Texas Instruments (TXN.US) Q3 conference call: Market demand is recovering widely, and industrial, automotive and data center businesses are expected to support Q4 revenue

The Zhitong Finance App learned that after the US stock market on October 21 (Wednesday), analog chip giant Texas Instruments (TXN.US) announced the third quarter results. According to financial reports, Texas Instruments third-quarter revenue increased 27.7% year-on-year to US$6.06 billion, higher than analysts' general expectations of US$5.90 billion; GAAP earnings per share were US$2.62, higher than analysts' general expectations of US$2.43. Profit quality improved simultaneously, and the operating margin rose to 47.5%, significantly higher than 35.1% in the same period last year; the profit margin on free cash flow reached 48.8%, a significant increase from 22.5% in the same period last year.

In terms of performance guidance, the median GAAP earnings per share guide for the third quarter given by Texas Instruments was $2.62, 14.7% higher than analysts' general expectations. The company's guidance for the fourth quarter was similarly strong, with a median revenue guide of $6.05 billion, higher than analysts' general expectations of $5.73 billion.

Texas Instruments power management-related chips and other components play an important role in servers and networks, enabling the company to increasingly benefit from large-scale expansion of AI infrastructure. Therefore, at a time when recent AI bubble concerns are dragging down the entire chip sector, this performance outlook given by Texas Instruments is a positive signal for the wider chip market.

The speech of Texas Instruments executives mainly conveyed three signals: a broad recovery in market demand, strong industrial and data center business growth; revenue growth and increased capacity utilization driving improved profitability; and the company continued to strengthen its ability to increase long-term free cash flow through long-term manufacturing investment, dividend growth, and prudent capital allocation.

Overall, Texas Instruments is benefiting from the cyclical recovery of the semiconductor industry and increased demand for data centers, with significant improvements in revenue, profit margins, and free cash flow. Future highlights include whether industrial and data center demand can continue to be strong, whether capacity expansion can continue to support growth, whether the 2027 pricing strategy can further improve profitability, and whether the company can maintain a balance between continued manufacturing investment and shareholder returns.

Here are the details of the Texas Instruments third quarter earnings call.

I. Executive speeches

1. Haviv Ilan - President, CEO and Chairman

First, let me briefly review our performance in the third quarter.

Revenue for the quarter was $6.1 billion, up 11% month-on-month and 28% year-over-year. Both the simulation business and the embedded processing business achieved month-on-month and year-over-year revenue growth. Revenue from the simulation business increased 32% year over year, and revenue from the embedded processing business increased 21% year over year. Revenue from other business units decreased by 6% compared to the same period last year.

This quarter, we saw a broad recovery in market demand, and revenue growth in all terminal markets and regions. The long-term trend of semiconductor content growth continues, and the industry has also ushered in a strong cyclical recovery. We're working closely with our customers to help them cope with today's growing demand. We are moving forward with our long-term manufacturing plan, and previous investments have also enabled us to increase plant capacity to support revenue growth. Next, I will further explain the revenue performance of each terminal market in the third quarter.

First, industrial business revenue increased by more than 40% year over year and increased by about 10% month over month. The revenue of the automobile business increased by more than ten percent year-on-year, and increased by about 10% month-on-month. Data center business revenue increased about 95% year over year and about 20% month over month. Revenue from the personal electronics business remained roughly flat year over year, and month-on-month growth was in a high single-digit range. Finally, revenue from the communications equipment business achieved both year-over-year and month-on-month growth.

Next, ask Julie to talk about profitability and capital management.

2. Julie Knecht - Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Thanks, Haviv. Good afternoon everyone. As Haviv said, third-quarter revenue was $6.1 billion. Gross profit for the quarter was $3.9 billion, or 64% of revenue. The gross margin increased by 280 basis points month-on-month.

Operating expenses for the quarter were $1 billion. Operating expenses for the past 12 months were $4 billion, equivalent to 19% of revenue. Operating profit for the quarter was US$2.9 billion, accounting for 47% of revenue, up 73% year over year. Net profit was $2.4 billion, and diluted earnings per share were $2.62. Earnings per share were reduced by $0.01 from our initial guidance due to some special tax programs.

Next, I will introduce our performance in capital management, starting with cash generation. Cash flow from operating activities for the quarter was US$3.4 billion, with a cumulative total of US$9.9 billion over the past 12 months. Capital expenditure for the quarter was US$463 million, with a cumulative total of US$2.6 billion over the past 12 months.

Free cash flow for the past 12 months was $8.4 billion, up from $2.4 billion in the third quarter of 2025. Free cash flow over the past 12 months included $1.6 billion in CHIPS Act incentive funds, which included both investment tax credits and direct financial support. We paid $1.3 billion in dividends this quarter.

In September, we announced a 7% increase in our dividend to $1.52 per share. This is the 23rd year in a row that we have raised our dividend. This reflects our long-term commitment to return all free cash flow to our shareholders. Over the past 12 months, we have returned a total of $5.8 billion to shareholders.

As of the end of the third quarter, our balance sheet remained strong, holding $8.1 billion in cash and short-term investments. We paid off $500 million in debt this quarter. The total outstanding debt is currently $13.65 billion, and the weighted average coupon rate is 4.11%.

By the end of the quarter, inventory was 4.7 billion US dollars, an increase of 67 million US dollars over the previous quarter; the number of inventory turnover days was 194 days, a decrease of 2 days from the previous quarter.

Next, let's talk about the outlook for the fourth quarter. We expect Texas Instruments fourth-quarter revenue to be between $5.8 billion and $6.3 billion, and earnings per share between $2.45 and $2.79. The effective tax rate for the fourth quarter is expected to be around 13%; for 2027, we expect the effective tax rate to be around 13% to 14%.

Finally, we will continue to focus on areas that create long-term value and continue to invest in our competitive advantages, including manufacturing capabilities and technology, broad product portfolios, channel coverage, and a diversified and long-life market layout.

We will continue to strengthen these strengths through careful capital allocation and focus resources on the best opportunities. We believe this will enable the company to continue to grow free cash flow per share over the long term.

II. Q&A session

1. Joseph Moore, an analyst at Morgan Stanley

In terms of gross margin, I'm a little surprised. The incremental gross margin corresponding to the new revenue appears to have reached about 90%. I know your long-term goals are below this level. Can you talk about what factors contributed to this performance this quarter and whether this level of gross margin is sustainable?

Julie Knecht

Of course. Thank you, Joe. The gross margin performance in the third quarter was mainly driven by revenue growth, which was the biggest reason for the increase in gross margin. Additionally, some changes in pricing, capacity utilization, and product and end market combinations have helped.

Joseph Moore

Judging from this performance, the gross margin implied in the performance guidelines appears to be roughly equivalent to this quarter. Is that correct to understand?

Julie Knecht

In the long run, I think an incremental profit conversion rate of 75% to 85% after excluding the effects of depreciation should still be used when modeling. It would be more appropriate to look at this indicator over a longer period of time, such as making a year-over-year comparison. Of course, there will also be various factors that will have a positive or negative impact during this period.

In terms of financial models, I would also like to add that we expect operating expenses to remain flat or rise slightly in the fourth quarter. Acquisition-related expenses should be roughly the same as in the third quarter, and net other interest and non-operating income and expenses (net OI&E) should also remain roughly similar.

2. Harlan Sur, analyst at J.P. Morgan

Execution performance this quarter has been outstanding. Over the past few quarters, both orders with shorter lead times and orders with longer delivery times have shown a positive trend for the Texas Instruments team. I expect delivery times may be extended, so customers will also place more orders with later delivery times. Did Texas Instruments once again achieve a positive order-to-shipment ratio (book-to-bill) in the third quarter? Is the order activity quite extensive, covering multiple markets?

Haviv Ilan

As I said earlier, we're seeing demand expanding to cover the three main markets we've been focusing on for a long time: industrial, automotive, and data centers. Overall, demand is strong across markets, industry sectors, and regions.

This has really put pressure on the delivery cycle, which I think may be slightly extended. Let me ask Mike to explain more. Nevertheless, I still believe Texas Instruments is in the best position to support growing demand. As far as delivery times are concerned, I think we are still the most competitive supplier.

Mike, is there anything else you can add?

Mike Beckman — Vice President and Head of Investor Relations

I think your summary is accurate. I'd also like to add that our previous investments in inventory and capacity have enabled us to support growing demand. In the future, we will continue to increase plant capacity to support revenue growth.

Harlan, do you have any follow-up questions?

Harlan Sur

Thank you guys for your answers. Haviv, you mentioned last quarter that as the company begins next year's annual pricing negotiations, it is likely to launch aggressive pricing initiatives with wider coverage. This includes not only analog and power products, but also embedded products.

Can you update me on relevant developments? I have a feeling that the supply situation in the industry seems to be deteriorating rather than improving. Texas Instruments clearly has a strong ability to meet customer supply needs. I think customers also value your supply capacity and are willing to pay a premium for the supply guarantees and predictability you provide. I'd like to know how the annual pricing negotiations are currently progressing.

Haviv Ilan

Yes. First, looking at the overall situation, Harlan, as you said, the current demand environment is stronger.

If you look at what I call the basic chip sector, especially analog chips, the industry has not added much production capacity in the past four years since the last peak of the market during the COVID-19 pandemic.

This is especially true for customers who value reliable geopolitical production capacity. Texas Instruments is well positioned in this regard. We have seen our customers recognize our investment and our ability to continue to expand production capacity. This not only helps meet demand over the next few quarters, but also supports predictable future demand growth. This broadly reflects the current market environment we are in.

Specifically, when it comes to pricing, most of our pricing discussions with our customers take place on an annual basis. However, in the middle of this year, we did uncover some opportunities: some of our customers were in urgent need of more supply, so we had the opportunity to have additional communication with them.

As Julie just mentioned in her answer, we did see some price changes. I'd say this mainly happened in the second half of 2026 and focused on simulation business. In contrast, the price environment remained flat year over year in the first half of 2026.

As a result, we saw a slight increase in prices, but for this year, the increase was not significant. As for 2027, we are currently carrying out the relevant negotiations you just mentioned. We are evaluating the customer's needs and the amount of supply the customer would like to receive warranty or support from Texas Instruments. This includes a pricing factor.

I think we will further explain the relevant situation when we announce the results and provide guidance during the conference call in January next year.

3. Bernstein Research analyst Stacy Rasgon

I would like to ask about the terminal market outlook implied in the performance guidelines. Generally speaking, due to seasonal factors, fourth-quarter revenue declines from the middle to the highest single digits, and sometimes even more. I know this is usually related to businesses such as calculators and personal electronics.

However, your current guidance shows that revenue is roughly flat, which is significantly better than normal seasonal performance. Considering that this is probably one of your strongest fourth quarters since the COVID-19 pandemic cycle, can you talk about the positive and negative aspects of each terminal market in the guidelines? Under normal seasonal rules, what changes are currently driving strong demand in various markets?

Haviv Ilan

Stacy, I'll try to explain it again. As you know, we don't provide separate performance guidelines for specific markets. I can add some background information, though.

The data center market has a strong long-term growth trend. In my opinion, this market is largely unaffected by seasonal factors. Demand is still strong and growing. Additionally, data centers now account for an increasing share of our overall business. In the third quarter, the data center business accounted for approximately 13% of our revenue. As a result, the growth in this part of the business helped us transition from the third quarter to the fourth quarter.

In addition to that, I am also very excited about the performance of the industrial market. We are seeing strong momentum in all areas of the industrial market, particularly aerospace and defense, energy infrastructure, test and measurement, and robotics. I think these areas benefit from both long-term growth trends and month-on-month improvements or cyclical recovery. As a result, the fourth-quarter earnings outlook given by Texas Instruments is higher than the usual seasonal level.

We also saw a recovery in demand from automotive customers in the third quarter. I think this trend is likely to continue into the fourth quarter. As a result, it is still the three major markets that drive our fourth quarter results guidance: industrial, automotive, and data centers.

Stacy Rasgon

Yes. I'd like to ask about capital expenses. You have always said that this year's capital expenditure will be close to the upper limit of the 2 billion to 3 billion US dollars range. With only one quarter left, are you guys still moving towards this goal? Additionally, you mentioned continuing to invest in manufacturing capacity to meet market demand. In line with this statement, how should we view the changes in capital expenditure in 2027 compared to 2026?

Haviv Ilan

Stacy, let me first talk about 2026. Of course, we'll provide more information during the capital management call next February.

Overall, you're right, we currently plan to continue investing, and the 2026 capital expenditure is expected to be between $2 billion and $3 billion. We want to reach a higher level of this range. However, we are also seeing a lengthening of equipment delivery cycles, especially for equipment in back-end processes. As a result, there are currently some specific implementation-level issues, but we do want to expand production capacity.

As you know, we have plenty of cleanroom space, and demand is strong. This quarter's revenue growth was at the high end of the 20% range. Therefore, we hope to continue to equip clean rooms, including post-process equipment, and equip front-end processes in subsequent stages.

We are actively advancing these investments. Once again, capital expenditure is largely dependent on when the equipment is delivered by the supplier, as the time of arrival of the equipment affects the amount of capital expenditure we finally confirm. Therefore, you can expect this year's capital expenditure to be between $2 billion and $3 billion; if our implementation schedule is in line with the plan, the expenditure may be close to the upper limit of the range.

As for 2027, I won't reveal the exact numbers yet. But I think capital expenditure depends on demand and what kind of growth goals we want to achieve.

Previously, we have provided a framework for how capital expenditure will adjust to anticipated long-term revenue growth. Of course, we invest ahead of demand. For example, to support 10% growth, the level of capital expenditure required will be different compared to a ten-percent increase in support. We'll explain more on the conference call in February next year.

I would also like to emphasize that we have the ability to control the direction of our own development. We have prepared ahead of time for investments such as clean rooms that require a long lead time, including infrastructure underneath the clean room, as well as equipment that takes a long time to procure, construct, and complete certification.

I'm very excited about that. We have reserved space for equipment installation for 2027 and beyond, and will flexibly adjust the pace of equipment arrival and installation according to the revenue growth rate we want to support.

4. Chris Caso, analyst at Wolfe Research

My first question was to learn more about the industrial market. This market has been recovering for a while, and this quarter's revenue increased by more than 40% year over year. My question is, how sure are you about this round of recovery? How much do you think the recovery is being driven by cyclical factors, and to what extent is it due to long-term growth trends in certain segments?

Haviv Ilan

OK. I'll talk about the overall situation first, then Mike can further explain the performance of various fields within the industrial market.

Overall, I'm excited about the industrial market because it's growing rapidly. However, it wasn't until the third quarter of 2026 that the market's revenue returned to the level of the third quarter of 2022. In other words, for the first time in four years, we have reached a new peak in revenue in the industrial business.

In my opinion, compared to the peak of the market during the COVID-19 pandemic, the new systems customers designed four years later included more semiconductor components. Looking at end devices and various industry sectors one by one, we saw an increase in the number of components included in each system. This is because customers want higher accuracy, faster speed, higher quality and greater throughput, or other performance goals.

Also, I think our product portfolio is outstanding. Over the past few years, we have continued to expand our product range and invest in research and development. I think with a richer product portfolio, we've gained a larger share of each system. I'm also very excited about that.

At the same time, there are also long-term growth areas, such as aerospace and defense, and related industries driven by data center construction. I'd like Mike to elaborate on the situation in the different segments. Some of these areas haven't even returned to their previous peak levels, so we're still in the early stages of growth.

Mike Beckman

As you probably already know, industry demand continues to hit new highs in several segments, such as aerospace and defense, and energy infrastructure, testing and measurement, which are closely related to data centers.

However, even fields such as industrial automation, which are experiencing a cyclical recovery, have achieved long-term growth in the number of semiconductor components included in each generation of products over the past four years, as Haviv said.

Therefore, we believe that the industrial terminal market still has great opportunities for development. As Haviv mentioned, this market has just slightly surpassed its previous peak. However, it should be emphasized that this change was achieved after four years of component content expansion. We look forward to continuing to support this market well over the next few quarters.

Do you have any follow-up questions?

Christopher Caso

Yes. My follow-up question relates to the embedded business. The second Lehi plant is expected to be ready before the end of the year. Can you talk about how you plan to deploy this portion of production capacity next year? As you said, the industry's production capacity seems to be getting more tight. What benefits will this plant bring to you? What are the relevant plans for next year? What impact will this have on profit margins?

Haviv Ilan

In terms of the embedded business, I think our investment in Lehi 1 and Lehi 2 is very valuable.

As you may remember, we have moved a large amount of our original foundry business to Lehi 1. However, Lehi 1 still has plenty of cleanroom space, so we will continue to expand production in our existing facility. This will at least support our growth over the next few quarters.

At the same time, as you mentioned, we also have Lehi 2, which can continue to expand the production capacity of the embedded business according to demand. We are currently evaluating the relevant data.

Overall, I think the cyclical recovery of the embedded business is about a year later than the analog business. This is not just the case for Texas Instruments, but probably the industry as a whole. The peak of the embedded business occurred in 2023, while the peak of the Texas Instruments simulation business occurred in 2022.

I also think there is a higher degree of mismatch between supply and demand in simulated businesses. Frankly speaking, in the past few years, part of the analog chip production capacity has been withdrawn from the market; at the same time, some foundries are adjusting their supply structure to support non-analog products, which has also caused other parts of the production capacity to gradually withdraw from the analog chip supply. As a result, the simulation business is currently facing greater supply and demand pressure, which is one of the reasons why the simulation business is growing faster.

Still, the embedded business is in a good position. Our product portfolio is expanding. LFAB1 has clean room space, and the main LFAB2 plant has already entered the final stage of construction. As a result, we are now able to flexibly arrange equipment installation according to requirements.

Finally, I'd like to mention our plans to acquire Silicon Labs. The acquisition will provide us with another cleanroom facility to help us gradually move the products we currently manufacture in our foundry to our own factory and eventually to Lehi as well.

In terms of gross margin, we are making significant progress. This trend has been reflected in the past few quarters. Julie, has gross margin increased by a few percentage points each quarter recently?

Julie Knecht

Yes.

Haviv Ilan

I think that on a year-on-year basis, gross margin increased by about 10 percentage points, or close to this level. Therefore, I think the embedded business not only still has room for revenue growth, but also room for further improvement in gross margin.

5. Wells Fargo analyst Joe Quatrochi

I'd like to ask about your comments on car needs. You mentioned that customer demand is beginning to pick up. Can you tell me more about the details? Are you seeing widespread demand growth? Are customers increasing inventory? Is this happening in both analog and embedded businesses, or is it mainly focused on one of them?

Haviv Ilan

I'll answer first. We saw that demand in the automobile market was quite strong in the third quarter. The month-on-month growth performance was good, with a year-on-year increase of about ten percentage points.

However, I don't think customers themselves maintain much inventory. So when they see an increase in demand, or possibly a slight increase in demand for electric vehicles as fuel prices rise, they aren't prepared enough, especially compared to some of the customers we've seen in other markets.

Now we're supporting these customers to help them increase production.

I don't see customers increasing their inventory significantly. Instead, I'd like them to prepare some more inventory. However, we are ready to expand supply. Of course, a fab's output mix can't be adjusted in place as instantly as pressing a switch. In this case, we can use the inventory previously established in advance to help some customers, but some products have more unique characteristics, and we need to respond according to customer needs. This is the current state of affairs.

Mike, can you tell us more about the situation in the different regions?

Mike Beckman

Yes. Similar to the previous quarter, you may remember that growth in both the Chinese and US markets drove overall growth. We continued to see this trend in the third quarter. As for the changes in the electric vehicle product portfolio, you can also clearly see this in our segmented data. The hybrid, electric vehicle and powertrain systems sector is growing at about twice the overall growth rate. This shows that the product portfolio in this field is shifting towards electric vehicles.

Joe, do you have any follow-up questions?

Joseph Quatrochi

Yes. We noticed that you mentioned that the delivery cycle for post-process equipment is beginning to be extended, and production capacity is clearly becoming more and more tight. Will this change your plans? For example, would you consider converting more back-end production capacity into in-house production? Given the current significant increase in demand, are you planning to use external production capacity more flexibly?

Haviv Ilan

Yes. I already talked about this earlier this year, and we have been taking relevant action throughout the year.

The production capacity we received from our outsourced semiconductor assembly and testing (OSAT) partners fell short of expectations. I think this is also related to the tight supply I just mentioned.

We are rapidly increasing production capacity at a new plant in Malaysia. This is our newly built largest assembly and testing site. I'm so happy we have this facility. Currently, related products are being certified and production volumes are gradually being increased. Therefore, with the existing clean room space in the factory, we can continue to increase production capacity every quarter.

The rate at which production capacity increases depends on how quickly we can add equipment, and the rate at which equipment increases is also related to demand.

Overall, I am very satisfied with the state of the pre-process and post-process process because we are able to control our own pace of development. During the industry's downturn, the delivery cycle for this type of equipment was very short, and we used this opportunity to prepare ahead of time to deal with all possible market scenarios.

What we are facing right now is a situation where demand is very strong.

6. Stifel analyst Tore Svanberg

Congratulations on your outstanding results. I want to know more about data center business. The business's revenue almost doubled year over year. In the past, you mentioned that Texas Instruments products in the data center market are still more basic modular components. However, I know that some of your new products are already being incorporated into customer designs. How should we understand the year-on-year growth rate that nearly doubled this quarter?

Haviv Ilan

I'm very excited about this market. Everyone knows what's happening right now, but I want to emphasize that we're seeing a very wide range of opportunities, and we're continuing to invest.

Customers want new solutions to better manage these devices. For example, computer racks or networking equipment racks are very expensive and require significant telemetry monitoring and cooling capacity, and energy efficiency is critical, as is power density.

We see that customers are very active in innovation, and they are using more components from our foundational chip portfolio, including analog chips and embedded chips, to meet these needs.

As a result, there are more and more product models in the data center market that we can participate in. We reviewed this earlier this week. Currently, we sell around 10,000 generic product models (GPN) to this market, and the number is increasing every quarter. This is a very exciting opportunity.

Our focus remains on leveraging the competitive advantage of our broad product portfolio. Of course, we're also looking at application-specific product slot opportunities. We have developed the appropriate technology for this. As I mentioned before, we have now begun to increase the production of related products on a small scale at Sherman, and the implementation is progressing smoothly.

Therefore, as long as US data center investments continue to advance, I am confident that we will further expand our data center product portfolio. Incidentally, this trend is not limited to the US; we are seeing relevant demand globally, but the US market is leading the way.

Tore Svanberg

The industrial business accounts for more than one-third of your revenue. You just talked about cyclical growth and long-term growth trends. I'd also like to know how much of the approximately 35% of revenue in all segments of the industrial business might also benefit from data center construction?

Haviv Ilan

The industrial business has about 9 to 10 segments, and the last one is what we call “other,” which covers all remaining end devices.

Among the remaining nine areas, I think two are particularly closely related to data center construction: energy infrastructure, and testing and measurement.

However, I think these two fields themselves are also very stable. For example, people will continue to build memory chips and GPUs for some time to come, and these products will need to be tested. Test and measurement has always been one of our fastest growing business areas, and we have performed well in it.

As for energy infrastructure, I think the world is rebuilding power grids, and the grid contains very rich semiconductor components. As a result, this area has brought us great growth.

Data center construction is certainly driving this, but overall, the world needs more energy. I think this demand will continue to grow with the development of automation and future advances in physical artificial intelligence, robotics, aerospace, and defense, as all of these fields require more energy. So I'm very excited about the progress in this area.

Additionally, as Mike said before, we are benefiting from other long-term trends. These trends are not necessarily directly related to data centers, but data center growth may accelerate some of them.

For example, in the aerospace and defense sector, there are more and more terminal devices that operate autonomously, and these devices require the use of a large number of components we produce. The robotics sector is still at a very early stage, but I think 2027 will be an important year for a rapid increase in production.

The value content of our stand-alone components in the robotics field is actually quite high. Taking humanoid robots as an example, the value content of Texas Instruments products in each device is about 500 to 1,000 US dollars. I don't know how many of these robots will eventually be produced next year, but what is certain is that customers want to scale up production, and demand is growing.

All of these factors have given a strong boost to our industrial business, and I'm excited about that. The industrial market not only has diverse customer needs and long product lifecycles, but is also one of our best performing markets in terms of profit margins. So it's a very lucrative market.

7. William Stein, analyst at Truist Securities

I'd like you to talk about the customer's inventory level and whether they can put together the complete set of components needed for production. We've heard from some industry insiders that customers are facing increasing challenges in this regard, a bit like the so-called “golden screw” period a few years ago. To what extent are you currently seeing a similar situation? And how can we help customers meet these challenges?

Haviv Ilan

First, we've all heard this feedback. I experienced firsthand the last upward cycle of the industry during the COVID-19 pandemic, but I wouldn't compare the current situation to that time. I think the current industry cycle is also at an earlier stage. So we need to keep watching.

However, from the perspective of Texas Instruments, we are more prepared now. We are able to continue to expand production capacity every quarter, and we have established inventory during the industry's downturn.

The problems you mentioned may occur when demand from some customers or markets grows rapidly, especially when customers are unprepared and have insufficient inventory on hand. I've given the example of the car market before. Currently, I think the automotive market is one area where this kind of situation is occurring.

In contrast, in the industry cycle during the COVID-19 pandemic, similar issues have spread far more widely, involving almost every customer or terminal market. So I don't think the two can be compared at the moment.

What I want to say is that quite a few customers have asked us for help more than once. In other markets, we've also helped customers resolve supply issues many times.

For example, some industrial and data center customers seek support from us, and we often have ready-made inventory and can promise to increase production capacity in 2027 and beyond. We have seen initially from some specific cases that we are capable of helping customers, but we still need to keep watching how things unfold.

As I mentioned before, in the past four years, regions outside of China, especially in the field of analog chips, have not increased much clean room space or added production capacity.

From cleaning up the land and building the plant to actually starting to produce products, the entire cycle takes about four years, and this does not include the time required for the plant to fully increase production capacity. Therefore, I think Texas Instruments is in a better position in this regard compared to other players in the market.

Mike Beckman

Regarding the customer's question about putting together a complete set of products, I think the customer will find us and tell us that they need to ensure they get the products they need from us to meet their overall production needs; at the same time, they may also encounter supply difficulties in other areas.

This is one of the things we've seen across the market. However, I think we have the ability to help our customers and work with them to help them scale up their business.

William Stein

Thanks for the helpful info. My next question is probably something you've already talked about, but I still want to ask how the delivery cycle has changed over the past quarter? How willing and able are customers to place orders from you and create a backlog of orders? Has the delivery period for the backlog of orders been significantly extended over the past quarter?

Mike Beckman

I think the current order backlog is consistent with the overall demand environment we have seen. We did see an extended lead time.

In this market environment, as you might expect, there are differences in the level of supply tension in different product sectors. Some areas will be more tight, while others are relatively relaxed.

However, judging from the delivery cycle, we are still competitive. Once again, we are able to invest in existing cleanrooms, assembly and testing facilities to support customer growth. As business progresses this quarter and beyond, we will continue to increase production capacity at these facilities.

8. Nabeel Aziz, analyst at Rothschild & Co Redburn

I would like to know the tight supply and demand situation this quarter, as well as your performance in introducing customer designs, the progress of cooperation with customers, and whether you have seen a further increase in market share this quarter.

Haviv Ilan

Nabeel, when it comes to market share, we don't like it as an everyday measure. Of course, we will analyze the relevant results internally, but I think the more reasonable approach is to evaluate from the perspective of the entire industry cycle.

If we are truly better able to support customer needs than some of our competitors, and demand continues, then we should have an opportunity to turn this advantage into market share growth. However, it is not yet possible to measure this.

Therefore, we need to wait for the entire industry cycle to continue to advance, see when the next market peak arrives, and then evaluate our market position at that time.

However, I am satisfied with the gradual growth momentum that has now been developed, and I am also satisfied with our performance in continuing to improve our supply capacity. The final results also need to be viewed from a long-term perspective.

Nabeel Aziz

I would like to continue to ask questions about post-process equipment. Can you confirm whether the supply of back-end process equipment may be a bottleneck limiting the company's growth? Will this be a key factor limiting your development in the next few quarters?

Haviv Ilan

I don't want to call these issues critical bottlenecks to growth. The real bottleneck is that you don't have clean room space and have to spend several years building the main body of the plant, the clean room, and the complete infrastructure behind it. We don't have such bottlenecks.

The current problem is more like some basic execution work, that is, making sure the equipment is in place on time. Our suppliers also face complex supply chain issues that need to be addressed gradually. The entire industry is in a period of high demand, and every company faces its own challenges.

However, there are great opportunities to expand production capacity, and we are also expanding production capacity.

I think the production capacity of the front process and the back process will be balanced. Of course, from the perspective of long-term capital expenditure, larger investments usually occur in the forward process. Advanced processes have more expensive capital expenses, and supply chain delivery times are often longer.

That's why we're considering not just 2027 and 2028, but development plans for the rest of the decade. We are thinking about how to arrange the installation of future equipment, and even when to build new clean rooms to continuously respond to the various scenarios that may arise in the market.

9. Mizuho Securities analyst Vijay Rakesh

I have a quick question. The data center business is growing very strongly. On an annualized basis, this year's revenue appears to be close to 2.5 billion US dollars. Looking ahead to 2027, do you expect this growth rate to continue? Is the data center business expected to double what it is today? I have a quick follow-up question.

Haviv Ilan

Like everyone else, we are closely monitoring capital expenditure investments in the data center market. Currently, we're not seeing any signs of slowing down. Instead, demand continues to grow.

As I mentioned before, our product portfolio is constantly expanding. That's why I'm excited about the investment in question. We are not standing still; we are developing new products and continuing to expand new areas of subsystem application.

Therefore, we hope not only to grow as the market grows, but also to enter more product application locations and ultimately increase market share.

So far, everything is going well. Next, we need to see how demand will change next year.

Mike Beckman

Vijay, let's look at it from a more macro perspective: when electricity demand increases, opportunities for Texas instruments increase; when power density increases, so do our opportunities; when voltage levels increase, it also creates more opportunities for us. Obviously, these are all the directions the data center market is currently focusing on. We look forward to continuing to support this market.

Do you have any follow-up questions?

Vijay Rakesh

Yes. I'd like to ask you a quick review about electric cars. Does Texas Instruments have more exposure to the Chinese market, especially the Chinese export electric vehicle market? How would you describe the strength and weakness of demand for electric vehicles in different regions of the world?

Haviv Ilan

As I have mentioned many times over the past few years, the Chinese automobile industry, especially the electric vehicle industry, is in a leading position in many aspects, and the cars produced by Chinese companies are not limited to the domestic market.

Therefore, suppliers like Texas Instruments have always been very important to Chinese automakers. We are a global company with a diverse supply chain around the world, and have been incorporating our product designs into the systems of our Chinese customers.

What excites me is that China's automobile industry is growing faster than its export business. The reason is that in comparison, these businesses usually have a higher content of bicycle components, and we can also get a higher share of products in them. So this has also fueled our growth.

Mike previously mentioned that Texas Instruments' automotive business growth in the third quarter was mainly driven by the Chinese and US markets. We're excited about our position in these two markets.

Mike Beckman

OK. Next, ask Haviv to summarize today's conference call.

Haviv Ilan

OK. In conclusion, I would like to restate the point we have always emphasized before.

Essentially, we are a company of engineers, and technology is the foundation of the company. But at the end of the day, our goal, and the best indicator for measuring the company's progress and creating value for shareholders, is to increase free cash flow per share over the long term.

Thank you all and have a nice evening.