go back to what we discussed earlier. We're excited that they're across a broad customer base and growing, but we will experience some fluctuations.

Alright, thank you, Wamsi. Can we have the next question, please?

Next question comes from Christopher Glynn from Oppenheimer.

Been around the portfolio pretty thoroughly, so just wanted to talk about capital and the portfolio. You did a little bolt-on. There hasn't been much on divestiture for quite a while. I'm not sure how you view sensors, but just that and the weighting of acquisition pipeline versus buyback acceleration potential?

Sure. So first of all, similar to what we teed up in November at the Investor Day, nothing has changed. We really like the portfolio. I believe you'll continue to see the bolt-ons that we discussed, like I mentioned with Richards in the energy space. Certainly, we pursued something in the DDN space around technology acquisition. It's more about playing offense than defense and how we consistently capitalize on growth trends within the portfolio. Heath, would you like to add anything?

Chris, I'd say the pipeline for M&A is actually quite active right now. There are many opportunities that we see either in real time or anticipate coming to market in the next three quarters. We’re closely examining how they fit with us and where we can create value for our owners. There are other opportunities which may be interesting, but others might be better suited for different owners. So, there's genuine interest from our side beyond just technology investments mentioned. I would say stay tuned because strategies are non-linear; we need to see when opportunities arise.

Your next question comes from Joseph Spak of UBS.

Just wanted to touch on margins for a second. I mean you mentioned some of the inflationary costs. Given the velocity with how fast things moved, I wonder if that weighed at all in the quarter. More importantly, for the next quarter outlook, you mentioned how in the past, you always do a good job internally passing costs on. But that may protect EBIT, but should we expect a little bit of margin pressure just on the math next quarter? Could you quantify that at all?

Joe, we've been dealing with various types of inflationary pressures, whether they're tariff-related or metal-related, where we've seen significant inflation for a while. Within the quarter we just reported here in Q2, we have noticed increases in oil-based derivatives—for us, that's resins—and we do purchase a lot of resin. We've also seen freight and logistics costs increase as we move product to our customers. Our team is well-conditioned to not be caught flat-footed when these issues arise, allowing us to largely pass through costs in terms of pricing or other logistical arrangements with customers. There’s a bit of variability in our absolute margins, but as we discussed during the Investor Day, we are still committed to achieving at least a 30% flow-through on operating income year-over-year. We managed to do that in both segments. You will see a similar performance as we move forward. Getting that 30% flow-through means that at 22% margins, there is room to shift margins upward. Both segments are performing well under these circumstances, though there is some noise impacting margins; that timing of cost realization and price adjustment will affect margins.

Question comes from the line of Joe Giordano of TD Cowen.

Curious, like I guess this is somewhat data center, but it could be more broad, and I think you just touched on it a little bit. But when you see orders up as much as we're seeing and price costs still kind of lagging, how do we think about the price inherent in the orders versus the price that's coming through in P&L? Is there a real lag there? Are you kind of covered already in the backlog? Heath, if there's any update on CapEx expectations for the year given that growth?

Yes. Joe, let me get into this. From an order perspective, we haven't had any real activity or motivation to adjust for early orders. The orders we have are project-based, coming from the pipeline. Distribution is pretty steady as well. We haven't heard of clients trying to adjust purchase patterns ahead of upcoming price increases. The orders we've received are more typical procurement cycles with no significant concerns on inflation timing mismatches. Regarding CapEx, our expectations have increased. Previously, we discussed this on earlier calls, and you should expect CapEx this year to be about 6% of revenue. This increase is primarily due to ramping up AI programs within our DDN business. These investments are aligned with specific programs we have been awarded, so we are not speculating on those investments. It can also serve as a good indicator of what lies ahead in that space.

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

I think you said the AI business would be running at $2.4 billion this year. I assume that includes the cloud business, which I think was running at about $500 million last year. My question is actually on the 30%, which is AI or cloud related. Enterprise telecom potentially could be squeezed for or competing for dollars from AI because of AI investments. So maybe you could talk about the trends in enterprise telecom and other IT.

Actually, thanks, Scott, for the question. What we’ve seen, and we talked a bit last time, is that energy spending isn’t growing at the same level as AI spending, but we are still seeing positive momentum there. In the enterprise, telecom, and wireless sectors overall, we’re observing solid growth, though not at the rates I mentioned for AI. How people prioritize between those types of spending decisions will differ, but our order trends reflect positive growth in these categories.

Next question comes from the line of Asiya Merchant of Citigroup.

My question revolves around tightness in components, whether it's memory, CPUs, or even GPUs and allocation. Could you assist us in understanding if hyperscalers have been providing better visibility as a result of supply chain issues? Are you forecasting any complexity as these programs ramp in the back half?

Sure. First off, when looking at the product categories you're discussing, we don't procure memory or those chips directly. It's well-known that memory is tight. For our business, we've seen customers going out with orders to ensure they can secure capacity as their ramps close in—and they’ve built backlog for us, as articulated in our DDN orders. However, we aren’t experiencing any availability issues for the products we buy to create our offerings. Our customers continue to ask us to ramp quicker and have no slowdowns on product deliveries into their operations. There continues to be momentum, as indicated by the $150 million extra we mentioned as their ramps are increasing.

Your next question comes from Steven Fox of Fox Advisors.

I just had one on the energy market. The organic growth has slowed, still double digits. But I was curious, Terrence, you've talked about how energy can sort of align with the growth you see in some of the data center markets. Are you observing conversations with customers indicating a lag effect, suggesting we might see an acceleration in growth? Or is 10% the number we should be thinking about?

Yes, Steve. I think it's important to frame what I've discussed; 60-plus percent of this energy business concerns utility grid hardening. There are also developments in the industrial and data center areas, which are full steam ahead. The growth rate slowdown is partly due to clean energy where we’ve witnessed some pauses. With other opportunities in utility grid hardening and the industrial/data center niches, we feel very optimistic about maintaining that double-digit growth rate moving forward.

Your next question comes from the line of Samik Chatterjee of JPMorgan.

Terrence, if I could ask you to revisit the discussion around your capabilities that you're adding related to optical and copper in terms of scale-up. At the Investor Day, you mentioned your AI rack representation, and copper content could be as much as $870 per chip. As you engage with customers now and consider the role of optical in scale-up, do you see that being additive to the content opportunities you've outlined previously? Or is it part of what was presented at the Investor Day?

Thank you, Samik. First, consider the technology acquisition we made and what I mentioned earlier; this will help us with scale-out elements, where we haven't had a stronghold. Implementing this technology enhances content, particularly where fiber optics will connect to the CPO. Over time, we will see a blend between copper and optical in architecture design. However, there will be an iterative process as we navigate this with our customers as they shape their designs to maximize efficiency. This positioning allows us to capture growth effectively. So to clarify, we're enhancing the content levels while also getting ready for the transformation.

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

A follow-up on co-packaged optics. If you don’t develop your fiber optic capabilities from where you are now, can you frame the downside or potential loss of content if a customer switches from copper to a fiber optic solution?

Colin, I'm going back to what I said earlier. It's clear through our customer interactions that it's not either/or; it's both copper and optical. This isn’t merely semantics; it’s crucial we emphasize that both technologies will coexist. The copper TAM will persist, even as optics are introduced, primarily due to the essential power elements within the rack. We're predicting TAM growth in copper while greatly benefiting from other growth opportunities embodied in optical with the positions we are taking.

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

In the industrial end market, I have two related questions. The D&N piece shows clear growth in bookings, and congratulations on that. While it is clear you have growth coming, it was a bit surprising to see two sequential quarters of flattish revenue performance. I wonder if you can explain why revenue hasn’t been significantly growing in that industrial segment over the last couple of quarters. Related, we saw segment revenue increase in Industrial but operational margins decline. Is that related to orders ramping later in the year?

First, Will, on your first question, it's essential to realize we’re set to grow this year in DDN and AI by about $1 billion. When evaluating performance based on quarterly results, differences in program ramps and supply chain impacts will lead to fluctuations. The more significant point is that we've seen an increase in our revenue by an additional $150 million. We’re stepping up in the second half as mentioned. The total number we mentioned during Investor Day of $3 billion continues to shift due to the momentum we’re witnessing. Heath, do you want to address the margin aspect?

Year-over-year margins are up significantly. I assume you’re referring to sequential margins. There will always be some variability. Sometimes that works in your favor; sometimes it evens out over periods. We generally look at margins on a year-to-date or rolling basis. There may be a variety of factors, but we’ve ramped investments in our DDN business as previously mentioned, which could also create variations, but overall, I'm pleased with the margin performance and flow-through relative to organic growth.

Next question comes from the line of Shreyas Patil of Wolfe Research.

Returning to the discussion on CPO and optical. I'm curious about the current size of your optical business for AI applications and any need you perceive to bolster via M&A, perhaps in the transceiver or DCI module sectors?

Sure, Shreyas. I believe we will focus on growing within the passive domain. We don’t see transceiver technology or similar where we think we can add substantial value to the supply chain. As mentioned, our core competency is in managing the signal chain coming off the CPO attached to fibers and connecting to optical backplanes. The technology acquisition helps us to build upon the fiber link. It’s about enhancing how we position for future growth with our current capabilities while supporting our customers’ trajectory of development.

Alright. I want to thank everyone for joining us this morning. If you have further questions, please contact Investor Relations at TE. Thank you, and have a nice day.

Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today on the Investor Relations portion of the TE Connectivity's website. That will conclude the conference today. Thank you, and goodbye.