In addition, I just want to reiterate that our entire Amphenol team around the world remains committed to delivering long-term sustainable value. And I would like to finally take this opportunity to thank each and every one of our 90,000 employees around the world for their truly outstanding efforts here in the third quarter. And with that operator, we’d be very happy to take any questions.
Operator: The question-and-answer period will now begin. Please limit to one question per follower. Amit Daryanani with Evercore. Your line is open.
Amit Daryanani: Thanks a lot. I guess, Adam, maybe for you, I hope you can just talk a little bit about, what are you hearing from your customers broadly? And really on the industrial side, given the ongoing macro-voluntary, I hope you talk about the distributors side is somewhat weaker, but what are you hearing from the OEM or the trend that OEM is much different than what you’re seeing in the channel? And how do you see that kind of pan out maybe into December quarter and beyond that, especially if you think about the inventory normalization?
Adam Norwitt: Amit, thank you very much. Yes, I think when we look at the industrial market, I mean, the beauty of our industrial business is we have a very broad presence across, really every segment of the industrial market. And we did see some of those segments actually performing very strongly. I highlighted that we saw a very robust growth in oil and gas and rail mass transit, so strong growth in medical applications, heavy equipment, another one. But then there’s other segments of the market where, which were down. And I think some of those have been pretty widely reported areas like factory automation, alternative energy, which seems to be having a little bit of a pause in the investment cycle for a variety of reasons.
But by and large, our OEM business was only modestly down. And it was really the bigger impact here was the impact from the distribution channel, who it turns out, feels that they have a little bit too much inventory right now. And we started to see some signs of that maybe coming into the quarter. And I think it maybe accelerated a little bit through the quarter. And our guidance as we look out into the fourth quarter certainly incorporates a continued adjustment by our distributors in particular, as well as some on the OEM side as well. And that’s what’s envisioned in our sort of modest sequential moderation that is implied in our guidance. How long will that last? We certainly, 90 days from now, we’ll try to give a good sense of what it looks like at least in the first quarter of next year.
I would expect that it’s hard to predict. But the underlying electrification and electrification of the industrial market broadly, that has not slowed down. I think, yes, there are certain things like Semicap and others where there’s a bit of a digestion period right now. But we continue to see an enormous array of new innovations, new programs, new applications across the breadth of our industrial market. And I think we’ve built such a broad offering of interconnect products, sensors, antennas, that wherever those next revolutions are going to be in industrial, there’s no doubt that Amphenol is going to be well represented there. So, I view this as a bit of a pause. I don’t take an overly macro view of what’s happening right now. I understand that some may look at industrial as sort of a macro proxy.
And maybe there are certain areas like the German industrial market, which is really where more of the factory automation that could have a little bit more linkage between that. But the general trend of more electronics, more content being driven across all these areas of the industrial market is something that we don’t see slowing down. And so, as we get into next year, we’ll certainly try to give a good read on where that looks like 90 days from now. But we feel really good about our overall position in the industrial market despite this pause today.
Operator: Thank you. Our next question is from Chris Snyder with UBS. You may go ahead.
Chris Snyder: Thank you. I wanted to ask on the IT datacom market. It came in much better than what you guys were expecting three months ago. It sounds like a big part of that is the AI demand search that you referenced, Adam. So, can we maybe just talk about how the AI business is ramping? If there’s anything you could provide to us around the size of the business today and any sort of outlook that we could think about into next year, because it does sound like the orders remain quite robust. And then, just kind of staying on IT datacom, any update on the broader, the non AI part of the business. Do you feel like that piece is kind of gotten through the inventory correction that’s been going on since really, I guess, the back half of last year? Thank you.
Adam Norwitt: Thanks very much, Chris. Appreciate it. Look, I think we’re really excited about where we are with our customers in AI. And I’ll just put some historical perspective on this. I mean, we’ve been working on the innovation of products that ultimately support AI for many, many years. This is not like, all of a sudden, something like ChatGPT shows up in the newspaper and we started frantically developing products. We’ve been working with customers for a long time on the type of products that uniquely are required for an AI processing system. And we talked a little bit about this 90 days ago, but the nature of an AI system, the fact that it is a neural network based system, where you have these very high power chips that all have to talk to each other across a fabric like architecture, just means that there’s a uniquely larger component of interconnect to allow those shifts to ultimately talk to each other.
And the requirements of that, those interconnect products, both from a speed, a latency perspective, not even to mention the significant power requirements that go into these AI data centers, which consume dramatically higher levels of power, and thereby require higher technology, higher efficiency types of power interconnect to ensure that these AI data centers aren’t just chewing up all the electricity in America, for example. These are really challenging and exciting opportunities where we’ve been investing in new product development for many, many years. It’s clearly ramping. I talked about the fact that really, I would say all of our sequential growth from Q2 to Q3 came from AI. And as you recall, we had already a decent amount of AI business in the second quarter.
And we don’t split that out. We already talked about end markets, and we don’t necessarily talk about every little sub component of that. But I would just tell you that it’s a very significant opportunity for the company long-term, medium-term, and short-term as it’s really driving that sequential growth that we’ve seen both in the second quarter and then the follow on sequential growth that we got here in the third quarter. What is the long-term of AI going to be? I don’t think anybody knows the answer to that. But I think we all know that it’s going to change a lot of things. And there’s no doubt that the investments that are being put into these AI data centers, which are not — these are not amounts that are for the faint of heart. They’re going to really have dramatic impact on a lot of the ways that we interface and interact with and use data networks and data systems.
And we’re just really excited to be able to play our portion of that to enable these next generation systems. As it relates to the kind of non-AI and the inventory correction that we certainly have talked about for nearly four quarters, I would tell you that as we look into the fourth quarter, I think we feel that it’s largely behind us, that inventory correction. Now, you could also say that some of the AI investments are “cannibalizing” some of the non-AI investments. I think there’s plenty of people discussing from that vein. But I think the inventory positions have become much healthier today. And now it’s all about investing in this exciting new revolution of AI and figuring out how to do that in effective fashion. And from an interconnect perspective, we’re really standing right there in the front of the line, making sure that our customers have what they need.
Operator: Thank you. The next question is from Luke Junk with Baird. You may go ahead.
Luke Junk: Good afternoon. Thanks for taking the question. Adam, you’ve done what I would consider to be a few higher degree of difficulty deals in the past couple of years, namely a public company and MTS and heavier cost work with RFS. And now another public company in your agreement to acquire PCTEL. Just wondering how much new muscle, if you will, the organization has grown, in terms of integrating deals like this, especially public companies. And just what it might mean for the acquisition funnel going forward in terms of the prospects that you’re looking at? Thank you.
Adam Norwitt: Yes, Luke. Thanks. It’s actually a really great question. I mean, if I go back, everybody on the phone will recall that it was the beginning of 2022 when we evolved our organization and created now three global divisions, which are reportable segments. And then under those global divisions, initially 12 and now 13 operating groups. And each of those operating groups is run by just an outstanding group general manager. I think in my career, I was a general manager, then I was a group general manager myself before I came here to headquarters nearly 17 years ago. And those group general managers run very significant businesses. They’re deeply involved in the operations of the company and they’re deeply involved in the identification, the assessment and ultimately the welcoming of these new companies to Amphenol.
And we now have just a broader platform of extraordinarily capable individuals. I’ve talked many times about how I view kind of my priorities as a CEO of this company. And I view them really twofold. One is to be the protector of our culture, that unique entrepreneurial culture that I believe is really second to none in its value and its impact on our results. And the second is to ensure the scalability of that culture so that we can grow as a company really in perpetuity. And, I joined a quarter of a century ago, we were less than a billion dollars in sales, but the culture was identical. It was general managers around the world who have full authority to run their businesses and ultimately can be held accountable. Therefore, today we’ve gone from when I joined the company less than 20 to today around 130 of those general managers and we’ve scaled the organization in support of that.
