Texas Instruments (TXN) Q3 2026 earnings call transcript

Welcome to the Texas Instruments Third Quarter 2026 Earnings Conference Call. I'm Mike Beckman, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Havi Vilan, and our Chief Financial Officer, Julie Kinnett. For any of you who missed the release, you can find it on our website at ti. com.

This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in the earnings release published today, as well as TI's most recent SEC filings for a more complete description.

Today, we'll provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into third quarter revenue results with some details on what we are seeing with respect to our end markets. And lastly, Julie will cover the financial results and give an update on capital management, as well as share the guidance for fourth quarter 2026.

With that, let me turn it over to Haviv.

Thanks, Mike. Let me start with a quick overview of the third quarter. Revenue was $6.1 billion, an increase of 11% sequentially, and an increase of 28% year-over-year. Analog and embedded processing both grew sequentially and year-on-year. Analog revenue grew 32% year-on-year, and embedded processing grew 21%. Our other segment declined 6% from the year-ago quarter. During the quarter, we saw broad demand with revenue growth across all end markets and regions.

Secular growth of semiconductor content is continuing alongside a strong cyclical recovery. We are working closely with our customers to support them during this time of increased demand. We are executing to our long-term manufacturing plan, and our investments have positioned us to ramp our factories to support revenue growth.

Now I'll share some additional insights into third quarter revenue by end market. First, industrial increased more than 40% year-on-year and was up about 10% sequentially. Automotive increased mid-teens year-on-year and increased about 10% sequentially. Data center was up about 95% year-on-year and grew about 20% sequentially. Personal electronics was about flat year-on-year and grew upper single digits sequentially. And lastly, communications equipment grew both year-on-year and sequentially.

With that, let me turn it over to Julie to review profitability and capital management.

Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, third quarter revenue was $6.1 billion. Gross profit in the quarter was $3.9 billion, or 64% of revenue. Sequentially, gross profit margin increased 280 basis points. Operating expenses in the quarter were $1 billion. On a trailing 12-month basis, operating expenses were $4 billion, or 19% of revenue. Operating profit was $2.9 billion in the quarter, or 47% of revenue, and it was up 73% from the year-ago quarter.

Net income in the quarter was $2.4 billion, or $2.62 per share. Earnings per share included a one-cent reduction not in our original guidance due to discrete tax items. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $3.4 billion in the quarter and $9.9 billion on a trailing 12-month basis.

Capital expenditures were $463 million in the quarter and $2.6 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $8.4 billion, up from $2.4 billion in the third quarter of 2025. Free cash flow in the trailing 12 months includes $1.6 billion of CHIPS Act incentives, which includes both the investment tax credit and direct funding. In the quarter, we paid $1.3 billion in dividends.

In September, we announced we would increase our dividend by 7% to $1.52 per share, marking our 23rd consecutive year of dividend increases. This reflects our continued commitment to return all free cash flow to owners over time. In total, we returned $5.8 billion to our owners in the past 12 months. Our balance sheet remains strong with $8.1 billion of cash and short-term investments at the end of the third quarter. In the quarter, we repaid $500 million of debt. Total debt outstanding is $13.65 billion, with a weighted average coupon of 4.11%. Inventory at the end of the quarter was $4.7 billion, up $67 million from the prior quarter, and days were 194, down two days sequentially.

Turning to our outlook for the fourth quarter, we expect TI's revenue in the range of $5.8 billion to $6.3 billion and earnings per share to be in the range of $2.45 to $2.79. We expect our effective tax rate to be about 13% in the fourth quarter, and for 2027, we expect it to be about 13% to 14%.

In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing the technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term.

With that, let me turn it back to Mike.

Thanks, Julie. Operator, you can now open the line for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you with an opportunity for an additional follow-up. Operator?

Sure, thanks, Joe. Yes, our margin in third quarter were really driven by higher revenue. That's the largest reason for that increase. but we also did have some benefit from pricing, loadings, and some product and end market mix.

Hey, Leigh Harland. This is Savil. Let me say a few words and I'll let Mike offer some more comments. So, look, we are seeing, as I said, the broadening of the demand coming across the three main markets that we focus on for the long-term, industrial, automotive, and data center. But in general, the demand was growing across the board, across the market, sectors, and regions. That does put pressure on lead times, but I think they maybe ticked a little bit higher. I'll let Mike comment. But I still believe that TI is the best position to support that growing demand. I think we are still the most competitive supplier in terms of lead time. Mike, if you can offer anything else here.

I think you characterized it right, and I'd just also add the investments that we've made in inventory and capacity do position us to support growing demand, and we'll continue to ramp our factories to support revenue growth moving forward. You have a follow-up?

Yeah, first, a high-level picture, Holland, as you mentioned, there is a stronger demand environment right now. And if you look at the area of foundational chips, as I call it, but specifically analog, there hasn't been a lot of addition into capacity in the last four years since the previous peak of the market during the COVID days. So especially if you do care about geopolitically dependable capacity, meaning usually factories outside of China and Taiwan. So in this case, TI has a good position. We are seeing our customers value our investment and also capacity to continue to grow them, not only in the next quarters, but also in the foreseeable future. So that's a good characterization of the situation we are in.

Regarding pricing specifically, look, most of our pricing discussions are done once here with our customers, but we did see some areas in the middle of the year where we had the opportunity to talk to customers that wanted more supply more urgently. And in this case, and Julie indicated in her answer, we did see some price movement, I would say, many on the analog side in the second half. I would just characterize it the second half of 2026. after a flat pricing environment year over year in the first half of 26. So we are seeing a little bit of an uptick, not very significant for this year.

For 27, yes, we are now engaging the discussions you just mentioned. We are looking at the customer's demand and what type of supply they want to guarantee, if you will, or to get supported from TI. And that has a pricing element to it. So I think we will report more of it when we provide our results, mainly our guidance during the January call.

Yes, Stacy, I'll take a stab at it. I'm not going to guide by market. As you know, we don't. But I will just give a little bit of color. You know, the data center market, it's a market that we see strong secular growth. I don't think it's influenced by seasonality. The demand continues to be strong and growing.

And it's just a bigger part of our business now. I think it was about 13% of revenue in Q3 or so. So I think just you see that coming in and just helping, if you will, the transition from Q3 to Q4. But on top of it, I'm very excited about what we're seeing on the industrial market. We are seeing a very strong momentum in industrial across the sectors, but specifically in areas like aerospace and defense, energy infrastructure, test and measurement, the robotics sector. So this is where we see a combination of secular growth, but also sequential or cyclical recovery, I would say. So this is why we're seeing an above seasonal forecast from TI.

We also saw the automotive customers waking up, if you will, with a higher demand in Q3, and I think that may continue into Q4. So, again, the top three markets, industrial automotive and data center, are the ones that are driving our guides into Q4.

Yeah, let me start with 26 right now, Stacey, and, of course, we'll give some more color during our February call for capital management about what we're seeing. But high level, you're right. We are aiming to continue to invest right now in 26, somewhere between 2 and 3. And, yes, we want to aim higher, but also we are seeing lead times extending on tools and everything, especially on the back-end side. So that is a very tactical situation, but we do want to expand capacity.

As you know, we have plenty of clean room, and we are seeing strong demand. Leaving this quarter, we grew in the high 20s, so you do want to make sure you continue to fill that clean room with tools, both on the back-end, but also later on on the front-end side. so we are leaning in and again now when you talk about capex it's when tools are coming in delivered by our suppliers and that's what influences more or less the result but you should expect somewhere between 2 to 3 billion this year and maybe on the higher end if we get that execution as planned now regarding 27 I won't say anything right now about the numbers but I do think it's a function of demand and what our aspiration of growth, Stacey.

I think we've given a framework at the time of what CapEx will do as a function of the expected longer-term revenue growth. Of course, you are investing ahead of demand, right? So there is a certain CapEx level to support the 10% growth versus a higher CapEx plan to support mid-teens growth, for example. And this is where we want to provide some more color in our February call. I will say that we are in a position to control our destiny.

We have taken care of the long lead time investments on clean rooms, including all the sub-fab and all the, to be fair, the equipment that takes right now a very long time to get and build and get qualified. So I'm very excited about that. We do have the slot results for 27 and beyond, and we are going to modulate the incoming rate based on the revenue growth we would like to support.

Yes, so let me start, and Mike, maybe you can offer some more color on the sectors inside the industrial. But high level, the excitement I have about the industrial is growing very fast, but only now in Q3, 2026, it reached the same level of revenue we had in Q3, 2022. So this is the first time we created a new peak in industrial after four years. I do believe that systems that are being designed by our customers four years later than the COVID peak are much more rich with content. We are seeing end equipment by end equipment, sector by sector, that there is just more content per system. As customers want to achieve higher precision, higher speed, higher quality, more throughput, whatever they want to drive, right?

So that is there. I also believe our portfolio has done very well in terms of, you know, we've built more and more parts in the last several years invested in R&D, and I think we want a larger share per system based on our portfolio, so I'm excited about that as well. Now there was also some, you know, secular areas of growth, like aerospace and defense, and also, you know, data center-induced sectors. I'll let Mike comment there about the different sectors. Some of them, by the way, have not reached their previous peak yet, so we are in early innings.

Right. So some of the sectors, as you probably know, that have had industry level unit demand like aerospace and defense or the ones that are more closely adjacent to data center like energy infrastructure or test and measurement, you know, make all new highs over time. But even areas like industrial automation that are going through recovery have also had, as you described, four years of content increase, you know, gen to gen secular content growth. So as we look at the industrial end market, we see opportunity ahead there. And as you mentioned, it's just now reached a little bit above its previous peak, but again, that's four years of content expansion. So we look forward to starting that market well in the quarters ahead.

So on the embedded side, we are seeing that our investment in Lehigh 1 and Lehigh 2 is extremely beneficial. On Lehigh 1, as you remember, we have transferred a lot of our foundry-based business into Lehigh 1, but we still have plenty of clean room in Lehigh 1. So we are going to grow into that. That will carry us, you know, at least in the coming quarters. But we do have Lehigh 2, as you mentioned, there to continue to grow embedded at the rate which demand will indicate. So we are right now looking at the numbers. I think that the embedded business in general, I think this is not only a TI comment, but in terms of the cyclical recovery, I would call it maybe a year later than analog.

We saw that the embedded business peaked in 2023 while analog for TI, while analog peaked in 2022. Two, I also believe that the supply demand mismatch is higher in analog because some of the analog supply, to be fair, went offline in the last few years and more is coming out as some of the foundries are transitioning their supply base to support non-analog portfolio parts.

So with that sense, I think the pressure is now higher and this is why you're seeing higher growth on analog. Having said that, Embedded is well positioned. Our portfolio is growing. We have clean room in L5-1. We have the shell in L5-2 that is the last stages of completion. So we can modulate now tool installations according to what demand says. Last but not least, I want to mention our plan with the Silicon Labs acquisition. That's another clean room that will serve the transitioning of the portfolio that right now is running in foundries into, again, into Lehigh. From a growth margin perspective, we are seeing a strong progress. I think we've seen it in the last several quarters.

Julie Wright, is it a couple of points per quarter that we're seeing lately? Yes.

Yes, and I think about 10 points here over a year or something. So I do see that the embedded has room to grow in the sense of, you know, not only top-line growth, but also growth margins as well. All right.

Yeah, I will start. But automotive, I think I will describe the demand we are seeing in automotive as such that demand is coming in pretty strong in Q3. We did see a nice sequential growth. We are seeing meetings year-over-year growth, but I think customers have not kept a lot of inventory on their side. So when they saw maybe demand growing, maybe a little bit more EV as fuel prices went up, they were not well positioned compared to customers we've seen in other markets. So we are now supporting these customers as they're trying to ramp their production.

I don't see any inventory buildup. on the contrary, I wish they had a little bit more. But we are positioned to grow. Of course, the Favza, you cannot flip a switch to get the output, the right mix immediately. And this is where we help some customers with the existing inventory we've built ahead, but some of the parts are more unique and we need to react to customer demand. So that's what I'm seeing right now.

In terms of region, can you add a little bit, Mike? Yeah, so similar to last quarter, you may recall that we saw China and the U. S. averaging up the overall growth. We continue to see that in third quarter as well. And, you know, the comment around EV mix, you can see it clearly in our sectors as well. So the hybrid electric and powertrain systems sector grew about twice as fast as the overall did. So that just gives you a sense of the mix that has shifted toward EV inside of that.

Yeah, I think I commented before earlier this year. We've done it throughout the year. So we are not getting as much as we wanted from our all-star partners. And I think it's also just tightness of supply, as you mentioned. So we do have a new site in Malaysia that we are ramping very quickly. It's our largest AT site, newly built.

And I'm very glad we have it. The parts are being qualified and ramped. So we can continue and increase capacity every quarter thanks to the clean room we have. The rate of which we grow is a function of how quickly we add tools, and that's also a function of the demand, I would say. But in general, I'm very pleased with our situation, both front-end and back-end, because we control our destiny here. And we have done the work during the down cycle, again, when lead times were very short on this type of equipment, to get ahead and to be ready for a range of scenarios. this scenario right now is a very strong demand scenario.

Yeah, look, I'm very excited about the market in the sense of you guys know exactly what's going on there, but what I would like to share is that we see a very high breadth of opportunity and we are continuing to invest. I mean, customers want new solutions to get more. I mean, these are very expensive assets if you think about the compute rack or networking rack, and it needs a lot of telemetry and cooling, and efficiency is critical. Power density is critical. So we are seeing customers being very, very innovative on how they add parts that are mainly, you know, coming from our portfolio of foundational chips, of analog and embedded chips to do all of that.

So just a growing opportunity in terms of diversity of part numbers. as we reviewed it earlier this week, and we have about 10,000 different GPNs or generic part numbers that we are selling into this market, and it's growing every quarter. So that's a very exciting opportunity. Now, our focus is, again, we are a company that is trying to embrace our portfolio as one of our competitive advantages, but, of course, we also pay attention to the more application-specific sockets. We have developed the technology for that. I think I've mentioned it. It's now early ramps in Sherman. I think the execution is going well. So I'm excited about continuing to expand our portfolio in data center, assuming the investments in data center continues in the U. S. And by the way, it's not only in the U. S. We are seeing it worldwide, but the U. S. is leading.

So I think we have about nine or ten sectors over there in industrial. The last one is kind of what we call other, all other end equipments. But of the nine, I think two are very much data center specific, energy infrastructure and also test and measurement. But I think I see a lot of robustness there. I mean, people are building, you know, memories and GPUs for the foreseeable future. They need to test them.

This has been a very fast-growing sector for us, and we are doing well over there. And then the energy infrastructure, I think that, you know, the world is rebuilding its grid, and the content is very rich with semiconductors. So that has been a very good sector growth for us. I think data center influences it, but the world needs more energy, I think, in general. If you think about automation, later on, physical AI and robotics and aerospace and defense, everything needs more energy, and I think that's going to continue. So I'm very excited about the progress over there. Now, we are seeing, as Mike mentioned before, we just see other secular trends that are not – I don't think they may be related to data center because they have helped accelerate them, But what's going on in the aerospace and defense with autonomous end equipment, if you will, that are very content-rich in the type of parts we make.

Very early on the robotic side but I think 27 is going to be a great deal of ramps Our content over there is actually per example per humanoid is very high I would say somewhere between to $1,000 per content for TI won on this type of system. I don't know how many they'll build next year, but definitely the demand is they want to grow. All of that is providing a lot of tailwind on our industrial business, which I'm excited about because it also helps you. There was a question before on margins. This is our best market in terms of diversity and longevity, but also in terms of margins. So a very lucrative market.

Yes. First, we all here, I lived through the previous upcycle during the COVID date. I would not compare the situations. I think also we are earlier right now in terms of where the cycle is. So we'll have to go to see. But, again, from a TI perspective, we are much better prepared in terms of we can grow our capacity every quarter.

And we've built inventory during the down cycle. Now, as you have a very rapid, fast growth in some of the customers or markets, and especially where customers have not prepared and did not have enough inventory on their side, you can run into situations like that. I think I gave an example before on the automotive market. That's the one place I would say that I see it right now versus in capital, in the COVID cycle, we did see a much broader situation across almost every customer over every end market. So I would not compare them yet. I will say that, yes, we have come for help many times. We have been the solution many times right now in other markets.

So some of our industrial customers, some of our data center customers have for us. And many times we had the inventory and could also commit capacity or growth into 27 and beyond. So we are seeing early anecdotal feedback that we can help our customers, but we need to see how the situation develops. I will say, as I said before, in terms of capacity addition, outside of China, mainly on the analog side, we don't see a lot of clean room and a lot of new capacity added in the last four years.

And as I mentioned, the cycle time to build from moving dirt to getting output from a fab, it's about four years, not to mention about full ramp of a fab. So I think TI is in an advantage position here versus the rest of the market. I do think that customers, in the context of the question on kitting and making sure they have all the products they need, they will come to us and say, I need to make sure I have what I need from your portion to meet as I get what I need in. maybe another area where they're having a challenge getting it. So this is all part of what we're seeing in our markets overall, but I think we are in a good position to be able to help work with our customers to help them as they grow.

So I characterize the backlog as consistent with the overall demand environment that we're seeing. And we have seen an uptick in lead times. And there are areas where you'll see just as you would expect in an environment like this where there may be more or less tightness in certain areas. But in terms of where we are from a lead time perspective, we're competitive right now. And, again, we're in a position where we can make investments into the clean room and the assembly and test facilities that we have to be able to support growth for our customers. And we'll continue to ramp those as we move into this quarter and beyond.

Yeah, Avil, I think when it goes to market share, we don't like to measure it. Of course, we look at the results internally, but I think we should look at it through the cycle. as again if we are indeed a better position than some of the competition to support demand and if demand continues we should be able to translate it to market share gains but that we cannot measure it yet so I think we have to wait through the cycle let's see when the next peak is it will arrive one day and then see where we are but I'm pleased with the momentum we are building I'm pleased with the ability to continue to ramp our supply and let's see how we do over the long term Do you have a follow-up, Nabil?

I don't want to talk about gating items, because a gate is when you don't have the clean room, right? A gate when you now are stuck for a couple of years to build your shell, to build a clean room and all the infrastructure behind it. We don't have a gating item like that. I think this is just people blocking and tackling, as we say, or execution of getting the equipment on time.

Our suppliers also need their supply chain. It's complex, and they have to get through it. It's just a period of high demand all over, and everybody is going through their challenges, but there is a very large opportunity to expand capacity, and we are. I would say that I don't see between front end and back end, we are going to be balanced. Of course, the higher investment we need to make when you think about capex for the longer term is always on the front end. This is where the capex is more expensive, and also where the lead times are always longer with the supply chain over there. And this is why we are not planning only 27 and 28.

We are actually thinking through the rest of the decade, what is our plan and how are we going to slot our future tools and even new clean rooms so we can continue to support a range of scenarios that the market may present to us.

Yeah, I mean, we are watching, like everyone, the CapEx investment into the data center market. It doesn't signal right now any... We are not seeing any slowdown. We're seeing continuing demand, actually growing demand. As I mentioned before, our portfolio is growing. That's what I'm excited about, our investment. We are not sitting still. We are creating new parts. We are continuing to attack new subsystems. So we want to continue not only to grow with the market, but also play more sockets and ultimately gain market share. So, so far, so good. We'll see how the demand continues to develop into the next year.

and Vijay just zooming out, you know, when there's more power, there's more opportunity for TI. When there's more power density, there's more opportunity for TI. When there's higher voltages, there's more opportunity for TI. And obviously these are things that are all being worked on very heavily in this end market. And, again, we look forward to supporting.

No, as I talked many times over the last several years, the China industry for the automotive industry, and especially EVs, is leading in many ways, and they are not only building for their domestic market. This is why a supplier like TI was always something that was very, very important to them. We are a global company, very diverse supply chain across the globe.

And we've continued to design our parts into their systems. I think I am excited about the fact that China is growing faster in their export business because these are usually just in terms of content, just higher content and also higher share for us there. So that also is driving the growth. Mike has mentioned before that automotive business for TI and Q3 was driven by China and the U. S. , and we are excited about our position there.

All right.

With that, I'm going to have Havid close us out for the call.

Okay. So let me wrap up with what we've said previously. At our call, we are engineers, and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate value to our owners is the long-term growth of free cash flow per share. Thank you, and have a good evening.