TE Connectivity (TEL) Q3 2026 earnings call transcript

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

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Third Quarter Results and Outlook for our fourth quarter of Fiscal Year 2026. With me today, our Chief Executive Officer, Terence Curtain, and Chief Financial Officer Heathmitz. 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-gap 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.

You may rejoin the queue if you have a second question. Now, let me turn the call over to Terence for opening comments. Good morning, everyone, and thank you for joining us. And before I get into the details on the slides, I do want to frame today's call around a couple key takeaways. Our strategic positioning around the Accelerating Data and Power trend continues to drive broad-based outperformance, and we are at the intersection of the largest technology and infrastructure investment cycle that's taking place around the world. We also continue to benefit from continued market momentum, driven by both secular growth trends, as well as positive cyclical market inflections, and we'll click down on these during today's call.

As we outlined at our Investor Day earlier this year, we expect our strategy to deliver broad-based growth while driving sustained margin expansion and double-digit earnings growth. As we progress through this year, we have continued to execute against this strategy, and our third quarter results and outlook provide further evidence that our strategy is working.

Our positioning is creating opportunities across multiple long-term growth drivers, as increasing data and power requirements are reshaping our customers' architectures. And this is where our interconnect technologies are essential. Investments in AI infrastructure continue to drive strong growth in both our digital data networks and energy businesses.

Further secular trends, including electrification, automation, and increasing compute at the edge applications are driving growth across our aerospace and defense, automation and connected living, automotive and commercial transportation businesses. These investments are expanding our opportunities across both our segments and reinforce our confidence in TE's long-term growth outlook. The strengths of these trends is reflected in our record-order performance, with double-digit-order growth in every business across both segments. For the full fiscal year, we now expect sales to grow approximately 15%, representing more than $2.5 billion of incremental revenue in 2026, while delivering margin expansion and earnings per share growth above 20%.

Importantly, our record-order momentum and growing backlog provide increasing visibility into continued broad-based growth as we move into next year, reinforcing our strategy, and our ability to compound earnings that create long-term value for our owners.

So with that as a quick overview, I'd ask you to turn to slide three to review our third quarter results and our outlook for the fourth quarter. In the third quarter, sales were $5.2 billion, and they increased 14% on a reported basis and 12% organically over last year.

Our order momentum continues to increase, which resulted in record-order levels of $5.7 billion. Growing 27% versus the prior year, as well as 7% on a sequential basis.

And as I normally do, I'll provide more details on sales and orders in the next few slides. We deliver 22% earnings per share growth to a record adjusted earnings per share of $2.94, and adjusted margins expanded 90 basis points, reflecting the continued execution of our teams, while also delivering for our customers.

You know, in this growth environment, the other thing that we're proud of, we continue to demonstrate the strength of our cash generation model. Year to date, we've generated approximately $2.2 billion of free cash flow, while continuing to make investments to support future growth in both engineering as well as manufacturing capacity.

In addition to the organic investments, today we signed an agreement to acquire Astridine TDI, which is a bolt-on acquisition that runs our portfolio of power and filter products for mission-critical applications that'll be part of our industrial segment. And Heath will click down with some additional details about this acquisition that we're excited about in his section.

Looking forward, we expect our fourth quarter sales of approximately $5.25 billion, which will increase 11% versus the prior year. And we expect to deliver adjusted earnings per share of approximately $3.05. For the full year, we expect to deliver growth of 15% in sales and 23% in adjusted EPS year over year. So let's get into orders. And if you could please turn to slide four, I'll click down into the order trends we're seeing.

Orders increased over $1 billion year over year to a record of $5.7 billion in the quarter. And the order momentum was in both segments, which reinforces the breadth of our growth.

The industrial segment continues at strong momentum, with orders increasing 36% versus the prior year. These record industrial orders were driven by increasing momentum in AI along with strong growth in every business. And just to give you the flavor of the momentum, in our digital data networks business, year to date, our orders are up over 70% versus last year. And in our energy, aerospace and defense, and automated and connected living all have 20% order growth year to date.

Turning to transportation, segment orders increase 19% versus the prior year, reflecting continued content growth in both automotive and commercial transportation.

We saw double-digit year over year order growth across all three of the transportation businesses, supporting our confidence in continued market outperformance driven by where we positioned ourselves on content. We are running a book to bill of 1.1, both in the quarter as well as year to date. Our orders have not only translated into strong growth this year, but also have resulted in a record backlog position. And this backlog position is a strong growth indicator as we move into our fiscal 2027.

Now, let me click down into the segment results and I'll start with the industrial segment that is on your slide five.

In the third quarter, our industrial solution sales grew 22% on a reported basis and 21% organically year over year with broad base growth as you see on the slide across the segment, led by over 30% organic growth in both our DDN and energy businesses. We are uniquely positioned at the intersection of the accelerating data and power investment cycle.

What differentiates our industrial segment is the breadth of our participation across the AI infrastructure with AI driving demand, not only for high speed and power connectivity in and around the rack, but also for the energy and infrastructure required to bring power to the data center. This positions both our DDN and energy businesses to benefit as AI infrastructure continues to scale while the rest of our industrial portfolio continues to benefit from broader secular growth trends. In digital data networks, our teams delivered another very strong quarter growth with sales increasing 34% year over year and up $100 million sequentially, which was aligned with our expectations. And we expect DDN to deliver the full year growth we talked about last quarter.

In data connectivity, we continue to see increasing demand as AI architectures evolve towards and genetic workloads, driving greater deployment of CPUs and networking, which increases the addressable market per high speed, top or connectivity. In optical, we see additional long-term growth opportunities beyond what we have outlined in investor day. Through the RAM Photonics acquisition, we strengthened our optical roadmap with fiber attached connectivity, and we are encouraged by our customer engagements around this future growth opportunity. In our DDN business, we also see growing opportunities and power connectivity as our customers evolve their architecture.

We have deep expertise in material science, thermal management, safety, and reliability challenges associated moving to higher voltage connectivity. As the industry moves towards higher voltage architectures, we are well positioned to support our customers evolving connectivity requirements.

Turning to energy, we saw very strong sales growth and our organic sales increased a very strong 33%. Driven by continued investment across grid hardening, where utilities continue to modernize aging infrastructure for increased power needs, as well as data center build-outs. Our AI opportunity extends beyond the rack. Data center build-outs are driving significant investment across the power infrastructure, and we provide the connectivity, solutions that enable generation, transmission, and distribution infrastructure, which gives us the unique position I highlighted earlier.

Turning to our automation and connected living business, sales increased 16% and 14% on an organic business basis with growth across every region. Versus 90 days ago, we are seeing additional indicators of both cyclical growth as well as content outperformance. We now expect this market to grow high single digits this year, and with our strong position and automation, we expect to outperform the end market. In aerospace and defense, our business grew 12%, which reflects the continued strength in both the commercial aerospace, as well as what we're seeing in the defense markets, where our data connectivity and power products are essential to next generation platforms.

In our medical business, our team delivered sales as we expected, and at the segment level, turning to margins, industrial segment adjusted operating margins expanded 70 basis points to nearly 23%, reflecting continued strong execution by our teams.

Now, let me turn to our transportation solution segment. That'll be slide six. In the third quarter, our transportation solution segment grew 7% on a reported basis and 5% organically year over year. Growth was driven by content outperformance in our end markets, particularly in Asia, our leading global position, as well as our customer co-creation model. In automotive, sales increased 5% on a reported basis and 3% organically.

We continue to deliver growth above the market due to content drivers, despite a decline in vehicle production. Data connectivity in the vehicle continues to be a significant driver, along with electrification of the powertrain, where we benefit largely in Asia and software defined vehicle architectures. We expect our full year content outperformance to be in our four to six point range for both this year, as well as longer term.

Turning to our commercial transportation business, sales increased 20% on a reported base, as well as 18% on an organic basis.

We continue to see improving cycle trends across regions and market verticals while delivering significant growth above the market through new program wins, further electrification of trucks in Asia, and strong execution across all regions. In our center's business, our performance was as we expected. And at the segment level, and looking at margins, the transportation team delivered adjusted operating margins of 21%, demonstrating the resiliency of the execution by our transportation team.

So with that as a click down on the segment performance, let me turn it over to Heath who will get into more details on the financial center expectations going forward.

Thank you, Terrence. Good morning, everyone. Please turn to slide at seven. For the quarter, we achieved adjusted operating income of over $1.1 billion in adjusted operating margins of 21.9%. Gap operating income was $981 million and included $9 million of acquisition-related charges, $83 million of restructuring and other charges, and $56 million of amortization expense.

I continue to expect her structuring charges in fiscal 26 to be roughly $100 million. Adjusted DPS was $2.94, and Gap EPS was $2.55 for the quarter, and included restructuring acquisition of other charges of $0.23 and amortization expense of $0.15. The adjusted to effective tax rate was 23% in Q3, and we expect Q4's rate to be between 22 and 23%. Importantly, as always, we expect our cash tax rate to remain well below our adjusted effective tax rate.

Please turn to slide eight. This slide reinforces the themes Terrence discussed, which are ongoing broad-based growth across the segments, strong operational execution by our teams, and continued earnings growth. Sales of $5.2 billion were evenly split between the industrial and transportation segments. Given the order strength that Terrence mentioned earlier, we will exit this year with a strong backlog position in both segments. Certainly, this is influenced by AI program wins within the DDN business. The order momentum and backlog growth give us confidence that our strong performance will continue into next year. Adjusted operating margins were 21.9%, expanding 90 basis points year over year. Adjusted earnings per share were 22% year over year, driven by sales, growth, and margin expansion.

The teams are doing a very good job of meeting customer demands while continuing to manage inflationary pressures through both price as well as cost actions. Turning to cash flow, cash from operations with $1.2 billion and free cash flow was $883 million during the quarter. Year to date, free cash flow is roughly $2.2 billion, and we've returned approximately $2 billion to shareholders through dividends and share buybacks so far this year. We continue to expect our free cash flow conversion to be roughly 100% this year.

Now, let me talk about the acquisition that Terrence mentioned earlier. Astrodine TDI will generate more than $250 million in annual sales and had a purchase price of approximately $1.4 billion. We expect to close the transaction by the end of this calendar year subject to customary closing conditions. Our cash generation model coupled with our strong balance sheet supports our capital deployment strategy. And Astrodine is a good example of a strategic bolt-on acquisition while we'll explore still returning capital to our shareholders. And before I turn it over to questions, let me reinforce that our performance reflects our positioning to benefit from the largest technology and infrastructure investments taking place globally. We're delivering well ahead of our through cycle business model, generating strong margins, earnings growth and cash flow.

And just as important, our record order momentum provides heightened confidence as we wrap up fiscal 26 and jump into fiscal 27 starts in October. With that, let's open it up for questions.

Thank you, Heath.

Hey, good morning. Good morning, Scott. Good morning, Scott. And he's in schedule. Morning. Hey, guys, I'm going to switch directions a little bit. And can you talk a little bit about the ramp you expect in your FAU optical business? I mean, my understanding is it's a hard business to scale up and scale out, but you guys seem to have some capabilities here. It could be pretty important to kind of calming that debate of copper versus optical. So just kind of curious to see where you're at there. Thanks.

No, thanks, Scott. Let me start with the second half and I'll talk about the FAU. I think the first thing is, as we said, it's copper and optical. I'm going to come back to that again, because you're going to have different needs. And we see in the architectures where within the rack, what you're doing in the rack, it's going to be copper is going to be the heavy workload. But with what we've done with the RAM Photonics acquisition, it really is something that we opened up incremental market access to as optics come into the things that are going to be the scale out and also probably moving off the switch in the architecture. And as you know, there's a lot of customers that are working on this.

What really makes this exciting for us is the engagement that we have with our customers on the FAU technology. It's early days. I think this is the type of thing. You know, you won't really see revenue until we meaningful revenue until we get to 28 and beyond that. But it's an incremental Tam, Scott. And it builds on the copper position. And it's going to add incremental revenue in Tam for us as we go forward. So near term, we're investing in it. Certainly, you all know the acquisition that we did. Certainly, we are investing in the scale, scaling of the manufacturing, as well as the engineering teams off that acquisition to really make sure we can meet the intercept point that our customers expect us to meet, which will be more in the 28 and beyond timeframe.

And that's what we get excited about how we rounded out the portfolio with that. And we'll continue to look for opportunities that strengthen it based upon where we're co-creating with our customers.

Okay.

Good morning. Thank you very much for taking my question. I'm hoping you can give more color on how the record orders and backlog are sitting in a company up for revenue growth, not only for this year, but any early thoughts on 2027. And as a part of the order commentary, can you speak specifically to DDN orders relative to your outlook for sales growth? Because you cited improving momentum in AI orders, but then you also said that revenue is tracking in line with your prior expectation within the DDN segment. So I'm trying to reconcile those comments and why DDN revenue for this year is in tracking to be better than you previously thought in light of the AI order momentum.

Thank you. Yeah, sure, Mark. Thanks for the question. And like you said, the orders I talked about in the call are up about $1.2 billion.

And the bigger jump was in our industrial segment. So about $800 million increase in industrial. And half of that order growth came from DDN. So it ties right into the trends that you see that relate to AI. And that's going to just continue AI as a percentage of that is just going to continue to increase. And I did mention that we had 70% order growth year over year to date in DDN. And let's face it, that's building backlog as we're ramping programs.

So just with where we are in the year with three months left, these are program ramps. And we have multiple program ramps going on at any time. So really, this momentum is really going to deliver more into next year than increases to this year. And we do expect DDN to be up in our fourth quarter sequentially over the third quarter. But just as importantly, when you think about that industrial segment order, and I know I mentioned some of these, energy business, AD&M business, as well as the ACL business, we're all up 20% year to date. And when you look at energy and AD&M, they're really, really strong secular growth trends that we don't see that momentum slowing down.

It's broad based. It's certainly, you can look at the investments that are happening, that that traction is going to continue and carry into 27 to your 27 question. And then the last piece that I think is the big piece in our industrial segment is ACL. ACL is a little bit more, has more cyclicality to it. And it's nice that we're having that cyclical uptick, but those orders are up. And then in transportation, our orders are up 400 million dollars every year. And we're seeing benefit of ICT. But the orders that we're seeing are really just reinforcing our content position and automotive. And vehicle production is down slightly. It really hasn't moved from when we talked to you back early in the year.

And we think it'll stay around this slightly decline. But our team's doing a great job delivering the performance of content above production. And that's what our orders are reinforcing, the programs that are coming in to really make sure it continues to have that four to six points out performance.

Rupu, thanks for the question. And thanks for coming for Wamsi. It's a great question. So let me frame it a little bit, because when you think about T, we need to think about production. And production is slightly down. And certainly, there's headlines that are out there that, hey, what's happening in China domestically. But China auto production is down similar to the global picture. And our Asian China position is very strong. And we had eight points about performance over production in China, or actually our China business grew 6% against 2% down in production. So and exports are the element that I think people miss in that narrative. So right now, the exports are sort of our China OEMs are offsetting a weak China local market.

But you have to think about those exports that's really driving it. What they're doing in Southeast Asia, Central and South America, where they have a 100% exports to Africa as well as Europe. So I do think some of the narrative is around the car sales in China, but the exports are clearly benefiting from that, and offsetting that. The other thing I would just highlight, while production hasn't changed, are European business had four points of outperformance in the their square back in there. After last year was sluggish due to some of the EVs, and really Asia and Europe are offsetting a weak North America market spill. So net net, we feel very good about the four to six productions staying exactly where we thought.

And we would expect production to be similar next year, maybe down a little bit. So feel good about the team momentum and also the content outperformance that we have this year, and then into the fourth quarter, that'll roll at 27.

Thank you. Good morning. Just wanted to go a little more into the energy segment. So the organic had pretty meaningful acceleration and organic growth versus a Tupper comp.

That's spelled exceptional sequential too. You see in a particular build in just kind of baseline run rates there. In other words, is that new key program and design ends layering in, or was there something peculiar about the growth in this quarter for energy?

No, Chris, thanks for the question. And let me frame it a little bit for you. One of the things that was really nice, and we've been talking about energy and how we get excited about it, certainly ties into the power trends, but was well over $100 million of growth this quarter of our $600 million total growth. So it's very meaningful. And when you look at it, we think of our energy business and three basic verticals below it that you should think about it.

About 60% of it or two thirds is really around where we service utilities. And we talked about grid hardening. There's the investment that's happening around the aging infrastructure. Clearly, that is on an upward inflection point that you all know about. There's about 20% of it that we call industrial, but this is also where you bring power into a data center. You bring power into buildings.

And that is clearly growing very fast, and we're benefiting from it, and you know, even reflected in some of this quarter's numbers. And then the remainders around clean energy. That had been and is a growth driver, been stronger in the past, but certainly what we're seeing in the data center as well as the grid hardening is just accelerating. And if you look at energy, you know, this year, we're probably expecting it. You should think about it more as a mid-teens type grower. This quarter, there is a project nature to some of our programs because you're selling into infrastructure. But I really think as you look at it this year in the next year, think about it more of a mid-teens grower is the right way to think about it.

And just the last thing I would tie back to is, and when we look at this market, yeah, there's energy cap X, but we do think about a third of the energy market growth where we're positioned is driven by data center build-outs. So it ties back into, yes, we have a great position in DDN, but you're also, you know, where we're going to benefit from the power infrastructure build-out is just as important.

Okay.

Yeah, fair. So that's, you know, the first question is pretty straightforward. When you think about what we think about DDN and where AI is, you know, we're on track to what we said last quarter for DDN. DDN will be exactly where we thought we were going to be. And when you look at it, because of the AI momentum and the orders that we see, all you're going to continue to see is the percentage of AI of DDN is just continuing to increase. It goes up. So I know a few quarters ago, we talked about it, 70%. Every quarter, it goes up as AI continues to accelerate, and that trend is going to continue. So that's the first part.

On the second part, on copper, and it goes back to Scott's question, on the copper and the inflection point, a couple of things. When you're in the scale up versus scale out, let's face it, scale out already is very optical, you know, because you have longer lengths and things like that. Optics are good. When you're getting into getting to more ingenic workloads, that's where you're introducing more CPUs. That's a whole going to be copper on it. So when you look at it as architecture is evolving, and that's why you hear the global merchant chip makers say copper is going to be the workhorse within the rack, and then that scale up is going to continue.

I think where you get the inflection point, which is incremental benefit for us, is when you would get opticals like CPO coming in at the switch level, you know, it's sort of in between. And in that regard, that's where I think with what we've done with RAM on the FAU side really plays into the connectivity suite, and that's incremental TAM. And that doesn't even get into, and that's just on the data side when we're talking about it. Like I said in the prepared remarks, power just continues to move up. You know, the power connectivity as they're moving to higher voltage architectures, you introduce optics that creates more power need. And if you look at that in some cases, we can get content increases that'll be 1.5, what traditional power content would be.

So all this inflection, we like it. We think it is all positive for us. And we have to realize when you play with technology and play where we want to play, architectures evolve, and you need data, you need power, and we do both. So we get excited about it, we think it's going to continue to benefit us as we move forward and clearly our orders also represent that.

How you doing? Hey, Joe. Good. I want to touch on the other parts of DDN. So like if you're tracking towards your, you know, AI cloud number of like, you know, around 2.4 billion, it suggests that like the rest of DDN, you know, that 800 million of more traditional stuff isn't growing that fast this year. And I'm just curious what the, can you frame that piece for us? And when you talk about the agentic CPU type incremental demand that you see, where would that fall? Would that fall within that 2.4 billion that you're currently calling AI cloud? Or would that fall into that other like 800 million of like more traditional? How should we think about the content stuff up there?

Well, a couple of things. When you see that content step up, this is where in the space, it blurs a lot. And it depends on, you know, where the customer is at doing it, Joe. And I'm not trying to be cute. But when you actually sit there, the hyper scaler is doing it, we would put it more in the AI cloud number. If it was just somebody buying a server, it might be an enterprise type number. So we continue to get clouding on that due to how these architectures evolve. And it's another reason why you're going to hear us talk much more at the DDN level as we go forward. But when you look at it, you know, talked about it just on the prior question, the growth in AI in cloud is the big momentum and growth driver.

What you look at in the other areas, you do see people prioritizing, you know, to the AI workload. So while you do see some increase elsewhere, it's not as big of an increase as AI and cloud. You know, in some cases, we actually see down a little bit as you have shift of investment. But net net long term, both will be benefited as these architectures go forward. I just think we're in really early days to see it outside of the AI in cloud space. All right.

Thank you. Yeah. So when you look at it, we had very strong organic growth in bookings that you saw on that slide. You'll look at that. If you, and I'm just you know, about half of that growth was due to DDN similar to the year over year. So we continue to get very strong growth momentum. And as I said, I think the real number is that 70% plus year to date booking growth that we have. So it's very strong across as you look at it, but DDN played a very big role in that order growth in industrial in the quarter, which was about half of our overall order growth substantially. Okay.

No Steve, great question. And let me talk about a little bit. And to your point, I know we get a lot of discussion around data, especially with DDN and where we do data connectivity in the vehicle. But we get excited about power and data because when you think about where we play in the architecture, somebody's making a semi choice, somebody's making a power supply choice. And how does the architecture come together is always what we're looking at. So we look at both. You know, even if you look at the shear with RAM, you know, that we don't, which is an optical connectivity, that's data. This is a power play. And, you know, I'll ask each about that.

But when you look at what we announced, Astridon TDI, you know, has a very good position, you know, both in power filters, which makes sure you have quality of power coming into applications, as well as some custom power supplies. And we already have a very similar position that Astridon has in the power filter side. You know, we've had something from a legacy perspective, we added to it with Schaffner, and about 40% of Astridon is in the filtering power filtering side. So this just continues to add to our position, which certainly, you know, is a great thing to have.

On top of it, they do some custom power solutions that actually go into applications that we really like, like semiconductor equipment, goes into the defense market, as well as medical markets that we talk about. So we're going to continue for those customers as they evolve, their architecture be able to give a pretty robust power solution piece to them that we've given them, but it's going to expand it. And that really, the custom piece expands our time. And we're very excited for this team to join T, you know, later in our, later this calendar year. And he wants to talk about some of the numbers.

Thanks. And Steve, you know, I mentioned on the call that this is, this footage has been growing very nicely with a really nice trajectory going forward.

And if we calendarize it for our fiscal year, it's about 250 million sales right now. As I mentioned, in my February marks, we paid about a billion four. That will be funded through cash. We expect it to close later this year, this business, as it comes into TE and our industrial segment, it will be a creative to our growth rates and our margins at both the TE level and the industrial level. So it's really attractive business. On top of that, we do see operational synergies, both in where they manufacture versus where we manufactured some opportunities there, as well as some other things that we bring to the table in terms of the construct of the deal.

So I'm pretty excited about getting this one over. We just got to get it through the customer close process towards the end of this calendar year.

Thank you. So a couple of things. First off, being as we said earlier, we expect E. D. to be delivered in what we said 90 days ago, so it's fully as we expected. And it's going to continue. The A. I. revenues are going to continue to increase as a percentage of D. D. N. based upon the strong back like we have and the growth momentum going into 27. On the energy, as I mentioned a little bit earlier, about 20% of our energy business is benefiting from where you get data center build out. So you do see that. You see that driving really nice growth in the energy business. And when you look at the acquisition we just talked about with estradine, it gets the benefit really from where it plays into semiconductor equipment.

Clearly where you have that increased capacity going in, four chips that are older by A. I. Clearly that's a really good position they have and we will benefit from that through that position that they have and we're going to build on. Okay.

No, I think the things you said were right on, Joe, let me give you context. And we said this last quarter, $3 billion we laid out, we're ahead of. And that has continued to shift left. And that's how you should think about it. Even with the momentum we have in the orders we've laid out, you know, DDN is going to be a very big growth driver in the 27 again. And, you know, as well as the other units that we have, you know, from a growth perspective. So nothing has changed on that $3 billion continues to shift left. And you know, we'll be above that. And what's really good is the breadth of the growth we have, which includes DDN to really make sure we continue to compound the growth that we've had on top of the 15% we're going to deliver this year.

Right.

But does that actually allow some new competitors to come in with that technology shift potentially coming in the next few years? First off being, you know, when you think about power and, you know, NRA revenue, probably one third of what we do in AI is power connectivity, whereas two thirds is data connectivity. And when you sit there, you're going to continue to see as that power and flex up, you know, it's going to create opportunity for us. So, you know, we have a very strong position in power. You know, we're already architecting with our customers around how does the data and the power needs go together? When you're really talking at the rack, I don't see, you know, new entrants coming in because this is a simultaneous equation of trade-offs and constraints between the data and the power equation when you're at the rack.

And our customers really like somebody that understands both the power chain and the signal chain. So, when we look at it, we feel very fortunate that we can have discussions with them on the power chain that also considers the data chain, and that's an advantage position.

And we feel that you're going to continue to see outgrowth in that area as people move up the high voltage architectures. You know, some people are playing with 800 volt, but there's a whole continuum of where people are making trade-offs. So, I don't think it's one end game, and that's what's really great about what DDN is going through. All of our customers are really experimenting in the architecture on different trade-offs to make sure they get to the lowest cost per token. We have to realize that's the ultimate end game that they're going to, and different customers have different paths they're trying to challenge. So, when we look at it, that's going to be part of the growth momentum we have is what's happening on the power chain as you move up.

And like I said, already a third of our business is related to the power connectivity side.

Sure. Well, thanks for the question. Yeah, and on defense, I mean, let's face it. It is at a different inflection point due to some of the geopolitics in the world. And you all know that, so I don't need to talk about that. But what we're also seeing, we are seeing a velocity increase on programs, you know, due to what's going on. And, you know, it is also both very strong in Europe, as well as in the US. So it's on both of those vectors that are very much driving the increased backlog. And even when we talk about the backlog position earlier, and we said it a quarter or so ago, backlog that we're having, you know, some of the more significant builds are not only DDN, it's also an aerospace and defense.

And, you know, especially on the defense side. So that inflection point, and even when you look at what is budgeted for defense spending around the hardware side, which is where we would play, is very important. It is also important when you think about when you get into UAVs and applications like that, come back to the data connectivity and the power connectivity is very important. And, you know, when you get things that are remotely controlled, that comes into very high speed elements where the compute has actually happened real time. And we're benefiting from that. So we're on a breadth of programs. The growth that we're having, you know, the defense is growing faster than comm error right now, you know, which is, you know, a little bit different than you would have thought about TE maybe 10 years ago.

But that trend is a real secular trend that we don't see slowing down and we continue to invest in capacity to make sure we can deliver for our customers.

Sure, Shreya. Let me take the first piece. As I said earlier, when you think about optics today, we do have optical positions today that we have in DDN. The element is we are not a major player in scale out. So when you think about scale out, which is almost all optical today, we have a limited position there where we typically are completely focused in the scale up in the rack is where our focus has been and continues to be as we make the investments.

Do you want to talk about the margin? Sure. Shreya, we are running kind of where we would expect at these volume levels. And so certainly the heightened growth in industrial, you would expect to see 31% flow through for those types of volume. A given quarter, as I've said in the past, is not always the best measuring stick. But I would say the momentum is there and you see it in our margin. And our margin rates have continued to improve both at the industrial segment as well as the transportation segment that doesn't have quite the same market support that we're seeing in the industrial segment. But as we finish up the year, your fourth quarter questions, as we ramp up the year, certainly we maintain this strong momentum.

There's nothing that really changes that perspective on things. And quite honestly, as we jump into 27, we would expect the same kind of momentum.

Hey, thank you.

No, thank you. I want to thank everybody for joining us this morning. And if you have any questions, please contact investor relations at TE.