Earnings Call Transcript - TEL Q4 2025

Operator, Operator

Everyone, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter and Final Results Earnings Call for fiscal year 2025. 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, Vice President of Investor Relations

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 a 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 one 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, CEO

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 this 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 at $4.75 billion, growing 17% on a reported basis and 11% organically year-over-year. Both segments contributed to our sales being above 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 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 digital data networks as well as our energy and automation and connected living businesses. Also one thing to highlight in our orders, 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 the Industrial Solutions segment, which is on Slide 6. 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 reflects 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 in 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, CFO

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 around 20%. GAAP operating income was $916 million, which included $10 million in acquisition-related charges and $17 million in restructuring and other charges. For the full year of fiscal '25, restructuring charges amounted to $113 million, and I anticipate restructuring charges for fiscal '26 to be approximately $100 million. Adjusted EPS was $2.44, while GAAP EPS was $2.23 for the quarter, including a tax charge of $0.10 mainly due to the increase in the valuation allowance for deferred tax assets. Additionally, there were restructuring, acquisition, and other charges of $0.11. The adjusted effective tax rate was 21.4% in our fourth quarter and about 23% for the full year of fiscal '25. Looking to fiscal '26, we expect the adjusted effective tax rate in the first quarter to be around 22%, with the full year expected to be similar to last year at about 23%. Importantly, we expect our cash tax rate to be significantly lower than our adjusted ETR. Moving to Slide 8 for fiscal '25 performance, we achieved record sales, adjusted operating margins, adjusted earnings per share, and free cash flow. In terms of our business model, we are meeting our targets for sales growth, margin performance, EPS growth, and cash generation. Sales totaled $17.3 billion, reflecting a 9% increase on a reported basis and a 6% increase on an organic basis year-over-year, driven by our Industrial segment's growth. Adjusted operating margins for fiscal '25 were approximately 20%, showing an 80 basis point year-over-year increase, supported by strong operational performance. Both segments have reached the 20% level for adjusted operating margins, and we expect further margin expansion as volumes grow. Adjusted earnings per share were $8.76, a 16% increase year-over-year, driven by sales growth and margin improvement. On the cash front, we boosted our free cash flow to $3.2 billion in fiscal '25, a 14% increase or $400 million year-over-year. Our free cash flow reflects over 100% conversion to adjusted net income, a commitment we plan to maintain. Additionally, our strong cash flow generation in fiscal '25 allowed us to invest several hundred million in increased capital expenditures to support growth in our Industrial segment. We returned approximately $2.2 billion to shareholders through share buybacks and dividends and spent around $2.6 billion aligned with our bolt-on acquisition strategy. Our cash generation and solid balance sheet provide us with considerable flexibility in capital allocation for future growth, both organically and through mergers and acquisitions. As Sujal mentioned earlier, we are adjusting our non-GAAP reporting. Starting with the first quarter of fiscal '26, we will exclude intangible amortization expense from our non-GAAP financial measures, reflected in our Q1 guidance. You can find the historical impact of this change for fiscal '25 and fiscal '24 in the appendix of our materials. You may also anticipate that the amortization impact will be around $0.15 per quarter for fiscal '26. Before I take your questions, I want to emphasize that we are successfully executing in both segments, as evidenced by the record results achieved in fiscal '25. We have positioned the company for strong performance and value delivery for our stakeholders, and we expect this momentum to carry into fiscal '26 and beyond. We look forward to discussing our growth opportunities and value creation model at our upcoming Investor Day on November 20. Now, let's open the floor for questions.

Sujal Shah, Vice President of Investor Relations

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

Operator, Operator

Your first question comes from the line of Scott Davis with Melius Research.

Scott Davis, Analyst

Congratulations on a fantastic year. I want to touch on the AI aspect, as it seems to be a significant advantage for you, and you appear to be effectively capturing those revenues. Last quarter, you mentioned $800 million, but you actually achieved $900 million. You also suggested that 2026 could see $1 billion in revenue. Could we reassess that forecast? Additionally, where do you stand in terms of scaling to reach or exceed company average margins?

Terrence Curtin, CEO

Yes, that's a great question, Scott. You're right about the momentum we've experienced this year. Our customers are looking for more and wanting quicker delivery, which is crucial for success in this market. We generated over $900 million in AI sales for '25, up from $300 million in '24. This reflects our efforts with products like GPUs that support AI. We've tripled our revenue in this category, showing the team's successful ramp-up. Looking ahead to '26, estimates suggest hyperscale capital expenditures will increase by about 20%. We have strong orders and positive momentum from design wins. This year alone, we grew $600 million in AI revenue, which should serve as a baseline for next year’s growth expectations. I want to emphasize that while we focus on AI, we're also seeing significant growth in our digital data networks business outside of AI. Our cloud business, which is not AI-related, is currently generating around $500 million, doubling from last year. Additionally, in the enterprise and telecom sectors, we've observed double-digit growth in applications over the past six months. Although we've concentrated on AI, there's been notable growth in the cloud segment that isn't AI-related, contributing to the overall impressive 80% growth we experienced this quarter, and we anticipate that growth trend will continue.

Operator, 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 a power element 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, CEO

No, thanks, Joe. First, let me delve into our digital data networks business product sets. The main driver is high speed, but we've also seen growth in power interconnects, particularly in making power more efficient with liquid busbars and related solutions for our customers. Additionally, we provide cable connectivity between racks. The numbers I shared with Scott encompass all of these aspects. We are experiencing momentum across all categories because they are essential components of our architecture, which requires lower power, no latency, and higher speeds simultaneously. All of these products are important, and I don't see any single aspect having a significantly stronger impact than the others as we move forward. We will likely maintain the positive momentum we've experienced this year with our ongoing projects and successes. Heath, you can address the capital aspect.

Heath Mitts, CFO

Sure. Our capital increased by a couple of hundred million from fiscal year '24 to fiscal year '25, primarily to support various AI and cloud initiatives we've undertaken. As we transition from fiscal '25 to fiscal '26, we may experience some pressure to further increase that amount. While we don't provide specific guidance on that figure, I expect it to be somewhat aligned with, though potentially slightly less than, the dollar increase we observed in the previous year. Considering the revenue growth from these programs, I believe we will still achieve a total equity average in the slightly over 5% range. However, it's important to note that the revenue generated from these initiatives can sometimes lag behind the fiscal year when investments are made. Some of the team's considerations for this year include investments in late '26 that are intended to boost revenues in '27. There is considerable momentum, and the key for us will be to operationalize these initiatives to ensure we don't hinder our customers.

Operator, Operator

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

Mark Delaney, Analyst

I was hoping you can help us better understand trends by end market beyond digital data networks, including how demand trends have changed over the last 90 days? And any early views you can share for fiscal '26?

Terrence Curtin, CEO

Thank you, Mark. As mentioned earlier, we invite you to attend Investor Day, but I will share what we've observed and how things have evolved over the past 90 days. Let's focus on the orders we've discussed, which you can see in the slide. It's encouraging that we saw order growth compared to both last year and sequentially in both segments. The overall environment appears to be better than it was 90 days ago. Looking at the specifics by segment, in Transportation, we experienced an increase in orders year-over-year and sequentially in the automotive sector. In 2025, we witnessed growth in production in Asia while production in the West declined. We believe there is a trend toward more stability with production likely becoming more balanced between regions, although auto production is expected to remain flat in the range of 87 million to 88 million units. We anticipate continued content growth outpacing the market at 4% to 6%, driven by the increasing need for data in vehicles, enhanced comfort features, and the ongoing rise of electrified powertrains in Asia. In industrial transportation, compared to 90 days ago, there hasn't been significant change. Growth is still evident in Europe and Asia, while North America continues to see declines in the truck, bus, and agricultural sectors. We are hoping for signs of a rebound in North America, but currently, we do not see any encouraging trends. In the Industrial segment, I'm skipping over digital data networks as you requested. Overall, we are seeing consistent growth across our end markets. In Energy, we recorded organic growth of 20% this quarter, thanks to our positioning in North America and increased grid investment by utilities. This continues to drive strong order momentum, and we are also benefiting from utility-scale renewables like solar. The Automation and Connected Living markets are progressing well. Airframers have mentioned improving build rates, and it's encouraging to see the supply chain showing signs of improvement. In our Automation and Connected Living business, particularly in factory automation—which is the larger part—we are seeing order growth across all regions. However, we have experienced some weakness in areas related to HVAC and appliances. While the industrial side of the business seems to be improving, the residential or consumer side has softened a bit. Nonetheless, we still achieved good growth, and we believe the industrial part will continue to gain traction. As we approach 2026, our guidance reflects 17% overall growth and 11% organic growth in the first quarter. The Industrial segment retains solid momentum, and we are observing some stability within the Transportation segment alongside a few markets that still present uncertainties.

Operator, 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, CFO

Okay. I will address what seems to be three questions in one.

Terrence Curtin, CEO

Wamsi, you're ignoring Sujal's instructions.

Heath Mitts, CFO

I appreciate your questions and interest. Let's start with margins. This has been a journey for us. We were clear in our previous comments about Transportation, aiming to reach a margin target of around 20%. They are largely there now, though there will be fluctuations each quarter. For the year, they are at 20%, and we expect positive margin performance as we move into FY '26. The Industrial business has been focused on consolidating opportunities and leveraging scale, particularly with strong programs in our digital data networks business. We are pleased with their progress and growth in FY '25. Looking into '26, we anticipate balancing our investments, expecting both segments to contribute to revenue growth of about 30% or slightly more, depending on the mix. As you do your modeling for organic growth, 30% is a solid estimate. The flow-through math greatly impacts our gross margins, and we also gain some leverage on operating expenses. This past year, we have seen approximately 35% gross margins. The changes in amortization mainly affect gross margins, providing about 100 basis points of improvement on that line. Recasting it for '25 puts us at about 36%. As for segment performance, our provided schedule details the recasting for the past eight quarters, showing our actual results. The Industrial segment is more heavily weighted due to amortization expenses from acquisitions, especially with our higher acquisition activity in that area, including the Richards deal we completed earlier this year. Regarding mergers and acquisitions, we plan to discuss them more at our upcoming Investor Day in about three weeks, focusing on capital deployment. We are excited about potential bolt-on opportunities, which can vary in size. For example, we recently completed both the smaller Harger deal and the larger Richards deal. Our appetite for acquisitions depends on the business and the potential value they could create. The free cash flow gives us confidence to be a bit more aggressive while we remain cautious with our investments. Stay tuned for more updates in a few weeks.

Operator, Operator

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

Amit Daryanani, Analyst

I just had a couple of questions just on the digital data networks segment broadly. Terrence, 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 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? I'd love to just kind of understand the levers behind the growth you see. And then on digital data networks excluding AI, your growth over there actually has 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 digital data networks excluding AI as well?

Terrence Curtin, CEO

Yes. So to clarify, when discussing the combination of AI and cloud, I want to ensure we understand where that growth comes from. It primarily stems from program ramp wins. As we've mentioned before, we have a strong position with hyperscalers and are engaged across various areas, making significant progress there. Our market share has remained stable, and we are benefiting from technology collaborations with our hyperscale customers, some of whom utilize their own GPUs. Beyond AI and cloud, during the past quarter, we experienced approximately 15% growth in enterprise and cloud segments, with similar double-digit growth in edge and IoT. This reflects the overall impact of trends in capital expenditures. Our product offerings are quite extensive, and as high-speed technologies evolve, their benefits tend to propagate over time. Consequently, the distinction between AI and non-AI is increasingly blurred. An important factor to monitor is cloud capital expenditure, which has been growing at about 20%, contributing to this cascading effect. Last year, we believed all cloud capital expenditures would be directed solely towards AI, but we're now observing a broader distribution. While the lines between these areas may overlap in some respects, this dynamic has fueled strong growth, not just this quarter where we achieved 80% growth, but also throughout the year organically. This includes growth in AI, non-AI cloud segments, and increasing momentum in enterprise, telecommunications, IoT, and edge in recent quarters.

Operator, Operator

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

Luke Junk, Analyst

Terrence, I wanted to circle back to Transportation and 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 portend to more balanced outgrowth algorithm? And I think you spoke to production being more balanced in the West, but what about some TE-specific dynamics as well?

Terrence Curtin, CEO

Thank you, Luke. You're correct in my earlier remarks. This year, we've experienced an imbalance in production, which has posed some challenges as our content per vehicle is higher in the West. This has led to our content outperformance being slightly lower than the expected 4% to 6%. Looking ahead, as we address the declines on the West Coast and they stabilize, I believe we will see growth in content per vehicle across every region contributing to the 4% to 6% target. Each region presents unique opportunities; for instance, the electrified powertrain is primarily developed in Asia while data connectivity is important globally. The features that drive vehicle electronics differ by region, but it's important to note that in every area, growth is occurring, just at varying rates. Overall, we do anticipate more uniform content growth over market performance this year, although there may still be some discrepancies due to different regional trends.

Operator, Operator

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

Unknown Analyst, Analyst

This is Samik Chatterjee from JPMorgan. I wanted to ask about the implied margin guidance for Q1. Based on my calculations, even after adjusting for changes in non-GAAP calculations, the implied margins are approximately 21%, indicating a significant expansion compared to Q4. Could you please highlight the factors contributing to that margin expansion?

Terrence Curtin, CEO

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

Heath Mitts, CFO

Samik, we do not provide specific margin targets. However, based on the information we've shared regarding our tax rate and the implications for our EPS and revenue guidance, it is reasonable to expect a modest sequential increase in margins, primarily driven by Transportation, which typically sees the highest auto production numbers in our fiscal first quarter. In Industrial, the margins may remain neutral or flat. While I prefer not to provide specific margin guidance, I believe this assumption is fair.

Operator, Operator

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

Guy Hardwick, Analyst

Terrence, I know you kind of answered the question about the growth in digital data networks excluding 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 assumption should we assume sort of medium term?

Terrence Curtin, CEO

Yes. First off, you are right. My comments in response to Scott's question focused on our cloud revenue from non-AI applications, which was about $250 million last year and increased to $500 million this year. I believe this growth is due to the upgrading of our infrastructure. Not everything includes a GPU, but there are cloud data centers and other components being enhanced that we are benefiting from. We are observing significant high-end computing advancements, and this momentum will continue to positively impact us. While this area may not have as much content compared to our AI offerings, it will still experience a healthy growth rate due to the necessity of high-speed connections in these next-generation servers required by the cloud.

Operator, Operator

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

Colin Langan, Analyst

Just a follow-up on the outlook in auto 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, CEO

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. 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 the full electric. The element that you have to remember is I need you to think about what's happened to the 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, Vice President of Investor Relations

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 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, CEO

Thanks for the question. I would say you have to look at order levels and the one element you get always this time of 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 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 a $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, Operator

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

William Stein, Analyst

I want to start by acknowledging the strong performance in revenue and earnings, as well as the positive outlook. However, I have a question regarding the margins. While you're seeing revenue growth and benefiting from the new AI category, which I would expect to have higher margins, the conversion margins seem to fall slightly below expectations. Looking at the next quarter, if you exclude the amortization adjustment, it appears to be a similar situation: revenue and earnings exceed estimates, but the margins are somewhat underwhelming. Can you provide clarification on any factors that might be affecting profitability today?

Heath Mitts, CFO

Yes, we've been maintaining roughly 30% flow-through for a while. When you assess our operational performance, especially for the fourth quarter or the entirety of 2025, and look at our guidance for 2026 year-over-year, particularly for the first quarter, I believe you would see a number starting with a 3. The change in amortization was implemented solely to better reflect our cash profitability. While there may be some fluctuations between segments and within a segment, these variations tend to balance out over time. From a fundamental standpoint, there’s nothing negatively impacting us. However, certain segments that are experiencing increased tariff pricing may face challenges, as that revenue does not include any margin. Consequently, a spike in tariff pricing can lead to situations where revenue grows but margins do not, creating some noise in our results. Nevertheless, if you review the schedules we provided for the quarter and the full year, you would notice around 30% flow-through reflected there.

Operator, Operator

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

Shreyas Patil, Analyst

On the AI front, you're experiencing significant growth, with a run rate of approximately $1.2 billion. You've previously mentioned that this sector is essentially a three-player market. One of your competitors seems to be substantially ahead in terms of revenue, possibly three times what you're generating currently. As we look to the future, how do you perceive the dynamics of market share in this sector? Should we anticipate that, in the long run, the market share will become more evenly distributed among the three major players, or do you envision TEL maintaining its position as a firm number two over time?

Terrence Curtin, CEO

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, ramp to the levels 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, Operator

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

Michael Elias, Analyst

This is Michael on for Joe. So previously, you mentioned strong content in busbars and cabling and also previously other quarters, backplane 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, hyperscaleers, stuff of that nature?

Terrence Curtin, CEO

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 shouldn't assume you get one product set or all product sets with one customer. We compete individually on each one of those product sets that you sort of talked about. And that's just reality as we work the architecture real time. The bulk of our wins that when you see the revenue traction we have in the ramp are mainly with the hyperscalers. We had 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, Vice President of Investor Relations

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, CEO

Thank you, everybody.

Operator, 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.