Texas Instruments Posts 28% Growth and 90% Incremental Margins as Analog Pricing Turns, With 2027 Price Talks Now Underway
Third quarter 2026 earnings call, October 21, 2026
Texas Instruments reported third quarter revenue of $6.1 billion, up 11% sequentially and 28% year-over-year. Gross margin expanded 280 basis points sequentially to 64%. The more notable change is in the pricing backdrop. CEO Haviv Ilan said the company saw "some price movement, mainly on the Analog side" in the second half of 2026, after a flat pricing environment year-over-year in the first half. He called the uptick "not very significant for this year," but said 2027 negotiations are now underway and "have a pricing element to it." Management will report more on this with its January guidance. That makes pricing a plausible source of upside to margins next year, though nothing has been quantified.
Incremental Margins Well Above the Model
Operating profit was $2.9 billion, or 47% of revenue, up 73% from a year ago. Net income was $2.4 billion, or $2.62 per share, including a $0.01 headwind from discrete tax items. Morgan Stanley's Joe Moore pointed out that incremental gross margins were around 90%, above the company's long-term framework. CFO Julie Knecht attributed this mainly to higher revenue, with additional help from pricing, factory loadings, and product and end-market mix. She did not suggest 90% is a run rate. She reiterated that the long-term modeling guidance is a 75% to 85% fall-through ex-depreciation, best assessed on a year-over-year basis, and noted there are "puts and takes" in any given quarter. Fourth quarter operating expenses are expected to be flat to slightly up, with acquisition charges and net other income and expense similar to the third quarter.
Guidance Is Well Above Seasonal Norms
Fourth quarter revenue guidance is $5.8 billion to $6.3 billion, with EPS of $2.45 to $2.79. The midpoint implies roughly flat revenue sequentially. Bernstein's Stacy Rasgon noted that Q4 is usually down mid-to-high single digits on calculator and personal electronics seasonality, and that this would be one of TI's strongest fourth quarters since the COVID cycle. Ilan said the company does not guide by end market. He pointed to three drivers: data center, which he said is not subject to seasonality and was about 13% of revenue in Q3; strong industrial momentum in aerospace and defense, energy infrastructure, test and measurement and robotics; and automotive customers "waking up." Personal electronics was flat year-over-year, so it is not contributing to the upside. The tax rate is expected to be about 13% in Q4 and 13% to 14% in 2027.
Industrial Reaches a New Peak After Four Years
Industrial revenue rose more than 40% year-over-year and about 10% sequentially. Ilan said this was the first quarter since Q3 2022 in which industrial revenue reached a new peak. Management argued that this is more than a cyclical rebound. "Systems that are being designed by our customers 4 years later than the COVID peak are much more rich with content," Ilan said, citing higher precision, speed and throughput requirements. He also said TI's broader portfolio has won it more content per system. Some sectors, such as industrial automation, are still in recovery, while aerospace and defense, energy infrastructure and test and measurement are already making new highs. Of roughly nine industrial sectors, two (energy infrastructure and test and measurement) are directly tied to the data center build-out.
On robotics, Ilan said 2027 should be "a great year of ramps," and put TI's content at "somewhere between $500 to $1,000" per humanoid robot. He declined to estimate unit volumes. He also described industrial as the company's most lucrative market in terms of margins, diversity and longevity.
Data Center Nearly Doubles, With a Broadening Product Set
Data center revenue rose about 95% year-over-year and about 20% sequentially. Mizuho's Vijay Rakesh estimated this implies an annualized run rate of about $2.5 billion. Ilan said TI now sells about 10,000 generic part numbers into the market, and that the number grows every quarter. These are mostly foundational analog and embedded chips used for power, telemetry and cooling. Application-specific products are in early ramps at the Sherman fab. Asked whether growth could double again in 2027, Ilan did not give a forecast. He said the company is "not seeing any slowdown" in customer capital spending and that TI is trying to "play more sockets and ultimately gain market share." Management noted that higher power, power density and voltages all expand its opportunity. The commentary is also conditional: Ilan said growth depends on data center investment continuing, with the U.S. leading.
Automotive Recovery Is Running Into Thin Customer Inventories
Automotive revenue rose mid-teens year-over-year and about 10% sequentially, led by China and the U.S. Ilan said customers had kept little inventory, so when demand rose, helped partly by higher EV mix as fuel prices climbed, they were "not well positioned." He said he sees no inventory build, adding, "on the contrary, I wish they had a little bit more." The hybrid, electric and powertrain systems sector grew about twice as fast as the overall automotive market. Ilan said TI is meeting some of the demand from inventory it built ahead, but noted that fabs cannot "flip a switch" to change product mix, and more specialized parts require reacting to orders. He also said China's automotive growth is outpacing its export business, which carries higher content and higher TI share.
Supply Tightness: Lead Times Edging Up, Not Yet a Repeat of 2021
Management acknowledged that lead times have "ticked a little bit higher" but said TI remains the most competitive supplier on this measure. Backlog is "consistent with the overall demand environment." Truist's Will Stein asked about kitting problems reminiscent of the "golden screw" shortages. Ilan said he would not compare the situation to the COVID cycle, adding that "we are earlier right now in terms of where the cycle is." He said the problem is currently visible mainly in automotive, though industrial and data center customers have also asked for help. In some cases TI had inventory and could commit capacity into 2027 and beyond.
Ilan's structural argument is that little new analog capacity has been added outside China and Taiwan in the four years since the last peak, and that building a fab takes about four years from groundbreaking to output. He also said some existing analog supply has gone offline as foundries shift capacity toward non-analog parts. On this basis he argued that supply-demand mismatch is greater in analog than embedded, and that embedded is roughly a year behind in its cycle, having peaked in 2023 versus 2022 for analog.
Capacity and CapEx: Tool Delivery Is the Constraint, Not Clean Room
Capital expenditures were $463 million in the quarter and $2.6 billion over the last 12 months. Management still expects 2026 CapEx in the $2 billion to $3 billion range, possibly toward the higher end if tool deliveries arrive as planned. Ilan said TI "would aim higher" but is facing extended tool lead times, particularly in back-end equipment. Back-end supply is also tight because TI is "not getting as much as we wanted from our OSAT partners." The company is therefore ramping its newly built Malaysia assembly and test site, its largest to date.
Ilan rejected the idea that this is a gating issue: "A gate is when you don't have the clean room." He described the tool delays as execution risk rather than a structural cap. TI has built the long-lead-time shells, subfab and infrastructure, and has equipment slots reserved for 2027 and beyond. It will adjust the rate of tool installations to the revenue growth it wants to support. He gave no 2027 CapEx figure, saying only that a plan to support 10% growth would differ from one for mid-teens growth. More detail is due on the February call. Management is also planning slots for tools and potentially new clean rooms through the rest of the decade.
Embedded Processing: Lehi Capacity and Margin Progress
Embedded Processing revenue grew 21% year-over-year versus 32% for Analog. Ilan said the Lehi 1 fab still has substantial clean room space even after absorbing foundry-based production, and the Lehi 2 shell is in its final stages of completion. TI also plans to use clean room capacity associated with the Silicon Labs acquisition to bring more foundry-run products in-house. Embedded gross margin has improved by about two points per quarter and roughly 10 points year-over-year, according to Ilan and Knecht, and management sees room for further gains.
Cash Generation and Capital Returns
Operating cash flow was $3.4 billion in the quarter and $9.9 billion over the last 12 months. Trailing free cash flow was $8.4 billion, up from $2.4 billion a year earlier, though it includes $1.6 billion of CHIPS Act incentives. TI paid $1.3 billion in dividends in the quarter and raised its annual dividend 7% to $1.52 per share, the 23rd consecutive increase. It returned $5.8 billion over the past 12 months, below trailing free cash flow, consistent with the stated aim to return all free cash flow over time. TI repaid $500 million of debt, leaving $13.65 billion outstanding at a 4.11% weighted average coupon, against $8.1 billion of cash and short-term investments. Inventory was $4.7 billion, up $67 million sequentially, with days at 194, down 2.
On market share, Ilan said TI does not measure it quarter to quarter and that any gains would need to be judged through the cycle. He added that if TI is better positioned on supply and demand persists, "we should be able to translate it to market share gains." The company's investment in capacity ahead of demand in the downturn is now being tested by a faster recovery, and management says it has the clean room space and inventory in place to meet it.