Texas Instruments Stock

Welcome to the Texas Instruments Second Quarter 2026 Earnings Conference Call. I'm Mike Beckman, Head of Investor Relations. For any of you who missed the release, you can find it on our website at ti.com/ir. 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, I'm joined by our Chief Executive Officer, Haviv Ilan; and our Chief Financial Officer, Rafael Lizardi. Also with us today is Julie Knecht, who will become our Chief Financial Officer on August 1. Julie has been with TI for more than 25 years and has held a number of finance and accounting roles, most recently serving as Chief Accounting Officer since 2021. As you know, Rafael, who has been our CFO for nearly a decade, plans to retire at the end of August. Rafael's focus on disciplined capital allocation, including our investments in 300-millimeter manufacturing capacity and commitment to return all free cash flow to shareholders have positioned TI for continued long-term growth and value creation. As this is Rafael's final earnings call, I want to thank him personally for all of his contributions to TI. I'm sure you will join me in congratulating both Rafael and Julie.

With that, today, we'll provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into second quarter revenue results with some details on what we're seeing with respect to our end markets. Lastly, Rafael will cover the financial results, and give an update on capital management as well as share the guidance for third quarter 2026.

With that, let me turn it over to Haviv.

Thanks, Mike. Let me start with a quick overview of the second quarter. Revenue was $5.5 billion, an increase of 13% sequentially and an increase of 23% year-over-year. Analog and Embedded Processing both grew sequentially and year-on-year. Analog revenue grew 26% year-on-year and Embedded Processing grew 16%. Our Other segment declined 2% from the year ago quarter.

Let me provide a few comments about the current market environment. In the second quarter, revenue came in above the range as we saw continued growth in industrial and data center in addition to accelerated growth in automotive. Our investments in inventory and capacity are serving us well, which allows us to support our customers during this time of increased demand. We are prepared with capacity and have clean room space available and are well positioned to support continued growth.

Now I'll show some additional insights into second quarter revenue by end market. First, industrial increased around 30% year-on-year and was up about 10% sequentially, growing broadly across sectors and regions. Automotive increased mid-teens year-on-year and increased upper single digits sequentially. Data center doubled year-on-year and grew around 20% sequentially. Personal electronics was flat year-on-year and grew upper single digits sequentially. And lastly, communications equipment grew year-on-year and sequentially.

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

Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, second quarter revenue was $5.5 billion. Gross profit in the quarter was $3.4 billion or 61% of revenue. Sequentially, gross profit margin increased 340 basis points. Operating expenses in the quarter were $1 billion, about as expected. On a trailing 12-month basis, operating expenses were $3.9 billion or 20% of revenue. Operating profit was $2.3 billion in the quarter or 42% of revenue, and it was up 48% from the year ago quarter. Net income in the quarter was $2 billion or $2.14 per share. Earnings per share included a $0.05 benefit not in our original guidance due to discrete tax benefits.

Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.7 billion in the quarter and $8.7 billion on a trailing 12-month basis. Capital expenditures were $514 million in the quarter and $3.3 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $6.5 billion, up from $1.8 billion in the second quarter of 2025 and continuing to trend up as growth returns. 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 second quarter, we received $549 million of ITC related payments for qualifying capital expenditures. In the quarter, we paid $1.3 billion in dividends. In total, we returned $5.8 billion to our owners in the past 12 months. Our balance sheet remains strong with $7 billion of cash and short-term investments at the end of the second quarter. Total debt outstanding is $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.6 billion, down $90 million from the prior quarter, and days were 196, down 13 days sequentially.

Turning to our outlook for the third quarter. We expect TI's revenue in the range of $5.65 billion to $6.15 billion, and earnings per share to be in the range of $2.23 to $2.57. We expect our effective tax rate to be about 13% in the third quarter. 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 and 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.

Before I turn it over to Mike to start Q&A, I want to say that it has been an honor to work at Texas Instruments for the last 25 years and to have been CFO during the last decade. I have thoroughly enjoyed working with so many wonderful people. Over that time, we have made TI stronger and position it for continued success. I feel confident about the future at TI, and I'm looking forward to what's ahead for the company.

Thanks, Rafael. Operator, you can now open the line for questions. [Operator Instructions] Operator?

[Operator Instructions] Our first question comes from the line of Harlan Sur with JPMorgan.

Julie, congrats on the promotion. And Rafael, thanks for all of the great support and execution. Haviv, last call, there was some concerns tipping into the second half that we might see some slight deceleration kind of similar to last year, right? But given your above seasonal guidance for Q3, it seems like the strength in the first half is continuing into the second half. We also are now starting to see the acceleration in automotive. Do you expect this profile of shrink to continue and market-wise into Q3 and maybe second half? And then what's driving the inflection in automotive?

Thanks, Harlan. I think you characterized what you're seeing well. The -- I think we -- right now, as we said in July, we see setup that stronger demand, and it's broader. It's not only in the last couple of quarters, it was really an industrial and data center play. Right now, you're seeing demand growing to the automotive market. I think my -- well, I'll talk about Q3, when you think about the above seasonal guide, I think the contribution will come from all markets. The 3 markets that we've -- that drove the 2Q growth, meaning industrial data center and automotive, but Q3 is traditionally a quarter of personal electronics strength. So I expect a strong demand across the board.

Now regarding automotive, I think we saw a combination of a couple of things. I think we did see an uptick in -- and by the way, developed throughout the quarter. So when we came to the call in April, we didn't have the same visibility. It built up as we went through the quarter, led by China. And I think it's really led by EVs and hybrid, cost of fuel drove that, I believe. In addition, I think our automotive customers have taken their inventory to a very low level. And now as there is a little bit more demand, they find themselves in a situation that is not sustainable. I think that also drove part of the demand. I think we are in the start of a cycle that is very, very broad. That's kind -- when I look at it right now, that would be my prediction.

Harlan, do you have a follow-up?

Yes, I do. So input costs are moving higher. Demand remains strong. I assume that the TI team is still seeing expanding short lead time orders not anticipated in your customers' initial forecast coming into the quarter. You put all of this together, right? You guys have talked about potential for pricing increases in the second half of the year on the last earnings call. Are you executing positive pricing initiatives with customers? When do these go into effect? And is the breadth of these increases across both your Analog and Embedded segments?

Yes. Thanks, Harlan. I will just -- first, let me just recap what we said in the previous call regarding the first half of the year, we now have the full 6 months behind us. And as we predicted, pricing was stable in the first half of the main flat, if you will. And that's an above average year for us, right? Typically, prices do go down a couple of points every year. And this time, they held. I will say that we have started executing price increases, yes.

And because we go to the market direct, we have the discussion. This is not a onetime discussion with our distribution channel, it's really a discussion customer by customer. So if you will, it will be dependent on the customer. Some of it will start to play in, in Q3, but I expect that to continue into the fourth quarter. And also some of our customers we decide pricing once a year during our annual price discussions and that happens only at the end of Q4. So that can continue into the next year.

Regarding the segment, meaning Analog and Embedded, look, where we see the most pressure, also within lead time, escalations, I mentioned automotive, it's right now mainly on the Analog side. That's what we saw in the first part of the year. But I would say that Embedded is joining the trend. So if I can -- if I look at our opportunity for the second half of the year, I think we have an opportunity across all markets, but also across the 2 segments. I think the pricing discussions for embedded will be more centered towards the next year.

Our next question comes from the line of James Schneider with Goldman Sachs.

I was wondering if you could maybe comment on where your factory loadings stand today? How much you plan to increase them in the next couple of quarters? And then maybe just sort of comment on your kind of desired inventory position went down slightly this quarter. Do you expect that to stabilize in absolute dollars or go down?

Thank you, Jim. Let me frame it at a very high level, and then I'll let Julie comment on this one. First, look, as I said, we saw the demand developing through the quarter. So it was very dynamic. And as we also mentioned in the last call, the best way to support short-term demand or demand that materializes very quickly through inventory, and that helped in the quarter. But of course, we also have to prepare for the future. And that's the loadings come into play.

Julie, maybe you can give some color on this.

Sure, sure. So our loadings did increase from first to second quarter. And throughout the second quarter, it did continue to increase. For third quarter, it will really depend on what demand looks like, but we do have clean room space available that we can equip and ramp so we can support a wide range of scenarios from a customer demand standpoint.

Jim, do you have a follow-up?

Yes. Given the free cash flow strength that you reported in Q2, can you maybe comment on whether you're on pace to exceed the range of free cash flow outcomes you sort of provided back at your capital management day earlier?

So let me just again remind everyone that we gave a framework of revenue and free cash flow. I think at the case of revenue, if I think -- if I remember well, at $20 billion, it was $8 billion to $9 billion, and I think at '22, it was $9 bilion to $10 billion. So that framework is still valid, Jim. You can use it as you model the company moving forward.

Our next question comes from the line of Stacy Rasgon with Bernstein Research.

I wanted to first ask about OpEx. Like usually, it's typically down seasonally a few points into Q3? Are you still anticipating that? Or are there some differences in your spending plans given the growth profile that we're seeing now?

Stacy, this is Rafael. I'll take that one. On OpEx, net other income and expense and acquisition charges, you should expect all of those to be flat, second quarter to third quarter. That should help you with modeling the company and modeling gross margins.

Got it. That's super helpful. For my follow-up, I just wanted to ask about personal electronics. I mean, I kind of got from your comments, it sounded like you were almost expecting strength into Q3 in personal electronics. I'm just wondering what you're seeing in that market, given the current memory dynamics.

Let me maybe clarify that. Thanks for the question, Stacy. It's very good. The -- we have typically a very high -- if you look at our PE or personal electronics business, typically in 3Q, it's growing nicely, sometimes mid-teens. I expect this business to be growing sequentially, but maybe at a lower level. You saw our results in 2Q year-over-year, it was -- PE was flat. We are seeing challenges in PE as shown shortages are putting pressure on our customers. So I think that the growth is typically in Q3, the growth is driven by PE. This time, it's more broad, okay? So think about all the markets. But PE will be a participant, I believe, because we see the demand breadth is very, very high.

[indiscernible] flat year-over-year or down in Q3?

Sorry, can you repeat the question?

Sorry. So do you think it's like down year-over-year in Q3, given it was flat in Q2 and given it's sort of weaker versus normal trends into Q3? I'm just trying to model...

Don't have a buy-in market guide for each of the end markets. But I think as have talked about it what we've sought, I think that's a good attrition what we saw in the second quarter.

Our next question comes from the line of Atif Malik with Citi.

Welcome Julie. I have a question on the data center sales that doubled year-over-year. Can you talk about your full year outlook? And then as the industry transitions to 800 volts, how do you see your competitive position versus incumbents?

Yes. Again, we do continue to see strong demand in the data center market, Atif. And I don't expect that to change in the foreseeable future. I think when we think about future architectures like 800 volts, it will be phasing into the market. I think you can envision at the beginning maybe in AC to DC, maybe 80 to 800 volts. And then an 800 to 48, 48 to 12, for example, right? That's how you bring in the technology.

So to me, that just means higher growth of the TAM, more conversion stages and that helps our market on the Analog and Embedded side. If you think about the different Analog parts participating in every convergence stage and also the Embedded controllers and the signal chain product. So I think that is a tailwind to -- for a market.

Now in the longer term, and that's going to take some time once we have the SST established data center input will be at a DC voltage of 800 volts. And then I envision maybe direct conversion on 800 directly to 12 or 6 volts. And -- but that's coming later. And this was the TAM continues to show strength. And the higher voltage, the more opportunity we see.

And I think that layers on top of the foundational position that we have in data center, which has been growing very nicely as well. So -- and we are looking forward to both those types of chips contributing in the future. Atif, do you have a follow-up?

Yes. On the gross margins for the data center business, as this business grows, the expectations at the profitability of the data center business will be in line with the corporate average over time?

So up to where we are now, it's been pretty similar to the overall corporate average. So I wouldn't skew you in either direction far on that. We'll have to see where it goes. I think we'll have to see as it ramps, what that's going to mean. But today, it wouldn't skew in either direction on what it's going to do to the gross margins overall. And what I will say is the good news is that as we ramp in any end market, including data center, it's going to be on 300 millimeters on newer assets that do have excellent ability to fall through for us. So we are looking forward to that.

Thank you, Atif. Move on to the next caller, please.

Our next question comes from the line of Vivek Arya with Bank of America.

Best wishes to both Rafael and to Julie. Having my first question is for you, which is, where are we in the industrial recovery cycle? How many more above seasonal quarters should one expect? And I think you mentioned pricing as a lever for Q3. Can you help us quantify how much pricing is contributing? I think, 8% or so sequential growth in Q3 and can prices go up again in Q4?

Yes. Let me start with the initial market, and maybe I'll say a few words about pricing at the end. So look, the -- I think, Vivek, we have a lot of opportunity in front of us. We -- even with a nice growth in Q2, we are still -- I have to go back to 2022. And we are still lower than that peak, maybe 5 or 6 points lower than the 2022 peak. So if you think about a trend line of the industrial market, and I like to think about it as a mid- to high single-digit growth on a market TAM opportunity. You -- and your 4 years later, one can argue that we still have a lot of room to grow ahead of us.

On top of it, I think the data center market is also providing tailwind into the industrial market. Think about sectors like the energy infrastructure and think about test and measurement. And they were our fastest-growing segments or sectors, as we call in the second quarter over the first half of the year. So I think there is no tailwind ahead. I do believe that customers are early and not yet building inventory. So I think the setup is very positive.

Regarding pricing, look, as I said, we -- in our case, it will be really weaved into the future. It depends on the customers. So if I think about the forecast for Q3, the vast majority of it is just unit growth and maybe a little contribution from pricing, but almost insignificant.

All right. Do you have a follow-up, Vivek?

Yes. So I mean, if we try to think about TI's opportunity in the data center beyond '26, right? So '27, '28 and beyond. What is the right kind of growth rate that one should think about? Is it 40%? Is it 50%? Like what is that right way that 1 should model TI's growth rate? And as part of thinking about that growth rate, do you think that achieving that growth rate kind of exposes you to winning or losing specific GPU or ASIC vendors? Just how is your visibility? How should we think about TI's long-term growth rate in the data center business.

Yes. I don't think I can help there, but maybe, Mike, you can say a few words about what you're seeing. But look, our opportunity in data center is growing. And the reason it's growing, Vivek, is because of our R&D investment and also our ability to supply. That's the way I look at it. So as we move on and that market becomes the most substantial part for -- of the Analog, Embedded market in general. Ability to supply, ability to supply from geopolitical dependable capacity like we hold is becoming an advantage. So I think as long as we continue to see CapEx coming into data center, I think TI can do very well there. Our objective is not to put a certain growth rate, but actually to outgrow the market. I believe we will do in 2026. And that's our plan into 2027.

Yes. And I would just add, Haviv talked about a lot of our CHIPS are used in the power tree involved in the data center, and there's other CHIPS that are also -- that would more on the signal chain side that are also there, too. But as you have more power that's dedicated to data centers, as you have a larger number of them out there, and we're going to benefit from that given the amount of CHIPS that we have in those systems. So it really depends on what that buildout looks like. But as Haviv pointed out, we're in an excellent position from the portfolio that we have and the opportunities that are in front of us that we're working on as well on the ASSP side to be able to grow faster in that market compared to the overall. So I look forward to that. And with that, we'll move on to our next caller.

Our next question comes from the line of Timothy Arcuri with UBS.

I wanted to ask about CapEx and the ITC. So Rafael, you're kind of run rating. It looks like at the lower end of the 2% to 3% gross CapEx guidance for the year. So I'm wondering, is it right to think that we'll be at the low end for the year? And then also as part of that, net CapEx has basically been 0 during the first half of the year because of the ITC. So is it right to think that the ITC is going to still contribute about the same amount that it did during the first half of the year per quarter?

Yes. So a couple of things in your question. First, on the CapEx expectation for 2026, it continues to be $2 billion to $3 billion. I could not skew it. I would not skew it or buy is it lower on the lower end at this point. If anything, it could be on the higher end of that midpoint just given demand and how we want to support that for the subsequent years.

On the ITC question, ITC can be choppy because it's for equipment that was placed in service the prior year in -- so you just saw the first half or even the quarter it was net, it was more ITC than CapEx, but you shouldn't expect that. In fact, if anything, going forward, because a lot of the CapEx will be disproportionately placed in the assembly test operation, which is not in the United States. That portion does not get ITC. So we'll continue to file and get 35% ITC on U.S. manufacturing, front end and expect that benefit, but just -- it can be a little choppier over the years.

Tim, do you have a follow-up?

I do, Mike. So Haviv, I also had a question on data center. So I think you qualified some new designs on Phase 2. And I guess in that business, because you have a high catalog business, I would think that you should be able to take advantage of like hotspots more so than maybe some of your peers could. So what are you seeing? I mean, are you really going in and you're able to gain share because you do a lot of inventory sitting there and -- or is that more like the exception versus the rule.

Tim, I think you and I discussed maybe end of last year. I do like the market or the complexity of a rec, if you will, just because of the diversity of sockets. And we like them all. We like the more complex ones that are higher AUP and usually very competitive sockets. We like to call them ASSPs. We also like, as you mentioned, the catalog ones, that you can have several options to solve a problem. But when you have inventory and capacity unit benefit. So yes, we are seeing examples -- real-time examples of pay. We are line on, please help us. And every time that happens, that's an opportunity because it's a discussion with the customer, and it's -- when you solve the problem, I think they make more bets on you for the future.

So that's part of the reason why you've seen our business doubling more or less year-to-date. And we plan to continue to have capacity, clean room inventory ahead of demand, so we can react or we can respond to these opportunities.

Our next question comes from the line of Josh Buchalter with TD Cowen.

Let me echo the congrats to both Rafael and good luck to Julie. Maybe to start following up on some of the earlier ones. I think if we plug in the flat OpEx, it implies sort of flattish gross margins for the third quarter despite what should be an increase in volume. Any -- can you just walk through some of the puts and takes in the gross margins for the third quarter across pricing, increased loadings and also 300-millimeter mix? Because I think it basically that the tailwinds are being offset by depreciation and anything else going on we should be aware of?

Yes. So yes, so as a reminder, Rafael said earlier on the call that OpEx acquisition charges and the net between aligning and interest should all be about flat for second quarter. And then if you play that in, then you have the fall through of 70% to 85%, excluding depreciation, you should get in the right ZIP code. But as far as third quarter is that 70%, 85% is a good placeholder, there's always some puts and takes in there. But it will -- the loadings will depend on what revenue looks like, but that model should get close.

But it shouldn't be flat. It should be a little higher.

Sorry, I'm on the road and I might have something up. And maybe bigger picture, I was hoping you could give an update on how you're thinking about capacity and CapEx coming out of this year with German and Lehi, shells built out, you're at the point where you can be more nimble but there's still probably like a year runway from spending to capacity output. So like I guess, how comfortable with the runway and the amount of capacity you have online you are now? And any early indications of how we should be thinking about 2027 CapEx as we think about being a couple of quarters into this up cycle.

Thanks, Josh. I think I also said in my prepared remarks, we are excited about where we are because we have the clean room. The clean room was our biggest headache in the previous cycle that, as you know, takes 2 to 3 years to be able to equip a clean room, and that's behind us. When you think about the combination of -- while we are equipping in a very high level Richards on RFAB2, we have a full clean room available almost in Sherman 1. So -- and not to mention a shell, a second shell in Sherman 2. So when I think about our Analog opportunity to grow into the brick-and-mortar we have, we are in a great shape.

On Lehi, we do have to execute on the Lehi 2 because as you remember, Lehi 1 enjoys the transfer of external manufacturing down in boundaries into Lehi 1, but we are also starting to see growth that is not insignificant on the Embedded side. So Lehi 2 will come in just in time at the end of this year. We'll have the shell, and we can again grow into it seamlessly as it's not a new site, and we don't need new customer qualifications.

Now what we will need to do, and I think Rafael alluded to it, we need to equip the FABs. And we are prepared for a wide range of scenarios. But I think uniquely prepared versus the competition. I think we are -- we have done the hard work ahead of time. And we have capacity to build into. And regarding the exact numbers, I'll let -- we'll keep that for the capital management call in February. But as Rafael discussed, we are already making decisions right now that think about not only '27 and '28, even beyond.

Anything to add, Rafael?

No, I would just say, high level, you can always use our -- the framework we've given you with 1.2x growth to calculate capital intensity, and that's not a bad rule of thumb to use to get a ballpark figure of where CapEx could go based on your expectations for top line growth.

All right. Josh, thanks for the questions. We'll move on to the next caller.

Our next question comes from the line of Tom O'Malley with Barclays.

Occasionally, you guys will give a little color on the out quarter by segment. It sounded like you kind of broadly said you saw sent across the board. I think the question was on personal electronics before, but you answered we're seeing strength across the board, which is typical seasonality. But anything that you could offer in terms of vectors of growth, particularly with auto acting a bit better in Q2? Do you think that continues into Q3? And do you think this mentality of kind of just in time to just in case continues to kind of spur above seasonal growth in the near term?

Yes. I think typically, I don't provide so much color on the future. But this time, it's just easy. It's everywhere, okay? So when I look at the demand signal, it's just very strong and broad. And now it's -- we need to execute right? We -- inventory helped. We are ramping our factories. We are going after it. And let's meet again in October, tell you how it went. But the team has executed in Q2, and I expect them to do the same in Q3.

Tom, do you have a follow-up?

Just in terms of the capacity expansion, I think that you guys have alluded to your ability to increase the utilization, but you also talked about clean rooms. Is there a way to think about when you are going to decide to expand your footprint? Just obviously, your plans already that you stated at the last capital minutes day or at least for some time now. But the assumption here with inventory where it is that you would take up utilization first. Any kind of metric that we should be looking at or market dynamic or revenue targets that could help us just understand when you decide to put more capacity in place versus just kind of turning the key on the existing facilities?

Yes. I'll just -- at the clean room question. And again, we'll give you more color during the '27 capital management call. But in general, we are good for the next 3 years, okay? So you know what we -- you can go back to our capital management slide. You can see the facilities between Richardson and Sherman One and the Shellings, and Lehi 1 and 2, it's for us, okay, let's -- we are in Phase III. Let's modulate the equipment. That was our vision. We are now executing to it. Of course, I also think about '29 and beyond, but we can give a little bit more color there during the capital management call.

Our next question comes from the line of William Stein with Jewish Securities.

Great. I want to offer my congrats to Rafael and Julie. And I don't think it's been asked, but can you offer us any update on the timing or update on terms or conditions and approvals regarding Silicon Labs and the potential close of that transaction?

Yes. So regulatory approvals are moving as planned. We still expect to close in the first quarter of next year. And really no changes on how we're planning for the transaction that we finance, still expected to fund the transaction with cash on hand and debt.

Do you have a follow-up, Will?

Yes. I'm hoping you can talk a bit about backlog and the duration of backlog. I wonder if you're seeing any extension in that, that might, for example, result in the change in lead time quotes?

We have seen backlog -- first of all, if you look at what the second quarter did, we did see backlog build throughout the quarter, both orders that are for immediate shipment but also for backlog, it's for ground time. We did see that build. And it's reflected in the guide. And as you heard me talk about what we're seeing, we are seeing strength across our core markets. With that, I'll move on to our next caller.

Let me just -- maybe just on the lead time. Let me just add 1 point over there, Mike. So lead times are still, I think, very competitive, but they were below -- I think we talked about it in the last quarter in one of my fireside chat on the conference. There will be lower core 13 weeks in Q2, but we are seeing a little bit of an uptick there, not dramatic, maybe a couple of weeks higher simply because the demand is growing. And I do -- when I talk with customers, I do believe our lead times are the most competitive in the market.

We'll move on to our last caller.

Our last question comes from the line of Tore Svanberg with Stifel.

Yes. Congrats to Rafael and Julie. Maybe on that last point there, Haviv, obviously, this cycle, you're very different as prepared in the last cycle, with good capacity, low lead times and so on and so forth. And I know share gains is something that you measure over time, especially in Analog. But are you starting to see more and more customers come to you, especially in this environment with those loan lead times?

Look, as you know, we were sharing this in our market move slowly. And this is why we like to measure it over time. But as I gave some examples, I think there was a previous question of immediate solving problems in an immediate way. I think we -- many times are the answer. And as you mentioned, in this up cycle, our plan is not to be the problem. We want to be the solution, okay? So in that sense, we are ready for that.

I will say that when some of the competition talks about lithium that are 52 weeks away, that's an opportunity for TI because that means that there is a little bit less visibility for customers. And sometimes, they will start a new design, even on a very complex part. So we are seeing more opportunities coming our way. But we'll have to measure it over time. As I mentioned, I think we picked some market share last year. We need to let this year play out and see how we did in '26, but I think this cycle will provide more opportunity. And when we get to the peak, we'll see how we did.

Tore, do you have a follow-up?

Yes. I wanted to ask a question on industrial markets. Obviously, very strong. And you talked about all the reasons why. And I know sometimes it's a little bit difficult to dissect exactly what's driving the strength. But -- you mentioned pricing. You obviously mentioned customer inventory levels and then there's the indirect impact from AI and so on and so forth. But I'm also running for your specific products? Is there also an element of just higher prices here, meaning you have newer products now that perhaps have higher value that carry higher ASPs. Because obviously, I think we're all quite surprised about how strong this market continues to be.

Yes, maybe I'll take that and have peer to add. But what we saw in second quarter, and you saw this leading up through first as well was broad strength across the sector base and the region based. I think that to Haviv's point earlier, you have had 4 years of secular content growth that's happened that has added content to industrial automation. We've seen aerospace and defense grow at higher rates, energy infrastructure for reasons. It's probably adjacent to some of the data center reasoning.

Robotics grew it at a higher rate as well. But if you look at the entire sector-based industrial, they -- all those sectors grew both sequentially and year-on-year, and every region grew as well. So it's pretty broad. I would chalk it up more to higher secular content growth than pricing and as Haviv mentioned, the first half pricing was stable, about flat for us. If we see that benefit, it would likely be in third and beyond as those conversations happen.

Yes, let me just -- to Mike's point, I think he was fun on. This is really driven by secular growth. So you can ask, hey, why do we have to wait so long. It's all about inventory. It's inventory of part, but it's also inventory of finished goods of the customer. So the customer that I think they've overbuilt during the prior cycle, and they have to go through that inventory depletion. Once they are done, what's waiting new systems, new systems that were designed in the last 4 or 5 years, as you know, design cycles in industrial are long.

And I think that's what we're seeing. We're seeing no motivation of inventory on top of it, you see a new generation of systems with higher secular growth. And to me, industrial is not different in automotive. If you look at an end equipment and you look at a generation-to-generation content, the content growth is quite significant. I also want to believe, and again, time -- the results will tell that we grew share on the larger content opportunity. So let's see how it does. But I think that's the reason you see such strong growth in industrial and expect that to continue.

And we'll go ahead and close the call and then move it to Haviv and let him wrap this up.

Thanks, Mike. 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 best metric to measure progress and generate value for owners is the long-term growth of free cash flow per share. Thank you, and have a good evening.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning, almost afternoon, everyone. Thanks for coming. I'm Stacy Rasgon. I'm Bernstein's senior research analyst covering U.S. semiconductors and semi capital equipment. And it's my honor to welcome our guest here today, Haviv Ilan, the President and CEO of Texas Instruments.

Before I start, I want to mention if you have questions you'd like to have asked during the presentation, you should have a link to the Pigeonhole form. I think there's a QR code that you can scan. You can submit your questions there. We'll have time for Q&A at the end.

So Texas Instruments, TI. It used to be that they were sort of the boring semiconductor company. They're kind of proud of it. I think it's been a little less boring lately, both for TI as well as for the space overall. But TI over the last 4 or 5 years has embarked on a program of significant capacity expansion that at least temporarily sidelined cash flow and return, and this is for a company who sort of pioneered the whole idea of 100% free cash flow return.

But they always do think long term. And we're now at kind of the tail end of that investment strategy. The cash flow now seems ready to start coming through again. And now with a manufacturing footprint that they'll be left with that potentially leaves them increasingly advantaged maybe in a world that is growing increasingly decoupled.

I think more tactically, the post-COVID overhang, and it was pretty long, seems to now be behind us. At a minimum, we've got an industrial rebound now that's driving upside. And now coupled with an AI environment that's gone mainstream and sort of dragging everything along with it, there's a data center story that maybe becoming more of a primary growth driver for the company, which complements the traditional focus on industrial and auto. So I wouldn't say things are all that boring anymore. And to tell us about it, it's my great pleasure to welcome Haviv. So thank you so much for being with us here today.

Thank you. Thank you, Stacy. Great to be here. Thanks for having us.

You bet. And maybe to start off, like just on that CapEx strategy because that really has sort of been the defining thing element of the company over the last like half -- I can't believe it's been half a decade already, but it really has been. You're at the end of this like 5-year CapEx and investment cycle.

Maybe just talk to us about how that's -- like what was the driver of it? What was the impetus? Like how has it gone versus your expectations? Where are we now? And what do we expect going forward in terms of CapEx and cash flow and return and margins and all? Like how is the company now, I guess, on the other side of it, different from where it was and where it was before we went in? And how does that advance?

Sure, sure. First, thanks for the introduction. You touched more or less the executive summary. So I appreciate that.

I'd like to make it driving...

Yes. In general, you're right, somewhere at the back end of 2020 and 2021, we got together and decided that we are going to set the company and prepare it for the next 10 and 15 years. This was not about the next cycle, but more of a longer-term thinking that secular growth in semiconductors will continue, especially, as you mentioned, in industrial and automotive. We also thought that it's -- we need to be ahead because one of the areas that we've learned during the previous cycle that when you fall behind and can't supply the parts or the sockets you've won, that's just not a good place to be.

That kind of did bite you a little bit during COVID.

Yes. And our customers deserve that we can support them in every scenario. And then you want to model a set of scenarios. And we said, "Hey, what could be secular growth in semis? Does it accelerate or not?" The answer was yes. The second is, do we only want to grow with the market? Or do we want to have an opportunity to gain some market share and also support our customers through the cycle, not only at the middle of the trend line, but also at the peaks? And of course, that's very, very important.

And along the investment plan, there was all these geopolitical tensions that continue to rise, and we said, hey, having manufacturing in North America, but in general, a geopolitical dependable footprint that is broad is going to be very, very important. So that's what kind of derived our plan. As you mentioned it, it was a 6-year plan between '21 and '26. Yes, it is '26. It feels again a long time ago. We are now in the last year of our investment cycle...

It feels like it went like that. So...

Some days are longer than others, but it does fly by, yes. So we are in the sixth year, and we went through a more than $20 billion investment cycle. And we always said we want to be positioned for every scenario. I mean a couple of years ago, as the cycle deepened or the down cycle deepened and lengthened to your point before, it looked like, hey, are we on the right path?

But we always had the conviction that we are. And I think right now, coming into 2026 after a year of growth in 2025, but maybe growing demand driven by industrial and data center, as you mentioned, we are very pleased to be where we are because we have the capacity. We have inventory that can support short-term demand from customers or surge of demand. And we also have the clean room or the footprint, especially from a brick-and-mortar and clean room footprint to grow into even faster growth scenarios.

So that's a very good position to be in because if you are falling behind in a situation like that, you have to wait 4 to 5 years if you haven't made the investments. So we are excited to where we are. I think, as you said, free cash flow should grow as CapEx goes down and demand goes up. And from here on, we should be more on a steady state of supporting our growth with investments as needed. So very happy to be in that phase of the investment cycle. Yes.

It might be helpful if you could outline for us exactly what capacity have you actually put in place over the last 6 years? And where does it sit? And I know there's Richardson and there's Lehi in there...

Yes. So from a footprint location, we made investments mainly in North America of 300-millimeter wafer fabs that are not common, by the way, for our analog and embedded market. We are building a very modern fab, fully automated and the scale of TI allows us to do it. So we've built what we call the Richardson 2, that's our Fab 2. It's now almost in full production, almost fully utilized.

We also decided to build a new site in Sherman, Texas, that's north of Dallas. And over there, we are planning a mega site, almost 4 fabs that altogether we will be able to support by -- per fab about $10 billion of revenue...

Each?

Each. And also, by the way, the cost to build one is also similar to that. So think about it at that rate. And we've built 2 of them. So 2 shellrooms are built. The first one is partially equipped that Sherman 1, went into production. We had our inauguration date in Q4 of last year, ramping up very nicely, but we have a lot of clean room available over there that gives us the analog growth that we will need through this cycle that we are hopefully experiencing now.

Lehi is really focused on 2 types of parts, mainly the embedded processing business, is served by the Lehi fab. That was an acquisition actually of a fab we bought from Micron.

That was the Crosspoint facility.

Correct. And what we decided to do not only to retool the fab into an embedded processing type of products, but also expand the site with the second fab, it's called Lehi 2, which is a much larger facility that can support even more revenue per the factory, maybe think about $15 billion of capacity over there. So altogether, the plan is going well. Remember that the Lehi fab was not only to support growth, but also to support internalization.

That was my question actually...

Building -- actually built at the foundries, mainly in Taiwan into the U.S., very, very important to us to control our destiny, and we will grow into our fab. So if embedded used to be maybe 10% or 15% built internally, it will reverse. So by the end of the decade, we see embedded running more than 90% internally.

Where is it like right now? Is it still 15%, 20% internal?

No. So right now, we are almost at 50-50 already because we are transferring our 65-nanometer embedded processing nodes into the factory. By the way, there is also some analog, high-speed analog mixed signal solutions that are built over there. But you can think about it as 2/3, 1/3 embedded versus analog. And that's already moving. Our next step is to move up 45-nanometer node. It is happening this year. So by the end of the year, embedded will be predominantly built inside our own factory.

Which 45 do you have and below in your -- I can't imagine it to be that high, but maybe it's higher than I think it is.

So 45-nanometer, we have a node that really for non-embedded flash technology. So think about external memories for embedded, think about radar systems. That's the main thing that runs on that. But we are going a couple of steps forward. So right now, we are already sampling our test chips for 28-nanometer embedded flash systems. So we have several flavors, one more mixed-signal analog-based and one more embedded processing embedded flash based.

Our future MCUs, especially the larger one that has more memory footprint will be built there. And we can take it one more step forward into 22 nanometer. That's more or less the plan of this fab. We are not planning to build a FinFET technology in Lehi. But that gives us, I would say, the excitement, at least 10 or 15 years of runway to support our businesses. And in that sense, very unique. The fact that we have invested in our own technology that allows us right now to respond to developing -- to the developing situations across our markets, whether it's industrial, data center and hopefully, automotive comes back soon as well. And we are feeling very comfortable about that.

Okay. You also closed some other fabs, right? That was also part of the internalization.

Yes. So we decided through this down cycle to shut our last 6-inch fabs. One of them was in Dallas, one of them was then same land in Sherman, different...

That's done, right?

That's done. So we are now in the last -- also from an overhead perspective, Q2 will be the last quarter of any expense related to these fabs. We are setting them down. And that's good to be because 6-inch fabs, they ran for 50, 60 years, by the way. Beautiful ROIC. But it's hard to maintain them. So when a tool goes down, it's really hard to fix it. So we took the opportunity to transfer all that goodness of long-lived parts into our 300-millimeter wafer fabs.

So how does all this translate into gross margins then? Because I mean, you used to -- clearly, when you first embarked on the 300-millimeter, that was probably 15 years ago, like with the RFAB 1 and [indiscernible] and everything. I mean you were running 4% of CapEx to revenue for 10 years or whatever. And I think gross margins peaked at 70%, close to 70%.

Yes.

And then we knew as you embarked on this investment cycle, gross margins were to come. And you never hit that. And they came down. I can't remember where they bottomed like mid- to upper 50s. They're kind of creeping up now. I think -- I know you don't guide to gross margin, but my math suggests the implied gross margin for next quarter is right around 60%, so at least maybe starting with a 6 handle.

And a lot of the things that you're talking about, like in theory, should be good for gross margins. We're through the depreciation slug. Revenue and utilization, hopefully, are going up. You've moved stuff in, so like the cost structure gets better. Like where do I see those going? Like can that actually get back to where we used to run like back in the old days or...?

Yes.

This is always the big question everybody always has for TI...

I understand. And we respect it. You know we run...

I know you don't run the company...

Yes, we'll get there. But let's answer your question because I think it's a fair one. First, about Q2, I think you said it. I think -- yes, it's a good assumption. The more you wait, the better it gets. And the reason is, Stacy, that -- and that's just a math of depreciation and growth and internalization of wafers. So I just invite you, if you want to see it in action, one way to do it, we now -- I think by segment, you can see the reporting of margin -- of gross margin by segment. Look at the Embedded segment. So you will...

You put operating margin by segment, not gross margin...

No, gross margins.

Do you put gross?

Yes, that's in the rules. So you go to the 10-Q, you'll see there...

Really, I didn't even know that.

Yes, you see. So you always learn something new. So you can look at it and see the progression of embedded because what you're seeing there are wafers that are coming into Lehi. The reason Lehi is now at 50% utilization is that transition, and it continues every quarter because now our 45-nanometer wafers are moving in. And you'll see gross margins right now getting closer again to 50% on embedded used to be much lower. And you'll continue to see that moving.

That's one example of how you move a foundry wafer into TI. That's going to be accretive to your gross margins. Same is going to be in Sherman because -- but over there, you have to grow revenue into that wafer capacity. And I think both are happening right now. So -- to your question, can it get back to the areas of before? And again, we don't think that way.

The answer is yes, but that's not going to be satisfying for TI. We care about free cash flow per share growth. So you can have very nice margin in the high 60s and your free cash flow per share can do less than double-digit growth as we've done in the previous decade. So our eye is how do we get back to that trend line of this about 10% CAGR of free cash flow per share. And that's how I talk to the Board.

That's our commitment. And as you said, we'll take a big step forward in 2026. Why? Because we are seeing some revenue growth, okay? We are seeing internalization of Lehi to your point. And we are starting to see the CapEx levels going down. So the math just works together. And as I said, the more you wait, the better it gets. So that's kind of the plan. I'm always cautious, and we had an encounter last year where we were at the same point of time a year ago.

And I want to see the demand continuing. But so far, the indications that the environment is a little different. This is a more broad environment of demand. I see it across regions. I see it across markets to your point. Let's see how it develops. Of course, when we go out there in July, we will report further on the progress over there.

Yes. Let's maybe talk about some of those demand drivers in some of those end markets. Maybe start with industrial. And so this historically was the biggest piece of your business. And this was probably the peakiest during COVID, given the shortages and everything and it fell off the most. And I can't remember how much you were down...

Almost 50% down from peak on a quarterly basis.

Almost 50%. So I guess where are we now? Where are you seeing regarding the industrial recovery? Which areas are stronger or weaker? And where are we sitting today versus that prior because now...

Yes, that's a great point because I look at it all the time...

And I know you've been waiting -- you always draw this chart of like growth versus trend, and you've been making the point we've been below trend for, I don't know, multiple years, right?

So the beautiful thing is that we are still below our peaks, okay? And we are talking about 4 years later. So let's go and recap what happened first in Q1. I think it's just good to set the stage. Industrial did grow sequentially 20%. So very strong growth of almost a comeback, right? Year-over-year, close to 35%, somewhere between 30% and 35%, but closer to 35%. But still Stacy, 15% below peak.

1-5?

1-5, okay. Now it's catching up very quickly. So as I indicated in the call, the reason we see an above average growth in Q2 sequentially is driven by industrial and data center, which is a different story.

I get to data center.

We'll get there. I'm sure. I appreciate the fact that you haven't started there. That's great. But the fact that industrial is coming back is very visible for us. And by the way, some of it in sectors that are data center related. If you think about energy infrastructure as a sector, a big sector for TI, I think data center helps us there.

Test and measurement is a sector that is getting helped by it. So these sectors are growing faster, but aerospace and defense is coming in a big way. And we are starting to see -- this is my biggest excitement, factory automation or industrial automation and robotics coming back. And that's an area where last year, it was waiting to come back, but I think then with all the anxiety about tariffs, I think our customers took a breather of making the CapEx decisions.

And I think they're moving now, okay? So we are seeing this beautiful situation of industrial growing very fast on top of secular growth in data center. And if I may add, automotive is still hovering at nice levels, closer to the peak, but has not grown back to where I think it should be. So overall, we think we are in a good setup.

You sounded a little squishy on auto, I think, on the earnings.

No, because in automotive, if I look at the progression in the last 3 years, peaked in 2023, automotive never dipped like industrial, kind of stayed hovering around the same level. And I think that's what happens with content growth. I mean there was inventory correction, but content growth continues to only keep it flattish. So not the industrial story. But I think that also continues to grow.

There is secular growth in automotive continuing. And when that happens, my confidence level will be higher. So you're right, automotive was growing about mid-single digits year-over-year in Q1, but very close to peak levels, which is a better story. Hopefully, that gives you a picture about industrial.

It does. To go back to industrial. So any thoughts on how much of the strength we might be seeing might be customer restock given lean inventories versus actual like sort of fundamental underlying demand? And I guess, would you be able to tell?

Yes. First, you're right. We are trying to be very humble about we don't have that information. We just have anecdotes, right? I will say that I believe because we are 4 years further away from the peak, and because we are still 15% lower than the peak, I think it's very early in the -- hopefully, the recovery phase. And typically, in the early phase, customers are not building inventory. Typically, that happens towards the end of the cycle or closer to the peak.

Now the customers are sounding -- and I did visits in Asia, did visits in Europe actually this month. And it does sound that customers need more parts to really support ramps. We have seen also -- I've seen anecdotally, this is where the only way I can tell with data that there is, yes, I appreciate your 6 weeks lead time, but I need it now, meaning customers are not carrying inventory.

But that's always for 1 or 2 parts. That's not across the board. This is not close to what we've seen in the COVID cycle. But there is more -- there are more cases where TI need to solve a problem...

A little more...

Yes, yes. There is -- my inbox was very quiet for 3 years. So it's coming back right now. Let's see how it plays out, Stacy. I think we've seen industrial also picking up in the first half of last year, then it took that a little bit of a breather. I want to see it one more quarter in. So far, so good.

In general, your lead times are -- do you effectively still have 100% available, 100% of your parts or pretty close to it?

Yes, I'm saying 100%, then I get a call from a customer, hey, but you owe me that part. But in general, yes, our lead times are stable. Most of our portfolio, by the way, the general purpose portfolio is 6 weeks lead time. The more application-specific that are more unique and have less diversity, we usually keep them at 12 or 18 weeks of lead time, depends on the part, but mostly 12 weeks.

The average lead time is at around 12 weeks, okay, across our revenue footprint. And that has been very stable. And for a good reason. We have built inventory. We have capacity. So we have -- and I expect it to stay for the foreseeable future that way. Again, demand, I don't forecast right now. But as long as demand continues to be strong even at that level, we should be fine.

The only area where we've seen a little bit more work to do on our side is on the assembly and test side. So over there, the mix is changing sometimes because of demand signals that are coming in order to solve problems, as we just mentioned. And this is where you never know the mix upfront on this...

It's just like there is so many different types of package...

Correct. So many SKUs. We have thousands of SKUs on the assembly and test, and it's different bonders, different lead frames that you have to take care of. So we are putting a little bit of adjustment on our -- how we allocate CapEx in 2026. it's really towards more the assembly and test side. We also see the OSATs, the outside assembly test houses that we are still using, more compressed. So we are actually accelerating the internalization of our manufacturing into TI. We have the clean room...

I can't remember what the target was for like -- front end, I think it was something like 90% internal. Back end, was it similar?

Similar, at 2030. What you can -- what I can comment about, it's probably going to happen quicker because we are seeing tightness externally. We just have to qualify more technologies internally, and that's what we are doing right as we speak right now.

Are you guys holding like more die bank now because of this?

We do. We do hold more die bank. Again, it gives you that flexibility of what does the customer want. It's also a more -- financially, it's more effective way to hold inventory.

Got it. Got it. Let's talk about data center. And so you report...

28 minutes or 23 minutes in. I'm proud. That's amazing. Yes. That's good. Usually, it's the first question so I appreciate it.

We got to build to it. So let's talk about it. So you're reporting it as a segment now...

Correct.

As an end market. And your old segmentation, you had this like enterprise systems, which I think was primarily like more traditional servers and things like that. And it looked like to me, you took some of it out of the -- what used to be in industrial and some out of what used to be comm, put it all together and that's data center. And it's growing, I think, last quarter, grew 90% year-over-year, something like that, right? I guess the first question -- and it was -- I can't remember 9% of your revenue last year, so relatively small still, but growing at a very rapid rate.

I guess maybe the first one is just what is in that segment? What are you serving? And how much of it would you classify as like actually like AI-driven versus more traditional data center? And by the way, maybe those 2 things are the same thing now, like I don't -- just given the way the market is going. But like see if we can peel the onion back a little for us on what's exactly in that segment now.

No, I think it's -- let me take a moment to just set up the data center market for our type of chips because you guys spend so much time on.

[indiscernible] zillion things. I'm assuming.

No. But you're -- exactly. But you guys know logic and memory, you know the story over there, and that's not our area. We make what I like to call foundational chips that are analog and embedded chips and there are many of them, okay? I think even at the street level, people like to talk about a few sockets, but there are so many of them, really thousands and sometimes we count on tens of thousands per rack, okay?

So very broad opportunity in the sense of product diversity. Customer diversity is more narrow, but the product diversity is very high. Now in our case, we decided, as you said, to define the end market as data center because it was too -- I mean first, it was very small at the beginning, I would say, go 5 years ago. When we made our plans, I did not envision data center running at now in Q1, 12% of our revenue...

12% in Q1. Okay.

In Q1, 12%. Last year it was 9%, exactly as you said. And the definition for us, it's -- whatever is inside the walls of the data center, some people call the white zone unlike the energy infrastructure that sits in the gray zone where the dust is, right? So we are inside the wall.

Okay. So if you got like stuff like a turbine that's in a [indiscernible], you wouldn't count that...

SSTs or some of the UPS system, they sit outside. So that's not in our number. That would be in industrial...

And also still growing?

It's still growing. Yes. That's one of the sectors in industrial that I mentioned before was energy infrastructure. But go back to the walls, now you talk about 3 sectors. And it's really -- if you think about the rack, Stacy, there is the compute trays, and this is why I don't say CPU traditional -- today, on a compute node, you can have a CPU and 2 accelerators, right? So to me, it's compute. And I'm not trying to break it between AI and non-AI.

To me, it's all compute. There is networking that is larger than you would think. I'll actually give some numbers in a minute. And then there is what we call rack power and cooling. And the rack power is the traditional PSUs. AC comes in, DC comes out, that's -- there is also a change over there, as you might know. But overall, the market, if I quantify it last year, I call it in our area, $7.5 billion, less than 10% of our TAM, okay? That's growing.

That's the market. That's now you're right...

That's the market. That's the market. We've done $1.5 billion, so at about 20% share...

It feels low, like just given all the.

$1.5 billion? We like 20% share...

No, no $7.5 billion.

That's the numbers we are -- we've done our math, and it's not very far away from what we've seen. I call it this year, and you can check some of the analysts out there that we came in at a very similar numbers. I think it's $12.5 billion this year. So the growth rate is 65% or so. That's high. TI in Q1, just to complete the point, grew 90% year-over-year. And the run rate is right now above $2 billion. So it's close to somewhere between $550 million and $600 million. So that's just to set the stage.

Now why do we want to talk about it? Because of the growth rates as more power is added to data centers and power density also grows and architectures are changing. There is a very important and I think unique growth opportunities for our type of chips, sitting around power, sitting around communication, clocking, sensing, cooling, protection, you name it. And we want to play there. Our play in data center is across the rack. I would say when as architectures change from 480 volts AC to 800 or plus/minus 400 DC, our play is going to be in the entire rack. And I would segment it to 3 sectors, as I said. So I think half of the TAM is more or less in the compute side, power and signal chain..

This is like the analog and other stuff on...

Feeding the power to the consumers on the board. If you think about the compute trays, okay? But not only power sockets. There's also a lot of signal chain clocking, et cetera. Then there is networking about 35% and the rest is data center power and cooling. So that's kind of a percentage of footprint...

Repeat those percentages for me so that.

So 50% will be compute, compute trays; 35%, we count our estimation for networking. And networking includes also optical networking, the optical modules, et cetera.

It's only 15% on the power side.

Power delivery, I'm talking about the AC to DC node, okay? There is power also close to the GPU. That's part of the compute node, okay? So that's the way we think about it. Think about it as the end equipment is the tray, okay? That's the way we think about what's the content. And the beautiful thing is it's very rich. There are so many sockets per board, power, signal chain, clocking, protection, sensing.

And we play in all of them, Stacy. So our growth even last year was in all these sockets that no one likes to talk about. It's like the broad portfolio that we have, and we serve it very, very well. I love these type of sockets. They don't generate a lot of attention. They are not attacked every other day. But we also want to play, and that was my comment in the last call on the more application-specific one.

Some people will call it -- I like to call it multiphase power. That's what feeds that. You have to take, I don't know, 2,000 amps into a GPU. You don't do it in one wire. This is a heavy socket with multiple voltage regulators that are delivered in different phases of time. That's -- some people call it the Stage 2, we'll play over there. And over time, as architecture is growing into, let's call it, 800 volts or is 400, we also want to play there because we do have a GaN technology that we've invested in.

And that's a great technical solution to convert energy, convert power call it, from 800 volts all the way to 12 or 6. You can do it very nicely with GaN solutions. So that's the opportunity for TI. We can grow into more application-specific sockets, very competitive sockets. You have to win at multiple customers, but we're going to play there.

Is it fair to say that like on the application-specific stuff, that is where you have to compete for the socket, but the other stuff, you really don't have to compete as much. Like I said, it's more -- I don't -- I'm probably simplifying, but catalog....

I think competition is tougher for the application-specific also because they are defined by the customer as multi -- usually, they will define the footprint. And if you want to serve the socket, you're not doing it alone. This is not only yours, right? So you have to compete with other players. Plus the revenue concentration, we talked about it last year. Revenue concentration of the socket is high. Every win or lose is a lot, okay? So obviously, there is more competition there. Now our supply footprint, the fact that we have such a broad portfolio serves very well the general purpose sockets. And they are maybe on average, $0.20 or $0.30 per socket, but they add up.

How do we think about content like per rack for you guys?

Yes. So we -- you can do all kind of math, but I will say it's in the tens of thousands of dollars per rack, okay?

Actual content or opportunity.

Opportunity. Our win rate last year or our share last year was 20%. Do we want to grow market share? We do. So look, I called the TAM at about 65% growth. So far, 1 quarter, we grew 90%. Can we keep it up at that clip? Or can we outgrow the market? We'll have to wait a year and see, but that's always our intention to outgrow the market.

I mean auto and industrial, clearly your biggest segments...

Correct. like 1/3, 1/3, and now we are talking about 12%.

Does data center become -- does it overtake the other ones at some point?

I don't know if it overtakes the other one, but I think it overtakes consumer or PE over time just because of the clip of growth rate. If you think about...

Where is PE now, 20%?

PE is now 20 -- low 20s, I would say, but it doesn't grow fast, Stacy. Again, you've probably talked with people who are saying there's going to be new personal electronics, I don't know, wearables or whatever. I have not seen that market develop yet, but that could also change. But right now, this market has been growing at the low single digits. So when you grow a market at the 60s, you can come -- it can become our third market -- third largest market very quickly, yes.

I mean maybe to touch on PE, just and I get it, it's not a driver, and it's not that big, but I'm a little worried about PE just into the back half on memory pricing and everything else. What are you seeing there?

No, I think that's also part of the reason I want to see one more quarter before I call the second half. To me...

I don't think you should call the second half. I think it's better...

Call the third quarter. I will give you a third quarter forecast, right? So I don't want to talk about it right now. But to me, our second quarter, I mentioned 8% sequential growth, nice year-over-year growth. Let's see it play out. But as I said, so far, we are on plan. If I had something to report, I would let you know.

To me, the PE is one of the question marks because I think memory is a constraint. I think they would want to build more end equipment, but they can't. So how -- and it's still 21%, 22% of our business. So that could change the number. So we want to see it play out.

Are there memory impacts on anything else besides PE?

I specifically have not seen it, but I know our customers are busy around that, and they have to really -- I heard it's supply limitations, also the costs are higher. But luckily, I guess, we don't build memory anymore and we are focused on our stuff.

Yes. That's right. How are costs in general trending for you guys? I mean we're clearly in another inflationary environment and you got other like -- I mean maybe if you're in-sourcing, you're a little more protected from foundry pricing but foundry pricing going up in memory and other things. And there's been -- I don't even know if it's a rumor. I mean you guys have been taking up price along with many of your other peers in this environment. I guess how do we think about -- maybe the right question is how do we think about your pricing actions, both in the wake of cost increasing as well as the potential to capture more value for yourselves?

No, I think you set it up correctly. There is -- we are experiencing inflation, especially when you think about energy in Asia. For example, we have all of our assembly and test -- cost of resin. So you think about what's coming inside the package and the fillers or the mold compound, that's all higher. Cost of metals are higher. So yes, that's part of what we are seeing. But pricing environment is better than last year.

So if you think about the COVID cycle where prices went up all the way into 2022, we have seen 3 years of our model coming through like '23, '24, '25, this low single-digit price effect, if you will, like-for-like didn't materialize in the last 3 years. But as I commented on the call, in the first half of this year, we expect pricing to be flat, which is good news for us because usually, when you start the year, prices are usually because of price negotiations does fall down a couple of percentage points.

So that is flattish. But yes, we have started discussion with our customers to talk about costs and what -- and the supply-demand situation. And I think the second half of the year, prices could be a little higher. And we will be a follower here, Stacy. We are not trying to set the market price, but we are watching the market environment. And right now, you're right, market prices are going higher.

I just find it interesting because I look at the equipment guys, like lagging edge equipment demand has not been great. I know we're seeing maybe a recovery now in some of the end demand for some of these, but the end demand in some of the trailing nodes stuff has not been great. And like usually, you see price increases when supply in these markets is really tight. I'm not exactly convinced that in some of the markets that you play the supply is like incredibly tight, and we have been seeing pricing coming. So is that just a function of like we saw during COVID, it is inflationary and you do have the ability to at least pass those costs along without the customers...

I think it's a fair question. But again, this is why we have to be cautious because it's only a couple of quarters in. But you're seeing what's happening in industrial, you've seen the data center market becoming strong. And I just came back from Taiwan. I was there last week, really focused on more data center customers and their supply chain, if you will, is heavily there. And I think we are starting to see areas of supply and demand mismatch even in our areas. So especially on the analog side, Stacy, we do see that.

So the discussion I had with customers last week was all about, hey, make sure you continue your lead times as they are, make sure that you can upside if we need to. And I always tell them we have parts. We have capacity, we have inventory, bring it on. But it's not -- I think we are a little bit different than average there. I have seen -- and you can see it also in lead times. Our lead times you asked before, are stable. It's out there that lead times have been increasing, especially on the analog side, sometimes to a year, okay?

So I think TI is uniquely positioned. And we are not surprised. I think we have been disciplined in adding capacity through the down cycles, we are unique there, okay? And it sets us up. We always said to every scenario, the scenario is still getting built as we speak. And you and I will watch it together. But I think if it wants to continue to be strong in the second half, we will be ready. If it wants to continue into '27, we'll be ready.

So that's where we are, and I love where we are because if you fall behind and we saw it in the previous cycle, and you said, okay, I want to chase it now. You count 4 years. From the minute you move there to substantial output from your fab, it's 4 years. So you're not talking about current cycle anymore. So in that sense, TI doesn't have that lead time issue, okay? We are very well prepared.

Got it. Talk to me about the SLAB deal. You guys sat out of M&A, while the industry was consolidating for a long time and I don't know what it was. It wasn't -- there wasn't a strategic fit. So the returns on the valuations weren't there and why now?

Yes. So first, you sat out in making a decision, but we don't sit out on making..

No, I understand you evaluated all. I get it...

We have a quarterly process, okay? So that's ongoing. And you've seen that. We've done a big one in the early 2000s. We've done a big one in the early 2010, yes. And we did another one. So on average, it's 10 to 15 years. So we are on the cadence, right? Now why this one? And that's, I think -- let me set up a little bit of embedded because it's an embedded-centric acquisition.

And this is where there is a change. I would say 10 years ago, we would not consider it because we are not sure about our embedded business. And we were very -- I mean, Rich was very open about it. We come from -- you look 10, 15 years ago, custom business, more than 50%, big logic DSPs, very digital, mainly built externally. That's the embedded business we are building today. So 5, 6, 7 years ago, we said, okay, let's retool our embedded business towards our competitive advantages.

Let's bring it in. Let's create a broad portfolio, meaning less big processors and more MCUs with some analog periphery, some application-specific MCU for power conversion, for motor drive, connectivity solutions, radar systems. These are the type which are also part of a DSP investment that we have. So these are the kind of investments we are making right now in embedded.

So number of parts we build every year is higher. We are going to build them all internally, and embedded is going to be more than 90% internal by the end of the decade. Now when you come into Si Labs, this is where we had an opportunity to give ourselves a step function in our portfolio because we have some connectivity parts, but they are mainly serving very well the automotive market. This is where we are winning and expanding.

Our industrial portfolio is slowly growing, and that's a onetime -- we saw a onetime chance to really increase our portfolio in a step function. If you think about our competitive advantages, Stacy, it's a beautiful -- there are 4 elements, but they bring in 2, we add 2. So we talk about manufacturing and technology and building it internally in our technology. We talk about the broad product portfolio. We talk about a very strong channel position or advantage, both ti.com, but also our very large, largest in the industry of sales team and the position of diversity and longevity.

What do they bring in? They bring in a broad portfolio, a broad industrial portfolio and a good position in terms of diversity and longevity. 90% of their business is industrial. You look at the revenue by socket, very, very broad. I think you can see it on our website. So they bring in 2 elements. You add to that the fact that you can bring inside our Lehi fab and build it internally and control your destiny in terms of technology and manufacturing.

And also the field and the ti.com that can really sell beyond that connectivity chip, they have a very narrow portfolio in that sense from a technology perspective. You get into the Excel sheet works, okay? So that doesn't happen every day. Many times we look stuff, it looks good strategically, but we can't make sense of the price. And look, if you ask me, would I do this deal today, it will be harder. Look at what happened to market prices of assets in the last 3 or 4 months.

So in that sense, I think the stars aligned, and we made the acquisition. Very pleased about it, very pleased with the progress towards completing the deal in the next, I would say, 3 to 4 quarters by the first half of next year. And I think it will be a great addition to our embedded business. So that's a story over there. You want to do this deal 10 years ago, you don't have Lehi, you don't have conviction that can be successful with our portfolio. Our confidence level is higher, and that's kind of the way we'll think about it moving forward.

Got it. So you wouldn't have had confidence in the business and you would...

[indiscernible] business...

You wouldn't have anywhere to put it even if you...

And the synergies will not come in because these guys are using mainly TSMC and...

How long will that take you to internalize their product? And how difficult is that...?

So luckily, we have been doing it ourselves many times, including right now as we speak on bringing stuff from the foundries into Lehi on our portfolio. But they've done a great job, and this is very rare in a company on an embedded field, very, very well organized platform operationally, very well invested. It's only somewhere between 10 and 15 different dies, which is...

Plus how many different products, you said?

2,000 products. So they have done a very good job on doing this platform approach that you can build 10 to 15 dies and then approach many, many products out there. So that would take not too long, okay? It will be mostly completed by the end of the decade. We will start...

End of the decade?

Yes, it's going to take 2 to 3 years. But we're going to start immediately after close. We are -- and that's the way we've modeled the synergies. Now internally, I want the team always to move faster. But as you saw the $450 million of synergies that we described, they are mainly supported through the COGS, and it's almost fully in by the end of the decade.

Got it. So that also means that it's harder to buy somebody that sells 10,000 different products...

There you go. There you go. And most companies, especially on the embedded side, the breadth of the portfolio is so high. It's hard to do. It's hard to do. It's hard to bring in the synergies when you buy a fabless company. Now in the case of National, they have their own fabs. So it's a different story. But this is why these things are not trivial. They're not easy to do. That's why you see us doing it rarely. But I can tell you, nothing has changed on the strategy. We'll continue to look at assets. And I think this one was a unique one.

Got it. Talk to me about China. So clearly, you guys have made a bet on the U.S., and I get it. And I understand the whole concept of geographically, geopolitically attractive capacity. At the same time, I know it's an investment controversy. I don't know how real it is, but it's an investment controversy about your position in China. And I was joking, Texas Instruments has Texas right in the name. And most players in China, there has to be some sort of a China for China strategy, whether it's working with local partners or making it directly in the region or whatever. How do we think about TI's competitiveness over time in China relative to some of the local players given the trends that we're seeing on the geopolitical spectrum right now?

Yes. Let me break it. Thanks. I think it's an important topic. Let me break it down to 2 parts. The first one you mentioned is kind of we bet on the U.S. maybe on manufacturing or new manufacturing footprint, not on the market only. The market-wise, we are a global company, okay? So -- and the fact that we are investing in the U.S., it doesn't mean that we don't know how to solve China from China.

We have a factory in China. We have a fab. We are still -- we have a big assembly and test house. So we can support China manufacturing-wise. I think the challenge in China is actually how do you compete in the market. And especially when you are not a Chinese supplier, I think that's more interesting. And first, we want to play there. Why? China is, what, 20% of world GDP, more or less...

Most of your revenue, I guess, by headquarters...

Our revenue by headquarter is in last year was about 20%, okay. More importantly, China has some very important customers, let's take automotive that are technology leaders. You even go into data centers, optical links. China is a big player there in terms of headquarters company. And we also see areas in industrial where China robotics, for example, China is a big player. So you don't want to exclude yourself from China. You want to compete. It is harder. It is harder because of what you said.

There is a growing industry of a very hungry supplier base that is always expanding. I have my own China index. I review with my team every quarter a set of 25 competitors, 25 that together add up to about half of TI, but they are doing well. I mean they are competing, but TI can compete. And the reason we can compete is that we have some competitive advantages that are very, very important to our China customers.

The portfolio. The portfolio is very attractive. If I want to solve a problem on the board, do I bring in 25 suppliers? Some of them are start-up companies that are just trying to breathe versus an established player like TI that has good solution.

Now the portfolio is not enough. Cost competitiveness is key. But can TI play that game? Yes, we are vertically integrated. As much as the foundries in China are serving these local competitors, they still don't work for free.

And they also -- if you look at the utilization rates over there, they're also not -- they're not underutilized, let's say that. So we can compete by supply and also cost structure. A very strong channel or sales team that is entrenched over there and built relationship with customers for years. And a customer base, Stacy, I mentioned data center, but that's not the only case that is continuously wanting to diversify their markets, wanting to go into non-China markets.

It's actually where they make most of their profit. So that game has played well for TI. And the reason I say played well, just go to 2025. We report our China business. We grew close to 25%. The index I just mentioned grew slower, okay? And we are watching this every quarter. Q1 is now being reported. We are holding our share, okay? So you can argue that last year, we gained share in China in an impossible environment. This year, I think our odds are even better because of the supply-demand mismatch, usually, everything starts in China. That's not an outlier this year.

So over there, our capacity, our footprint, our cost competitiveness and our broad portfolio and channel advantages are playing on. And the risk I have about China, don't fall asleep. Don't be complacent. Don't say these guys are commodity players. We expect them, but also don't be scared to fight the fight. So we take the fight to Shenzhen, to Shanghai. Our customers over there appreciate us. And by the way, every time there is a tie, we lose a socket. So we always have to be a little bit better than the local competition. Hopefully, that covers China.

No, that does. That does. Two minutes left in the lightning round.

Whatever it means, I don't know.

We got a few audience questions. Robotics, humanoid or general drones or autonomous vehicles is a driver of growth for you going forward. When do you expect it to show up meaningfully in the top line?

I'll tell you, look, humanoid content is astonishingly high for TI, not only the TAM. So we are talking about content for TI higher than a car, higher than automotive. Think about $1,000 per humanoid. That's the content that -- now you tell me the number of humanoids that are going to be built. It depends who you listen to. But I think we are starting to see it, and I'm excited about it. I don't think it's as soon as people say, but I can see why humanoids like robotics will be one day walking around our factories, especially assembly and test and providing value. So I'm excited about that, yes.

Got it. We've got 1 minute left. So I'm going to finish this up the way I always do with everybody. We've got a whole room -- full room of folks here. Why should they buy TI stock?

Yes. So again, I think part of your introduction helped me. But Stacy, as you discussed, we have been preparing for an opportunity for a long time. It's been a long journey. I even kind of wake myself up why it's been 6 years, but we have done the hard work for being prepared.

Now tell me what the scenario will be. I think we are seeing more and more evidence that this is going to be a good time to be in semis. There is a secular growth in the data center market that is really not negligible anymore. TI is in a great position. There is industrial coming back in a nice way. And I think automotive is around the corner. So you put all these 3 together, you can envision a very strong demand environment. We are well positioned to support it. We have the inventory. We have the capacity. We can grow into it, allowing hopefully share gains for the company. So thank you, Stacy. I appreciate being here, and thanks for the time.

I appreciate having you here. Thank you so much.

Thank you.

Welcome to the Texas Instruments First Quarter 2026 Earnings Conference Call. I'm Mike Beckman, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir.

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 first quarter revenue results with some details on what we're seeing with respect to our end markets. Lastly, Rafael will cover the financial results, give an update on capital management as well as share the guidance for second quarter of 2026.

With that, let me turn it over to Haviv.

Thanks, Mike. Before I go into the results, I want to highlight that in the first quarter, we announced an agreement for TI to acquire Silicon Labs. This transaction enhances our global leadership in embedded wireless connectivity, expands TI's portfolio and leverages TI's internally owned technology and manufacturing and reach of market channels. We expect the transaction to close in the first half of 2027, subject to necessary approvals.

Now let me provide a quick overview of the first quarter. Revenue was $4.8 billion, an increase of 9% sequentially and an increase of 19% year-over-year. Analog and Embedded, both grew sequentially and year-on-year. Analog revenue grew 22% year-on-year and Embedded Processing grew 12%. Our Other segment declined 16% from the year ago quarter.

Let me provide a few comments about the current market environment. In the first quarter, revenue came in above the top of the range as we saw continued acceleration in industrial and data center. The overall semiconductor market recovery is continuing, and we remain well positioned with inventory and capacity that allows us to support our customers with competitive lead times through the cycle.

Now I'll share some additional insights into first quarter revenue by end market. First, industrial increased more than 30% year-on-year and was up more than 20% sequentially, growing broadly across all sectors and regions. Automotive increased mid-single digits year-on-year and was about flat sequentially. Data center grew about 90% year-on-year and grew more than 25% sequentially. Personal Electronics was flat year-on-year and grew low single digits sequentially. And lastly, communications equipment grew about 25% year-on-year and grew more than 30% sequentially.

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

Thanks, Haviv, and good afternoon, everyone. As Avid mentioned, first quarter revenue was $4.8 billion. Gross profit in the quarter was $2.8 billion or 58% of revenue. Sequentially, gross profit margin increased 210 basis points. Operating expenses in the quarter were [ $974 million ], about as expected. On a trailing 12-month basis, operating expenses were $3.9 billion or 21% of revenue. Operating profit was $1.8 billion in the quarter or 37% of revenue and was up 37% from the year ago quarter. Net income in the quarter was $1.5 billion or $1.68 per share. Earnings per share included a $0.05 benefit for items not in our original guidance, primarily due to discrete tax benefits.

Let me now comment on our capital management results, starting with our cash generation. Cash flow from operation was $1.5 billion in the quarter and $7.8 billion on a trailing 12-month basis. Capital expenditures were $676 million in the quarter and $4.1 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $4.4 billion, up from $1.7 billion in the first quarter of 2025, trending up as growth returns and CapEx begins to moderate.

Free cash flow in the trailing 12 months includes $965 million of CHIPS Act incentives. This includes a $555 million payment received in the first quarter as part of our direct funding agreement, related to the start of production at our newest 300-millimeter wafer fab in Sherman, Texas. In the quarter, we paid $1.3 billion in dividends and repurchased $158 million of our stock. In total, we returned $6 billion to our owners in the past 12 months. Our balance sheet remains strong with $5.1 billion of cash and short-term investments at the end of the first quarter.

Total debt outstanding is $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.7 billion, down $109 million from the prior quarter, and these were 209, down 13 days sequentially.

Turning to our outlook for the second quarter. We expect TI's revenue in the range of $5 billion to $5.4 billion and earnings per share to be in the range of $1.77 to $2.05. We expect our effective tax rate to be about 13% in the second quarter. 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 and 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.

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 an opportunity for an additional follow-up. Operator?

[Operator Instructions]. Our first question is from Tim Arcuri with UBS.

I wonder if you can comment just on the behavior of customers. I know you're guiding up a little better than seasonal off of a number in March that was very strong. So it sounds like it's mostly industrial, but can you comment kind of on -- I know we're seeing signs of price increases and things like that. So is this impacting the customers' behavior?

Yes. Thanks, Dave. In general, I think Q1 was a continuation of what we saw in Q4, very similar behavior, meaning growth coming from 2 main areas, led by industrial, as you mentioned. And also supported by the data center market that we've seen a secular growth over there for the last couple of years. This was the eighth quarter of sequential growth. off of a higher number. So that also helps the overall growth of the company. I will say that the industrial signal was a little bit broader this time.

So I would say all sectors, all geographies grew sequentially. And it continued to accelerate through the quarter. So if you think about January, February, and then you always want to see how the exit from the Lunar or the Chinese New Year break is going to look like, but it continued in March. So just a continuation, I would say it's now 5 or 6 months of continued growth in industrial. We want to keep watching it, but I would say that what guides our forecast into the second quarter.

Mike, anything to add on that?

Yes, I think I just want to be mindful to just the overall macro backdrop and want to see how sustainable the growth is, and that was factored into the guide.

Tim, do you have a follow-up?

I do. Yes, Mike, maybe you can comment on -- I know typically you don't break the guidance down by segment, but just given how different it was in March. And given that we're hearing some choppiness in autos, particularly in China, I mean I would think that most of the sequential growth will be in industrial. But can you give any comments for what is being thought of the mid-June guidance for those two.

Let me take that, Tim. I think I can help you a little on the automotive side. But first, I think, as you said, we are not seeing a change from the previous quarter. So I expect growth to be led by industrial and data center. I won't break it out between the 2, but we see strength in both. Regarding automotive, you're right that Q1 was -- it's always the same in Q1 in China. China was -- the overall quarter was flat sequentially. But China was down. The rest of the world was up. I want to see automotive and see how it develops in Q2. It's too soon to call it.

I will remind us though that during the COVID cycle even automotive was last to join in and also the last 2 peaks, right? So I'm not surprised by the behavior of this market. I will say that secular growth in automotive continues for the foreseeable future. And that's what -- that is my encouragement. We are seeing cars adding features. We are seeing more content added to vehicles across the powertrains whether it's BEV or I or the hybrids.

Anything to add on that, Mike, in terms of the guide?

No, I think you characterized it well. And as you know, auto has been steady at an elevated level for some time. It didn't really have that steep correction that we saw in the other end markets. So I think as you called it out, these markets have been in the past have been transitioning out of phase, I don't think it's unrealistic to assume that could happen again. So we'll have to see how it plays out.

Yes. I think it's an important point as Mike said, Q1 was kind of a flat quarter, but very close to peak levels, maybe a point or 2 below its peak. So it's holding very nicely at a high level.

All right, we'll move on to our next caller.

Our next question is from Vivek Arya with Bank of America.

I mean, on this industrial growth up 30%. I think you said year-on-year, this is obviously well above the long-term trend line. Could you help us dissect which applications, which end markets are driving this? Is this -- is it still inventory replenishment? Is this pricing? Is it share gains? Just what kind of checks and balances do you have in place that this isn't any kind of double ordering or hoarding of your product?

No, I don't see that. At least I don't have the evidence to show that, Vivek. But remember, industrial, you said, yes, for 1 quarter, that's a lot of growth. But if you look at the long-term trend line, we are still below the trend line. If I just did the math. In Q1, our industrial, we had a very good quarter in Industrial, growing at the rates that you've mentioned, but still 15% lower than the peak that was back in 2022.

And as I say many times, there is a secular growth continuing in industrial. So we deserve a higher peak, right, 4 years later. So I think there is a lot of room to grow. The encouragement I would have on industrial this time is that I see it at a broader application. So all of them, not only the data center related, the energy infrastructure or power delivery, not only aerospace and defense, we know the geopolitical tensions in the market is establishing new peaks every quarter. I saw it across all sectors in industrial and also across all customers in terms of regions, but also the size of customers. It's the first quarter where we saw the broad market, as we call it, the tail starting to wake up again after a long hibernation period, I would call it.

So I am encouraged about the fact that we are seeing growth over there, but I think there is -- I mean I would like to see a secular growth in industrial continuing and then higher peaks establishing in 2026 or later versus the 2022 peak. So in that sense, trend line are suggesting we still have room to go. Hopefully, that helps.

Do you have a follow up, Vivek?

Yes. So last year, we saw the overall Analog industry do very well in the first half, and then there were some level of deceleration in the second half. I realize every year is different. And I know you're not guiding to the second half, but from what you see today, what are the puts and takes as you look at the second half versus the first half? Is there anything that could be different just given right all the macro trends, memory price inflation and whatnot. And as part of that, if Rafael could also help chime in with how you're managing fab loadings as you look towards the rest of the year.

Yes. Let me start, and Rafael will follow. So first, Vivek, you spot on, right? We had a similar, let's say, strong beginning of the year, last year, maybe the year-over-year growth last year was a little lower, but it was still in the teens, and it looks like it was getting stronger. But it was, whatever you want to call it, a head-fake fall start or whatever. We had a good year in Analog, but it did not accelerate in second half, it actually slowed down a little bit, right? So I think we need to be cautious. I think Mike mentioned it. There is geopolitics. There is a macro that we are watching.

On the other hand, there is secular growth in our market. So in the long term, I'm still very optimistic. We want to play it quarter-by-quarter. That's part of the way we have guided $5.2 billion in the midpoint. Let's 2Q play out, and we'll call it as we see it. I remind you that the way we support our customers with the way we go to market, we go -- we serve our customers direct. We have very friendly customer terms.

So we see the buildup of demand as we go almost through time. And I want to see -- let 2Q play out and see if this growth is sustainable. That's the biggest question I have for myself for the second half. But at least the fact that industrial is still trending below previous peaks and the secular growth in data center and of course, the content growth in automotive makes me feel optimistic about the long-term. Rafael, can you comment about loading?

Yes. I just said that we have the capacity and the inventory that we're well positioned on both of those to handle a wide range of scenarios in this upturn.

Our next question is Joe Moore with Morgan Stanley.

On the topic of fab loading, can you talk about what's going to happen with inventory over the course of Q2? Are you seeing incremental gross margin off of Q1 that are sort of better than normal, worse the normal, just normal? Just what are the dynamics around that transition?

Yes. Again, we're well positioned on inventory. The objective of inventories to customer service, keep lead times short and stable and we are accomplishing that. So we feel very good as to where those are, and we'll continue to determine what makes sense from a loading and inventory standpoint throughout the quarter to handle any range of scenarios.

And Joe, just to add on that, you and I talked a month ago, we saw a rapid growth in Q1, and inventory served us well, right? We've depleted some of it -- we've served our customers real time according to their demand. And we just don't want to see how sustainable that would be. But as Rafael said, if the market wants to have a very rapid growth and maybe catch up to trend line even quicker, we are well positioned. Of course, we are in this Phase 3 on the fabs, and we can modulate more start the -- we have the capacity.

We may make some incremental investments on the ATs because we are seeing on the assembly and test side, a little bit of a tighter environment, at least externally. So as you know, we've brought most of our supply internally, and we have that not as well. We are very excited about the fact that we are prepared. If the market wants to grow at the same rate of Q1, we mentioned 19% year-over-year, we are ready. If it wants to accelerate, we are already as well.

All right. Joe, you have a follow-up?

Well, just on the -- just my question was also on the gross margin aspect. Do you -- is the incremental gross margin going to look normal? Or is there some part of inventory management that makes it less or more?

Yes. No, the fall-through that you should expect is in the 75% to 85% that we have guided, that's excluding depreciation over a long term. But on a year-on-year basis, if you look at our midpoint on EPS and revenue and make the right assumptions on OpEx and other lines, you should get to a good a reasonable assumption on gross margins, and it's -- and it will be in that fault that we have guided.

Our next question is from Stacy Rasgon with Bernstein Research.

Maybe just to dig into that gross margin point, if I sort of -- I mean, I typically think of your OpEx is up at a couple of points in Q2. I come up with a gross margin implicit in the guidance, maybe low to mid 59%, up from 58% and it's up, I don't know, 100 or 150 bps year-over-year on a pretty material revenue growth. Like part of you would almost expect it the incremental gross margin to be higher given the revenue growth. But maybe is the differential just like the increase in depreciation? Or like how should I be thinking about the different drivers of gross margin in the Q2 -- not quantitatively, if you don't want to give us a quantitative.

Yes. So Stacy, to help you out a little bit, your OpEx assumption was not a bad one. So you should expect some growth in OpEx first to second. Maybe what you're missing is the acquisition charges line, you should expect to continue to have charges there every quarter at the tune of what we just reported in first quarter. We should continue -- we'll continue having those there every quarter until we close, at which time, there'll be a lot higher at close and then they'll be steady after that for a number of years.

But for now, for second quarter, just assume somewhere in the range of what we just reported on the acquisition line. When you do that, you'll get a gross margin assumption that should make sense.

All right, do you have a follow up?

I do think -- maybe to ask about the acquisition itself, not the deals, but I know you've talked about it being accretive. You guys are like one of the few, if not maybe the only company in my coverage, certainly that still does a pure GAAP earnings. And I even remember when you bought NAT Semi, you did pro forma for a little while and kind of said this is stupid. We're going back to GAAP. You guys make whatever adjustments you want to make. What are your intentions for how you're going to report once you do close a slab because I have a hard time getting it accretive on a GAAP basis. Are you going to be going to a pro forma? Or how should we be thinking about that?

Thinking right now is we will do GAAP, but we'll give you all the pieces that you need to do your own non-GAAP in whichever way you want to do that. So we'll have the acquisition charges line, for example, you can take that out, if you like, and not count it. Once we're on a run rate basis, all those will be noncash. But initially, there are actually -- some of those are cash charges, right? The charges to cost to the bankers, the lawyers, the regulatory fees, et cetera. There'll be other things like the first quarter will have some weird transitions in gross margins and inventory as we write up the inventory that we're buying. So we'll give you all those pieces that way you can do the non-GAAP analysis result.

Our next question is from Ross Seymore with Deutsche Bank.

I guess the first one is, given the strength that you saw, I guess, what was the biggest surprise versus the midpoint of your guide in the first quarter? And was pricing part of the strength in either the quarter or the guide?

Yes. Let me start maybe with pricing, then we can chat a little bit more about what happened in the quarter. I think we answered it, but I'll repeat the same messages. The of pricing, I think we said in the last quarter, we don't expect pricing to help the growth, at least not sequential or year-over-year, and that was the case. But it was better than our model. Like usually, Q1 pricing is a couple of points down, call it, the low single digits down year-over-year and also sequentially because usually, the price agreement, they kick in, in the beginning of the year.

So the quarter behaved a little better. We had -- pricing was stable, flat, if you will, like-for-like, both sequentially, Q4 to Q1, and also year-on-year, 1Q '26 versus 1Q '25. So that helped a little bit. And I expect Q2 to be very similar, Ross. Just the way we work with our customers, these are discussions that are not happening immediately. We serve them direct. And I will mention that as I look at the year, if demand. And right now, the demand signals are strong. If demand continues to be strong. And we are monitoring the market price, and there is definitely at least an average price increase in the last several months across the Analog market. I think it's likely that prices may go up in the second half of the year. Again, this is going to be a case-by-case discussion in our case, but that's a pricing environment as I see it right now. And again, it's always a function of supply and demand and the unknown for me right now is the sustainability of demand. So I want to see it playing out one more quarter, and then we'll figure out for the second half.

So high level, not immediate support on growth, both sequentially and year-over-year on pricing. Now what we have seen is just breadth of demand, right, what I said before, multiple sectors or all sectors, all regions, all type of customers, small, large -- and supported by a data center market where we do pretty well. I think our portfolio is growing. I believe we are fulfilling customer demand at the highest level we have no shortages.

And it allows us, I believe, to over time, at least take market share over there. So that's, I think, what drove Q1, I expect a similar behavior in Q2 and the second half of the year is still unknown. We are seeing as I mentioned before, a higher tension on the Analog side. I think we see strength over there. And I think we are unique in the setup in the sense that we have the capacity we have in inventory and we are well positioned to support customers at the highest level.

Do you have a follow-up, Ross?

Yes, I do. One of the concerns people have, and it doesn't sound like in the strong reporting guide that you guys are seeing it, but one of the concerns people had was more consumer-oriented and marketing demand destruction with higher memory costs, memory availability, those sorts of things. Are you seeing any evidence of that? Your personal electronics segment seemed like better than normal seasonal in the first quarter. I suspect that's where it would arise if it were to arise. And so I just wondered if you guys have seen any evidence of that across your business.

High level, we have not, although customers are very aware of it, but I think they are doing well preparing themselves. And I'll let Mike comment about the personal electronics market.

Yes. I think it's also important to remember that fourth quarter last year was a pretty easy compare for the sequential transition for PE. And on a year-on-year it's about flat. So again, if that was happening, I don't know if you could point to those results as evidence of that. But again, you can't rule that out, actually, I think moving on to our next caller. Thank you, Ross.

Our next question is from Tore Svanberg with Stifel.

Congrats on the strong results. Haviv, I was hoping to zoom in on data center and specifically power. It's a great market, great opportunity. It's also very competitive. And I'm just wondering if you could talk a little bit more about some of the moats here as we go into the next few years that TI has I do assume your manufacturing footprint will be an important element of that. But any other color you could add on TI's positioning in power semis, especially with data center in the next 2 years?

Yes. Tore, I think, look, power in general is very important to data centers, as we know, and specifity power density. And we talk about both the just Think about the amount of power or the energy to drive into these systems, you need a lot of silicon to withstand it, right? So that implies on the importance of power electronics and TI is well positioned.

What I like about our position is this combination. And that's, by the way, it's true for every market. But in data center, I think there is a lot of attention to the -- what I call application-specific sockets, you can call it Stage 1, Stage 2, the VRN, the last -- the Vcore that these GPUs they need power delivery at the highest level, very complex parts, multiphase power delivery, et cetera. And there is also a lot -- a lot of general purpose parts in Iraq.

I would say, tens of thousands of them, lots of different SKUs. And this is where our general purpose portfolio is amazing. We can fulfill, I would say, almost every Analog socket on these racks. And I think we are very unique in that point, not only because of the breadth of the portfolio also because of our ability to supply. I think we have seen cases where our customers did help because they had supply shortages from their other suppliers and we come in and solve the problem. I think that's part of the reason our growth has been so high. I mentioned 90% year-over-year. And I'm very excited about the future there. So that combination of a broad portfolio and the ability to support customers with capacity and inventory is unique.

The second point, which I think I've touched upon in many calls or conferences. We are also investing more and more R&D in data center, and we are going to be one of the competitors on the application-specific socket whether it's VRM in Stage 2, whether it's high voltage, 800 to 12 or 6 at Stage 1 and we are well positioned there as well, both with the GaN technologies that we've invested in, in the past 15 years. but also on our very advanced BCD nodes that not only has the capacity needed, but also it's built in North America here in Texas and customers care a lot about it.

So I think that combination of broad portfolio, both on general purpose and ASSPs, ability to support the rec, not only the Board and ability to supply at scale with the tonnage, if you will, or the volume that this market demand is very, very unique. Not to mention that it's come from a geopolitically dependable location. So all of that is a unique combination. And that's part of what we like to talk about our competitive advantages. Maybe 1 of them is easy to replicate, but trying to replicate all in this case, all 3 is not easy. And this is why I'm very encouraged about our opportunity to continue to grow in this market. I will just add that our application-specific sockets are seeing momentum as well on the design-in phase right now. And I do expect that they'll kick in more in the second half of the year and into 2027, so my bar for the team and my expectations are high here.

Thanks, Tore, do you have a follow-up?

Yes, that's great color. And then as my follow-up. Just thinking about, obviously, now we're in another new up cycle in Analog. And just comparing this to the last one. I mean the last one, capacity got tight pretty quickly. Leak started extending pretty quickly. I know it's a different cycle, right? But I'm just curious now that you've made all the CapEx investments you've got the big manufacturing footprint. Are you starting to see share gains sort of pop up in your design wins since you are much better positioned with capacity now versus back then?

I believe we are, yes. And we have gained share, of course, in Analog in 2025, but I think we have a lot of room to go. We are still below previous peaks. And -- to me, the question, Tore, is can we do it quickly, meaning the demand -- or does the strong demand continue or it's going to take us more time.

From our perspective, we hope the demand -- we have the answer to customers. And in many cases, we are unique. I gave a minute ago the data center example, but we are starting to see other areas where our supply, our availability is allowing us to win back market share. So I mentioned pricing before. We are -- our pricing is very competitive. I think we have an opportunity there as well for the second half of the year. So it all depends on the sustainability of demand. I think Vivek mentioned before, we had a very unique 2025 where it started stronger and then it took a breather. I want to see it playing out Obviously, if it continues, our opportunity just grows.

Maybe I'll just add that we spent the last several years preparing with capacity and inventory, as you know, and our lead times have been stable over the last several years and especially the last several months, really happy with the delivery performance. And so as we look at what the future holds here, I want to make sure we can service our customers need also their growth as well across a broad customer base. And then we're really happy with the systems we have in place to allow that.

Our next question is from Matthew Prisco with Cantor Fitzgerald.

So you previously talked about spending about $2 billion to $3 billion CapEx in 2026. First, is that still the right number? And as we think about the modular build outs within its ongoing recovery, can you maybe help walk us through when you would need to start to add the incremental equipment? And how you're thinking of strategically about your capacity today as we're starting to see some foundry capacity custom mature nodes and now Tier 2 foundry pricing increases?

Yes, I'll start. First, the answer to your question is yes. We're looking at $2 billion to $3 billion of CapEx for this year. And in that number, there are -- there's capacity for what we call Phase III, which is incremental capacity that maybe you're alluding to. That's both for the -- in the fab side, but also in the assembly test side. And that is where a growing proportion of our CapEx is going to in the assembly test side to address growth.

Beyond that, what I would tell you for CapEx beyond '26 is think of the 1.2x rate that we have talked about before for the long-term needs of the long-term CapEx intensity. So for example, if you -- to make a number easy, 5% growth, would translate into 6% CapEx as a percent of revenue, and that's how you would want to model it.

Matthew, just one more point. I think Rafael touched upon it. So again, 2 to 3 very valid. But remember, we gave a framework that is still very valid. I think it was a couple of years back during capital management on kind of revenue scenarios and CapEx. I think these are also very, very valid. I will say that, as Rafael alluded to, we are seeing right now, even at the midpoint of the second quarter, and again, I want to see how it plays out. But we're looking at this, I don't know, 17%, 18% growth year-over-year for the first half of the year, that's stronger than last year. So of course, we want to be prepared in case it continues. We -- no one tells us what the future will be. We just have to support a range of scenarios.

So in that sense, we are taking the opportunity to divert some of the -- because we have enough that the thing about wafer capacity, I think we are well positioned with our 300-millimeter wafer fabs. We have the brick and mortar. We have to install equipment. But on the AT side, I think there is an opportunity, and we are very happy that we've internalized our supply because we are seeing more and more bottlenecks in the market that are popping up. And the fact that we control our destiny here and we can move more stuff internally as a benefit. So some of this $2 billion to $3 billion of CapEx that you're seeing this year, some of that is going to support faster internalization of our back end into our own assembly in test, and that allows us to support customers at a higher level.

Do you have a follow-up, Matt?

Yes, it's helpful. I guess just following, is there any update to your messaging around depreciation expectations versus 3 months ago? And then maybe how to think about timing of when CI will remain -- will receive the remaining ships direct funding?

Yes. I'll take that. No change to depreciation expectations for this year, 2.2 to 2.4. And then for 2027, continued upward pressure, but likely at a slower at a slower rate. On the chip side, first, I will tell you the more interesting one with ITC. We've been talking about that one. That's the one that's going to give us more money over the long term and that's a 35% of qualified manufacturing investments. We have been getting that ITC and then we'll continue to get ITC. But on the direct funding, we just received over $500 million in total, what received in fourth quarter is $630 million out of the up to $1.6 billion of direct funding. And the remaining, we should get that over the coming years as we continue fulfilling the various milestones stipulated in the contract.

Our next question is from Joe Quatrochi with Wells Fargo.

Yes. I was curious if you could maybe just help us understand, given the resegmentation of revenue, especially on the industrial side, what is normal seasonality now for the June quarter?

So if you can probably look back and model out what our revenue has done over history, and I don't have a buy end market specific, what the percentage is. But overall, what you'll typically see is the second and third quarter or stronger quarters. and fourth and first are typically lower compared to second and third. Do you have a follow-up?

I'll just add on that, just on seasonality. Look, our guide is -- I would describe it as a little bit above seasonal, right? I think we guided at what 8% sequential. So that's a little bit. And again, the combination of the market is changing. Data center, as we know, is now a bigger part of our revenue. But overall, my view on 2Q is it's slightly above seasonal guide. Hopefully, that helps.

Joe, do you have a follow-up?

Yes, as a follow-up, we had a really strong quarter in the first quarter out of the gate for free cash flow and just even cash flow from operations. Just any update on just how to think about free cash flow per share for this year. Any change there?

Yes. I think I mentioned, Joe, during the capital management call that as long as revenue is growing mid- to high single digits, that $8 of free cash flow per share is very probable, highly probable, okay? Now as I said before, first half of the year at the midpoint is somewhere between 15% and 20% growth, right? So there's definitely an upside. I'm not going to say what the number is, but go back to our framework that we provided back in the capital management call. You'll see, I think, I think at $20 billion we had in 8 to 9 and 22, we had 9 to 10. So it gives you kind of how every extra $1 billion of revenue is doing what -- how it helps free cash flow per share. It gives you a very high-level framework. But right now, assuming we don't have another full start, I think there is a very high -- very likely, we will be that will easily be that $8 free cash per share for 2026. Again, we need to see how the year continues, but I would say the probability is probably high.

Thank you, Joe. Let's move on to our last caller.

Our last question is from Chris Caso with Wolfe Research.

First question will be about fab loadings. And given what appears to be a strong start to the year. What are your plans for fab loadings? And what do you expect to do with inventory as we go through the year? I know you've been building inventory in order to be responsive to customers, do you expect to keep inventories at these levels or might that dip a bit?

Yes. So we feel very comfortable with our position with both capacity and inventory. And inventories there to support customer satisfaction, cubic time short and stable. So we'll continue to do that, and we'll adjust load-ins throughout the quarter to handle whatever comes at us in a number of scenarios in this upturn.

Just to add on that, Chris, we talked about all these phases of our investment, right, Phase I, Phase II, Phase III. So right now, the surge of demand is in analog, right? And in analog, we are in Phase III. So we are modulating start. We have the capacity we are moderating starts real time. We are just looking at the daily consumption, if you will, and this is where Rafael team of to start wafers. So of course, we have the opportunity.

Now in terms of inventory, it all depends on the rate of consumption. Meaning, if demand continues to be very, very strong, we'll continue to deplete inventory. Obviously, it takes time to build these parts, right? Some of the parts get built in 3 months, some of them can take 6 to 9 months. So Overall, that's why we have inventory. Inventory allows us a quick surge of customer support if they have a strong demand, that's what happened in Q1. We have a strong guide for Q2 in the midpoint, it's 8% sequential. It's above seasonal, as I mentioned. So I think inventory will play a role there. But then the machine catches up.

So to me, all these questions are related to what the second half of the year of demand will do. And based on the macro environment and based on what happened last year in terms of the market jittery, as I called it before, I want to see it play out. The good news is that we are prepared every scenario that will be presented to us.

Yes, let me just add a -- taking a longer picture and just the next quarter, when you think of our range of inventory days 150 to 250, during an upturn, we should be draining that number. It should be -- right now, we're at 209 should shift the drift towards the lower end. And then during the downturn, that's when we build inventory. And then it moves upward, right? So high level in an ideal scenario, that's what you would see in terms of days of inventory.

Chris, do you have a follow-up?

I do. And for my follow-up, I want to return to some of your comments about pricing. And we've heard from some others in the space who were a little more explicit on what they were doing with pricing. And is TI simply following the market right now on what's happened with your comments of potentially some better pricing in the second half? And then as a follow-on to that, to what extent are your customers -- what percentage of your customers would be on sort of annual price contracts such that if there was a reset in pricing, that would more likely happen towards the end of the year into next year?

Yes. I think, Chris, I think it's a good question. And I think we touched on was -- just to clarify, the TI follows, yes, because we want to see sustainability, right? We don't want to be changing prices every quarter. Of course, prices go up and down every quarter. It depends on the portfolio and where our customers need more demand and work supplies, et cetera. But let's look at 2025. In 2025, our pricing behaved as we expected. It was down this low single-digit number. That was the actual number in 2025.

In the first quarter of '26, it was stable. It was a good start of the year. I think if demand continues to behave like that and we see stronger and stronger requests from our customers, that opens up a discussion, and that's what we are going through right now. We are definitely seeing. If you go back to the -- you said the supply agreements or price agreements we've done, they were agreed upon last year, some the demand environment was very different then. We are seeing higher numbers in terms of demand. We will have to invest in our capacity. I mentioned back-end capacity investment to support all of that. There is a tightness on the OSAT world. So of course, it's a discussion. And I think customers are very thoughtful and most important for them is not to have a $0.30 part stopping their production. They need to have a high level of customer support, and that's what we are that's what we are offering. So not only supporting the part we promise them but also sometimes solving problems they have with other suppliers. That's the opportunity we have in 2026. But again, it all depends on the sustainability of the demand signal. So we'll continue to watch it. We are discussing with our customers as we speak. And we'll report back during the July call.

Thanks, Chris. Haviv, do you want to close this out?

Yes. So let me wrap up with what we've said previously. At our core, 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 owners is the long-term growth of free cash flow per share. Thank you all, and have a good evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.

Good morning. The 2026 Annual Meeting of Stockholders of Texas Instruments, Inc. is hereby called to order. I'm Haviv Ilan, Chairman of the Board of Directors. Our meeting today will focus on business items outlined in our proxy statement. Holders of greater than 85% of the outstanding common stock are represented at the meeting in person or by proxy. We have a quorum. The polls are now open for voting. The right to vote is limited to stockholders of record and proxy holders. Please raise your hand if you need a ballot.

Today's vote is on 3 company proposals, including director nominees and 1 stockholder proposal if it is properly presented. The full text of these proposals and the company's position on each matter is available in our proxy statement.

The first company proposal on the ballot is the vote to elect director nominees. All nominees for election to the TI Board are with us today this morning. All were elected at last year's annual meeting and their qualifications are listed in the proxy statement.

Two other proposals are on the ballot, an advisory vote on named executive officer compensation, and a vote to ratify appointment of Ernst & Young as the company's independent registered public accounting firm for 2026.

Also on the ballot for today's meeting is 1 stockholder proposal. The stockholder proposal is on the ballot for today's meeting was submitted by John Chevedden and will be presented by his representative. Mr. Chevedden's representative will have 3 minutes for remarks regarding the proposal. Please step up to the microphone to begin your remarks.

Good morning. Proposal 4, shareholder right to act by written consent sponsored by John Chevedden. Shareholders request that the Board of Directors take the necessary steps to permit written consent by the shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting at which all shareholders entitled to vote thereon were present and voting without any discrimination or restriction based on length of stock ownership.

This includes shareholders' ability to initiate any appropriate topic for written consent. This proposal topic won an outstanding 78% Texas Instruments' shareholder support at the 2021 Texas Instruments Annual Meeting without any special effort by the proponent. According to State Law, Texas Instruments' shareholders can have the right to act by written consent and the right to call for a special shareholder meeting. Both rights allow shareholders to take action between annual meetings. [ Chairman ] Texas Instruments was suggesting that its shareholders limit themselves to 1 shareholder right when Texas Instruments shareholders are entitled to 2 shareholder rights under State Law.

It is especially important for Texas Instruments shareholders to have the right to act by written consent because Texas Instruments' shareholders have only an unattainable right to call for a special shareholder meeting. Texas Instruments requires the backing of 25% of all shares outstanding to call for a special shareholder meeting. The reason that the 25% figure is too high is that more than 100 companies have had an opportunity to give 1 example of a special shareholder meeting ever taking place at any company whatsoever that required 25% of shares to call for a special shareholder meeting. Not one of these 100 companies has ever cited even one example of the special shareholder meeting actually taking place where the requirement was 25% of shares.

Companies such as Texas Instruments,like the 25% figure because they know the 25% figure is a safe figure and a special shareholder meeting will never take place. Please vote for a shareholder right to act by written consent, Proposal 4 because Texas Instruments' shareholders do not have an attainable right to call for a special shareholder meeting. Thank you.

Thank you. I will now open the floor to questions about the ballot items. The polls are now closed. Votes submitted prior to the start of the meeting have already been counted. We have the preliminary results of the voting and according to our independent inspector, all company proposals have passed and the stockholder proposal did not pass.

With that, the annual meeting is adjourned. Thank you for coming today.

All right. I think people are still filtering in, but we'll go ahead and kick it off. I'm Joe Moore from the Morgan Stanley Semiconductor team, and we're very happy to have back at our conference, CEO of Texas Instruments, Haviv Ilan. Haviv, thanks so much for being here again.

Good morning, Joe. Thanks for having us.

So you just came off of your capital management call. I know that's a sort of focus for you guys every year where you update us on your priorities. Can you maybe give us some of the bigger picture takeaways from that call?

Yes. I think that happened exactly a week ago, and not a lot of change. We are excited about where we are. We are in the last year of a 6-year investment cycle that was executed well. On budget, on schedule, actually ahead, and very pleased to be in that position.

But also wanted to go back to what we talk about every year, our competitive advantages, which is manufacturing and technology, a broad product portfolio, the channel advantage and a strong position in the market in the sense of diversity, of longevity of the business. We went into that. Also talked about our market. This year, we have provided a little bit more -- a change in our -- on our market. We've reorganized our market segments. We've added data center simply because the size of it and the importance in our economy is higher.

The economy, we just heard from.

Yes, we just heard about it. And we now have industrial, automotive, data center, personal electronics and communications, gave a little bit of visibility into that. But more important, very happy with our position in these 3 markets that we care about. I think they carry the most growth for the foreseeable future. Industrial, automotive, data center, 75% of our business there. And an improving portfolio, Joe. This is something that we've been working on for many, many years. I am excited about where we are.

And to finish with that, we -- remember, our objective is to grow free cash flow per share for the long term. We've given a little bit of an update of how we go closer to the trend line with a very good probability to hit at least $8 of free cash flow per share in 2026 with a lot of opportunity for upside.

Great. And you mentioned a lot of continuity over the years with the way you've approached capital management with different strategies along the way, but a very clear focus on optimization of cash flow. But one thing that is a little different, the M&A, the Silicon Labs deal. Maybe give us an overview of that deal, and then maybe we can delve into what that tells us about your priorities?

From a high level, strategic thinking about M&A has not changed, same framework. And we are doing them very rarely, right? We've done some in the beginning of 2000s with Burr-Brown. We've did another one with National in the beginning of the previous decade and last month, announced a plan to acquire Silicon Labs. We always said the markets that we like are analog, are industrial and automotive. In this case, a very industrial business for Silicon Labs.

The focus will be on analog and mixed signal. And I see Silicon Labs as a great mixed-signal asset. I think they also are a great fit or potential fit for our competitive advantages. So if you think about what they bring into the mix in TI, it's a very nice broad portfolio on the wireless connectivity side. People like to call it IoT. That's the way I think about it. And also a great position in terms of diversity and longevity. A very, very broad customer base, very sticky business, long design cycles, which we like.

What we want to bring into the mix is, of course, our manufacturing and technology capability. We are now -- we've invested since 2021 in this mixed-signal asset in terms of the Lehi fab we have. We think we can transition the portfolio over there. And also our channel advantage. I don't think we have quantified revenue synergies and actually assumed them at 0. But I think there are also revenue synergies that can come up as we put these products in the hands of our very capable field force.

And also ti.com with e-commerce, with the capabilities we have there, I think that can also accelerate revenue growth. So very excited about the opportunity. Of course, we have to execute through the plan, and we are expecting to close that transaction in the first half of 2027.

Great. Well -- and we cover Silicon Labs and like the fit a lot. I like the business a lot. I guess, just a couple of questions though about what it tells us about how you think of your business. We used to write about IoT 6, 7 years ago, and Rich Templeton was sort of saying we're serving that market through our catalog business. And I think a lot of that was when investors kind of focus on individual little product cycles and things like that. But it was very much -- we're not looking at IoT as a vertical. It's much more of a catalog. We're going to have these solutions.

SLAB is almost the antithesis of that, right, that they have looked at it as a vertical. And a lot of the kind of core strength of the company is that kind of tying everything together, having multiprotocols back like that. Does that say that TI is less catalog-focused and a little bit more vertical-focused? Or is that more something unique to this asset?

No, I actually agree with Rich. I don't think IoT is a vertical. So the way I think about verticals or it's markets, right? And the way I think about IoT is technology and the product portfolio and a line in the breadth of portfolio of analog, mixed signal and embedded products. It's just a very important line. It has secular growth because as people want to connect, especially with IoT, with AI and data. IoT or wireless connectivity is a great way to add connectivity capabilities to an already existing system, right? You don't have the wires, you add that feature. But it's a very broad business across multiple end equipment, very catalog-ish, in my view. And that's what we like about it. So in that sense, I agree with Rich.

We think that the unique opportunity with Silicon Labs, you don't see it many times in a young company that they have the persistence to build their business in medical, in health care, in metering, in enterprise automation, very rare to see early phase companies going after that. You'll see them mainly usually in very fast-growing verticals, to your point, whether it's communication or personal electronics or even data center. To me, that is exactly the opposite in Silicon Labs. Very broad portfolio, very sticky, a great fit to our company, especially as we internalize the portfolio into our own factories.

And how do you think about that dynamic between having the best catalog, having parts that sort of solve these analog problems versus thinking about verticals and thinking, okay, automotive needs these things and they need to interoperate with each other and industrial needs these things. How do you see the balance between those?

I think both are very important. And even in our capital management call last week, we talked about the 3 markets that we put more emphasis on, especially from an R&D perspective, industrial, automotive, data center, is that you have to play the general purpose play. You call it catalog, but a very broad, not application-specific type of socket. But also the application-specific type of socket. Why? Because it's a big part of the TAM. It's not a good idea to ignore it.

But I see the foundation of our business as this general purpose business. We love these type of sockets because revenue per socket or revenue concentration per socket is low. You can command high margins. The stickiness of the sockets are very high, simply because not a lot of people are looking at them. So once you've earned your position on the board, it gets reused again and again and again for multiple generations. You still have to have that discipline, Joe, to always make sure that your portfolio is current, meaning best size, best power, best cost structure. And I think TI over the last 15 years have worked very, very -- in a very high level of discipline to create exactly that.

On top of it -- and this is an end game -- you add the application-specific sockets. And especially with the markets we care about. So you won't see TI going after huge sockets on the communication market. If you think about base stations, you won't see us going and putting a lot of attention on personal electronics, although we do it, but we are very selective over there. In industrial, in automotive, in data center, you will see us playing in both roles. And this is a muscle that we are continuing to build. And I'm excited about this end game, have a foundation of general purpose business and on top of it, build the verticals that you think present the highest growth for the company.

Yes. I mean, they're both great parts of the business.

Correct.

Yes. Okay. That's helpful. And then with the Silicon Labs deal, you sort of said -- and you talked about it, it's not a fab filler. [indiscernible] But I guess, how do you think about having a lot of capacity, having at the moment, somewhat lower utilization of that, that you can actually add value through manufacturing by buying assets and bringing them into those fabs? Is that part of the benefit of having that capacity that you have? Or are you still much more focused on that as a strategic reserve?

No. To me, the way I think about an acquisition, or in the case of Silicon Labs, is the portfolio and the market position, and we cover that. In the sense of the fab, I think it's very important. And I think we say it, and I think people kind of okay, brush off it, but we say, especially this year, we are prepared for a range of scenarios. And it's related to that strategic position that you just talked about.

I think it's very, very important to be prepared. Right now, in the last few years, the market has started to recover, at least in 2025. And I want to be ready for any scenario in 2026. If the market wants to continue at the same rate of recovery, I think that's going to be not a lot of stretch for the company, and we'll be ready for that. But TI wants to be ready of what happens if industrial does want to go back to trend line quickly. What happens if data center continues to grow very, very fast as it has. What happens if the secular growth in automotive are actually getting -- continuing to generate momentum in '26 and beyond. We want to be ready for the opportunity.

And in that sense, we've put a lot of discipline on having enough capacity, but also in the short term, have enough inventory, whether in die bank or finished goods, to serve the surge as it comes. So far, look at 2025, we grew double digits at 13%, but it's not been a very, very strong recovery. But '26 is not done yet. I know a lot of people, you guys are spending one time of what it could be, but I want to be ready for each and every opportunity.

The excitement I have is that two things are continuing to happen in a meaningful way. One, data center is becoming a bigger part of our business and the growth rate is very, very high. I did not envision that 5 years ago. I think the CapEx investment over there and the need for energy -- for power density, the need for more connectivity, the need for more sensing and more control is growing. So that's been -- it's now -- we left the year at 10% or 11% of our business, but growing at 70% year-over-year. So that's a big part of the business now.

And on top of it, industrial is so far away from trend line. Yes, there are some sectors, in our case, it's aerospace and defense that are unfortunately generating new highs every quarter, but that's almost the outlier. The rest of the sectors -- and we have about 10 of them -- are way below trend line. And we are 4 years after the previous peak, right? So that is a market that has a secular growth. That is a market that has content addition from generation to generation, but still trending 25% below its peak. So I think it's due to a correction, and we want to be ready for that opportunity.

Great. So I want to ask you questions about a lot of things that you just said. Maybe start CapEx and inventory. On the CapEx side, you've talked about a business that could have maintenance CapEx of 4% to 5% going forward. So we'll start getting more cash flow relative to the levels that we've had if you sort of stay in that mode.

I guess, how do you think about that level of spending now? Do -- if we have a more robust recovery, would you spend more than that? And I guess maybe the question is, how do you optimize long-term utilization? It doesn't seem like maybe in the past, you thought about, let's be 100% at peak and lower trough. You're probably trying to optimize around a lower level than that, which makes a lot of sense given the economics of your business.

Correct, Joe, I think you touched upon it. But first on the maintenance side, look, every company, especially in IDM, that now we are more and more -- we are internalizing our capacity more and more. We'll finish the decade at above 95% of the front end and above 90% on the back end. That's a big change. If you go back, especially to the back end, it used to be about 60% or 55%. So that's a big change. We want to control our destiny across the front end and the back end.

And when you run your operations, even if you don't grow rapidly, there are always areas in your portfolio that are growing faster than others, right? So you always have to -- I call it maintenance, but you also want to stay current. If a certain part of the data center market needs a little bit more capacity, you make an investment. The same with certain packaging type. So that is where the 4% is coming from. And that would be at a low level if revenue doesn't want to grow. But I think revenue has an opportunity to grow way beyond that, and this is where we will modulate up our CapEx.

Right now -- and I think I mentioned it last week. As long as growth is very similar to last year, either this year or even next, we don't need to add a lot of capacity because we've gotten ahead. And we are internalizing right now, our -- at least our Embedded business from external fabs into the internal one. However, if the opportunity presents itself, we will happily equip the clean rooms and get a little bit of more spare.

And you're right, you never want to run at 100%. The factory cannot run at 100% utilization. This is where the efficiency of the factory drops. And you're just building [ WIP ], right? So operating at that somewhere around 80% to 90% is a sweet spot because we also want to have a surge of demand. And this is where inventory comes in. We want to carry more inventory. And this is something that we've learned back in COVID. It serves you very well in the short term. If there is a surge of demand, for whatever reason you can envision, that the inventory is the first aid to serve customers. And we've seen some of it in small cases. Tariff was an example a year ago. There was one company that ran out because of geopolitical tensions, could not ship in Q4. So this is where TI showed up for the game very comfortably and solved customers' problem.

Yes. I think the strategy there makes a lot of sense. I think it's a lot of inventory that you're talking about, 150 to 250 days. But when you think about the life cycle of the products that you have in inventory, it's actually a pretty low risk around that. So just -- how do you view that trade-off? I mean, it was -- I sort of understood why it was a high level. You went to a little bit of a higher level around the Capital Management Day. Just what's the calculus of what's -- I understand the logic of holding more. It makes a lot of sense to me. What gives you to the number, to the 150 to 250?

I think first, tactically, I think Rafael answered that question a week ago, the 150 to 250 is because we are now -- look, we are fully internalizing our capacity. So think about it, when you run foundry wafers, that [ WIP ] doesn't sit on your books, right? The same as on the [ AT ]. So when you go 90%, 95% internal, that's one reason you see a little bit of a higher inventory.

The second thing is the more strategic view, and this is where you have to be very careful on what parts you build ahead. So we will build a part that has the diversity and longevity phenomena or traits. You don't want to build a custom part inventory because that's how you get in trouble and scrap that inventory later on. So we are very intentional about looking at our portfolio and choosing the right part, the right wafers to build ahead. And because our business has a high level of general purpose parts, a high level of industrial and automotive, that longevity and diversity phenomena is there.

The second point is you see a range. Why do you see a range? If there is a very high surge of demand, your inventory will deplete. Your 250 will go down to 150. You don't want to go lower than that because that means that we are starting to be short and cannot serve the customer well during that up cycle. And you have to model your up cycle. So you have to model the slope of the demand. We have modeled several scenarios, taking our information from previous examples. And we want -- at least if the history repeats itself, we want to be a great supplier through even the upturn.

And of course, once you -- the cycle peaks, this is a great opportunity to go and replenish your inventory to prepare to the next one. This is where you see inventory probably climb to the higher level of the range. But that's a theory. Of course, no cycle is perfect, and every one of them behaves differently. But this is where we have to have the discipline to prepare for a range of scenarios, very, very important.

Yes. I think that's a really important point is that you guys -- more than a lot of companies have -- understand the inherent unpredictability of markets, and you're prepared for that range of scenarios. I guess in that context, how do you think about 2026? Most companies at the conference are seeing what you described, strength in data center, strength in aerospace, defense. Everything else getting a little bit better over time, but like maybe the pace of that is a little disappointing. What are the things that might make that change as you move through the year?

Yes. I would say a small -- in general, I agree. So far, it's more or less what you described. Very strong data center, but now it's a more meaningful part of the business. So that's very important to remember. Now it can move the needle on your overall demand.

I would be a little bit more -- I would not say optimistic, but we are seeing maybe a different change in industrial versus a year ago because the breadth of the growth in Q4. I look at Q4, we grew close to 20% year-on-year in industrial. Finally, we are starting to see a very broad demand signal, not only aerospace and defense, not only energy infrastructure that are kind of AI-related. You're starting to see the traditional industrial automation, of medical, of building automation starting to show strength again. I think they are due because they are so much below trend line.

And we've seen also -- what I was, I would say, encouraged by is that it improved every month. And we are now 2 months into the first quarter. And so far, so good, meaning we are seeing that signal continuing. So let's see how Q1 plays out. There is still March, and we just came out of Lunar New Year a week ago. But I think industrial is due for a correction.

Actually, I didn't break it out a week ago during the CAGR of TI growing in industrial, automotive and data center together from 40% of revenue to 75%, but the CAGR is 8%. That's a healthy CAGR even when '25 is not a great year, to your point, slow recovery. But if you look at the industrial market for TI, it was actually below 5%. It's automotive and data center that grew 12%. So I think industrial has more gain. And I would like to see it quarter-by-quarter. We had a couple of head fakes last year. Let's see what it wants to do. But I actually feel that that's the opportunity in 2026. And industrial is a big part of the TAM. It's 35%, 40% of the TAM.

So we have to be ready for that opportunity, not only that customers are getting back to their patterns of ordering, but also delivering new equipment with more content. And maybe if they want to build some inventory -- they're not doing it right now, but if they want to build some, we want to support them. We don't want to tell them no. So we want to prepare for that, and let's let '26 play out.

And I guess when you frame that, we're still so far below the peak of several years ago now. And the industrial activity in the economy has grown over that time.

Correct.

But obviously, at the peak, there's always some overshipment as well.

Correct.

So where are we do you think now relative to the level? Are you shipping to end demand? Clearly, there's not much replenishment. Is there still some pockets of reduction? Just -- are you still shipping below end demand, do you think?

No, I think we ship to end demand, but what is happening is that we are 4 years forward. So we are starting to see the new systems coming in. And customers, I don't think they are building inventory. I agree with your assessment. Of course, they don't tell us, but that's my view right now. I don't think they are building inventory. And there is also not anxiety in the market. This is just a healthy broad demand on the industrial side.

But who knows? We've seen some other markets where shortages generated a lot of demand. And we don't want to be short this time, we want to be ready for that. So that's what drives our decision, Joe. And again, let's look at it quarter-by-quarter and call it out as we see it.

Okay. Okay. And then automotive, kind of a very different shape of a cycle. You're at peak, but it never really came down that much, and it's grown. But there seems like there's still pretty strong underlying growth. And I think I'm bullish. I don't know if that's playing out or not like the last few months has been a question, but it feels like there's indications that inventories are low. You've seen disruption around some of the geopolitical stuff that you mentioned. Are we ready for automotive to start a more meaningful recovery, do you think? Or is it demand dependent? How are you thinking about the automotive market?

I think high level strategically -- and let's talk about the next 5 to 10 years -- I totally agree with you, Joe. I think content addition is still ongoing. A lot of people get hung out -- hung up about the powertrain. But we see growth in all sectors of the automotive, including ADAS, which is at the early innings of additions, especially across the portfolio of cars. The body, electronics with more comfort inside the car, more infotainment inside the car. And even the safety systems that are being redesigned with brake-by-wire and other actuators that are coming into the car. Chassis control, that is a cool application. And I think early innings of these additions. So at least for the next 5 to 10 years, I think content addition continues to grow. And this is why we've seen a 12% CAGR for TI in automotive for the last 12 years. And you're right, it never corrected down. It kind of plateaued at the peak.

I think what you're talking about is more tactical. So China, yes, there was a very strong 2025. Q4 was our peak quarter in automotive in China ever, okay? But the incentives are going away, and maybe there is a small correction. They built some inventory. I think it's a bump in the road. I think there is a lot of opportunity ahead for the foreseeable future. Now you take it decades from now, it will plateau because of saturation of content. But by that time, we have so many other end equipment like robotics. I think data center continues. So in general, these 3 markets have a lot of opportunity ahead.

And within automotive, China is becoming so important. A lot of the innovation is there at this point. And you do have domestic competition that at least, there's a lot of concern that investors have. Can you talk about competing in China in the automotive space?

Yes. First, in China, this is where we have had a little challenge during the COVID cycle because of supply shortage. That's actually driven some of our decisions to divert or to bias our supply into the industrial, automotive, data center market. So if I talk about TI, 75% of our revenue is in these 3 markets. In China, it's actually higher. It's more than 85% in these 3 markets because we were not supporting well, the PE market.

But I will say that the competition in China is intensifying, and it's a function of really, the customer base. The customer base is very fast moving. The demand for speed and urgency is high, but also the demand for a broad portfolio and quality and high performance. So we compete.

What I'm proud about -- and you can see our results even in 2025, TI has grown share in China. If you look at our growth in China, about 25% in 2025, and automotive was a big part of it. That was faster even than the local competition. And I think the way you compete in China is first with your competitive advantages. You can argue that there is a very competitive price point you have to compete in China, but we have our internal manufacturing where we don't have to share the profit with anyone, not with the foundries and not with the OSATs, right? That's one advantage.

The broad portfolio is crucial, especially in the markets I've mentioned. Instead of solving the problem with 15 different companies, which is the case of the local competition, you can solve it with 1 company, TI. And in the markets of industrial, automotive, data center, performance and quality, especially on the automotive market, is very important. You need to have the stomach and the quality discipline to compete in automotive, even in China and especially as they are exporting more and more of their vehicles across the world, if it's in South America, if it's Southeast Asia and Europe. So I think TI held its own, if not gained, and I'm excited about that.

Now having said that, we are highly respectful of the competition. We are studying them every quarter as they release their results. We look at their parts they release to market every time there is a new part, and we learn. And we've learned that these competitors are fast moving like their customers, like our customers in China and cannot be ignored.

Okay. That's helpful. And then -- so for a decade, you've been pretty consistent that the focus areas for TI are industrial and automotive. Now you've added data center to that. And I think everybody would agree with that prioritization given everything that's going on. But what -- as a CEO, what does that mean? Like what -- when you say that's a third priority area now, how are you focusing around opportunities in data center?

Yes. I think it's a couple of points. First, it's really allocation of capital. And number one and foremost is R&D. In data center, we have identified the trend of higher power density, higher power consumption that needed us to work on our technology, actually, our process technology and package technology. And that is a journey that we've embarked upon 5, 6 years back. We've identified that as a priority then. And luckily, these investments are coming to fruition, whether if it's in a BCD node for VRM and serving the last inch of feeding or delivering power to that GPU or ASIC or CPU. And also going to higher voltages. So we've invested in GaN 15 years ago, but to support the GaN requirements in data center, we had to update and accelerate actually our R&D, and we've done that.

The second thing is the product portfolio, build a portfolio, both general purpose and application-specific. I've mentioned that on general purpose, we've done very well. A predominant footprint of TI right now in 2025 and before is on our general purpose business. We have hundreds of sockets we can fulfill on a board and sometimes thousands, different sockets on a rack. But we want to add to it, the more application-specific that needed this new technology. So this is almost a one-two punch for us. We are we have done that very well.

On the industrial and automotive, I remember discussions in TI back in 2010 when we were very heavily based in phones and in base stations and in ASICs. And we said that's not our future, our future is industrial and automotive. This is where the acquisition of National helped us to accelerate into automotive. But moreover, the portfolio has strengthened tremendously. And we've now been at it for 15 years. The broad portfolio we see is, I think, second to none in these markets in our area of Analog and Embedded, and very pleased with where we are right now.

Great. So we have 4 minutes left. Let me see if we have questions from the audience.

[indiscernible].

Yes. You can find it on our website.

Other questions? I think -- maybe if no, I'd love to ask about your microcontroller strategy. I know you haven't been happy with Embedded performance, but there are some elements of pulling away from some of the base stations and things like that. How do you feel now about your direction in microcontrollers and your ability to outgrow the embedded markets from here?

Yes. First, just -- not happy is not the right decision. I would say proud, but not satisfied. So I am very proud of the inroads we've made into the embedded market and specifically to the, call it, the more broad MCU -- catalog MCU market and also more application-specific.

What we have said -- and I said it also on the -- someone asked about Silicon Labs before during the acquisition call -- is that I think the right way to do it is build it organically. Because when you look at the pure MCU companies, the number of architectures and portfolio permutations they have is so broad that it's very, very hard to internalize it. I think Silicon Labs was very unique in the sense that they had a very efficient platform discipline, and that was something that we find very rarely.

In the case of the MCU market, I think we have to build it ourselves. And I see a lot of momentum here. Our portfolio is broadening quickly. Our portfolio is now entirely running internally. It used to run -- 2 years ago, our [ F65 ] or embedded flash 65-nanometer controllers were all running in the foundries. They are now all internalized at high yields and very high performance. And that is the plan moving forward as we move into 28-nanometer. And this is where we can start to build a more sophisticated MCU with higher memory footprint and higher content per chip.

Very excited about that, but a lot of room to go. The opportunity in Embedded is very, very similar in terms of the growth of the Analog one. Our portfolio is the one that has to be built, and we'll stay very persistent in continuing to build it.

Okay. Yes, there's been a lot of good feedback on the product families and the new -- we did some survey work that showed TI at the top of the list.

A lot of work to do.

But when I said unhappy, the market share has come down.

Market share has to -- I mean, this is part of the "difficult." That's what we like. The moat of this market, nothing happens quickly. It's almost like a delayed gratification type of work. You do the work now, you'll see the results -- sometimes we say we are building a business for our kids and grandkids. But we are starting to see results coming in. I think we've started to nudge market share up in the last year, and we have more room to go. I see a question in the [ end ] over there, Joe, if you want to take it.

Yes.

I was curious, just -- obviously, at the Capital Markets Day, you have quite a bit of capacity and ability to gain share. But how are you feeling about that relative to industry capacity, which seems to maybe be reaching peak? Not peak, but high utilization rates like we've seen from GlobalFoundries and some of your peers as well as on the packaging side as we move forward?

Again, I think your question relates to what I described before. And I don't want to call out 2026, but I think the setup is very appealing in the sense of -- yes, you go and some of the foundries in China are reporting utilization, they are up there. We are starting to see hotspots. Not in TI, but areas in the market that we can fulfill. And right now, the way I think about it strategically, let's gain share, okay? Let's use that opportunity to get on the board and to increase our footprint. Later on, market price will do what it needs to do, but I think that's an opportunity.

The last point, I invite you to check a little bit what's going on in the biggest foundry in the world in Taiwan and what they have done with their legacy supply or fabs. I mean, there is a lot of conversion into advanced packaging houses, and that's also something that presents an opportunity for TI. So we'll have to wait and see. It hasn't come to fruition yet. I don't see anxiety in the market like we see in other parts of the market in different types of semiconductors. But I can promise you one thing. If the opportunity presents itself, we will be ready, both with capacity, to your point, but also with inventory.

And with that, we'll wrap it up there. Thank you so much, everyone. Thanks, Haviv.

Thank you, Joe.

Good morning, and welcome to the Texas Instruments 2026 Capital Management Call. I'm Mike Beckman, Head of Investor Relations, and I'm joined by our Chairman, President and Chief Executive Officer, Haviv Ilan; and our Chief Financial Officer, Rafael Lizardi.

This call is being broadcast live over the web and can be accessed through our website at ti.com/ir. In addition, today's call is being recorded and will be available via replay on our website, along with the complete presentation and prepared remarks for your convenience.

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 our most recent earnings release as well as our most recent SEC filings for a more complete description.

With that, let me turn it over to Haviv.

Thanks, Mike. Let me start by welcoming you to our 2026 Capital Management call. During today's presentation, we'll share more detail on our approach to capital allocation and our investments. We'll begin with a recap of our objective, strategy and business model that is built on our competitive advantages. We will review our scorecard for 2025 and update for 2026 as well as a historical view of our capital allocation. Then I will provide additional insight into our growth expectations, where we continue to see excellent opportunities across all of our end markets and especially in industrial, automotive and data center. Next, we will provide a brief update on our progress in strengthening our competitive advantages. And lastly, we will review our free cash flow per share performance and wrap up with a review of our cash returns. If you haven't already, I encourage you to read our investor overview, which provides insight into our business model and competitive advantages. It is available on our Investor Relations website at ti.com/ir.

The following guiding principles will help frame our discussion today. At TI, we run the company with a mindset of being a long-term owner. We believe that growth of free cash flow per share is the primary driver of long-term value. Our ambitions and values are integral to how we build TI stronger. When we are successful in achieving these ambitions, our employees, our customers, communities and shareholders all win. Our strategy is comprised of a great business model, a disciplined approach to capital allocation and a focus on efficiency.

Our business model is built around four sustainable competitive advantages: manufacturing and technology, a broad product portfolio, reach of our market channels and diverse and long-lived positions. After investments in the business to grow free cash flow for the long term, the remaining cash will be returned over time via dividends and share repurchases. With that as a framework, our objective is to maximize long-term growth of free cash flow per share. We believe this is the best metric to judge our performance and generates long-term value for the owners of the company.

Our strategy to achieve this objective has three elements: first, a great business model that is focused on analog and embedded processing products and built around four sustainable competitive advantages, advantages that we continue to invest in and make even stronger. Second, discipline in allocating capital to the best opportunities. This spans how we select R&D projects, develop new capabilities, invest in manufacturing capacity or how we think about acquisitions and returning cash to our owners. And third, striving to constantly increase our efficiency, which is about achieving more output for every dollar of input.

Our strategy is designed around four sustainable competitive advantages that, in combination, provide tangible benefits and are difficult to replicate. First, at the bottom of this slide, we start with the foundation of manufacturing and technology. This provides us with lower costs and greater control of our supply chain and provides our customers with geopolitically dependable capacity. Our second competitive advantage is a broad portfolio of analog and embedded processing products. These products provide us more opportunities per customer and more value for our investments. Third, the reach of our market channels, including our sales team and ti.com. This provides us access to more customers, projects, socket per project and insight into their needs. And lastly, we have diverse and long-lived positions, resulting in less single point dependency and longer returns on our investments.

With that, I'll turn it over to Rafael, and he'll review our approach to capital management and the scorecard.

Thanks, Haviv. We have shared our capital management scorecard with you since 2013. You can see that the scorecard includes descriptions for our long-term objectives for each metric as well as the target range. The long-term objective provides insight into how we make decisions and run the business as opposed to only a number or a range.

In 2025, we again met our objectives. Capital expenditures were about $4.6 billion and cash return was about $6.5 billion, which is a reflection of our continued commitment to returning all free cash flow via dividends and repurchases over time. We are pleased with the consistency of these results over time that have been enabled by our business model, discipline in allocating capital and constantly striving to increase our efficiency.

For our 2026 scorecard, we have updated our CapEx targets. We expect CapEx in 2026 to be in the range of $2 billion to $3 billion. For 2027 and beyond, CapEx will continue to depend on revenue and expected growth. Our long-term objective remains the same: to support new technology development, revenue growth and extend our low-cost manufacturing advantage. We have also updated our inventory days target to 150 to 250 days, which allows us to meet our objectives of high levels of customer service through a range of market conditions by providing competitive and stable lead times while minimizing inventory obsolescence.

Turning to cash management and debt. Our objectives are unchanged. We plan to fund the recently announced acquisition of Silicon Labs through a combination of cash on hand as well as debt financing that we will arrange prior to closing. Silicon Labs will enhance our leadership in embedded wireless connectivity solutions, and we expect it to close in the first half of 2027. Our commitment to return all of our free cash flow over time is unchanged, which includes a sustainable and growing dividend as well as repurchases when it is accretive to future free cash flow for long-term owners.

In the 10-year period spanning 2016 to 2025, we have allocated about $109 billion of capital. Given that magnitude, you can appreciate why capital allocation is a job we take quite seriously and one that has a significant impact on owner returns. Our largest category of capital allocation, about half of the total, has been investments in critical areas that drive organic growth such as R&D, sales and marketing, capital expenditures and inventory. For reference, R&D and capital expenditures have accounted for the majority of our investments over this 10-year period. As we previously mentioned, we have long had a commitment to return all free cash flow to owners over time via dividends and repurchases. And finally, potential acquisitions are evaluated through two primary factors. There must be a strategic match, and they must meet certain financial objectives. These factors remain unchanged. For simplicity, we have not included changes in net debt, which over this 10-year period increased about $8.3 billion.

Now I would like to turn it back over to Haviv to share additional insight into our growth expectations.

Thanks, Rafael. First, let me make a few comments about the overall market environment. This slide, which we have shared for the last few years, shows all semiconductor units shipped, excluding memory on a trailing 12-month basis over the past 30 years as reported by WSTS. You can see here that market recovery is continuing, though the slope of recovery is more modest when compared to previous upturns, with units shipped still below the historical trend line shown in gray. This historical trend line, which grows consistently over time, guides us as secular content growth continues and our confidence in the strategic opportunity remains high.

During the last decade, we have worked hard to focus our product portfolio on analog and embedded products and strengthen our position in large growing markets. This includes investments in process technology, package technology and the expansion of our product portfolio.

As we discussed in our earnings call a few weeks ago, we reorganized our end markets to include data center. We see opportunities in all of our markets. However, we place additional emphasis on industrial, automotive and data center. In combination, these growing markets made up around 75% of our revenue in 2025 and are gaining momentum.

I would like to expand a bit on our broad portfolio of general purpose and application-specific analog and embedded processing products are well positioned to serve the industrial, automotive and data center markets. Starting with automotive, we are continuing to see growing opportunities across our automotive sectors where subsystems with higher content are becoming standard features in more vehicles. We are seeing content expansion across all vehicle types, battery electric, hybrid and internal combustion engines. As a result, our exposure in automotive is broad with growing opportunities across customers and geographies.

Turning to industrial. Our positions are diverse and long-lived. We see content growing across many sectors as increased automation, more sensing requirements and increased energy efficiency are expected to continue for the foreseeable future. Our general purpose products and ASSPs are able to serve a broad array of sockets in the industrial end market with many designs lasting for decades.

Lastly, I'd like to spend a moment describing our position in the growing data center end market. This end market is comprised of sectors found within the walls of the data center, which includes data center compute, data center networking as well as infrastructure related to rack power and thermal management. This end market is supported by a broad set of products from TI. For example, DC to DC voltage regulators, clocks, hot swap controllers, current sensors, interface products and point-of-load controllers are just a few of the many general purpose products and ASSPs that are enabling data center growth. These products are used throughout the data center, including the entire power tree from high-voltage AC to DC conversion to the intermediate bus, all the way down to the multiphase controllers and power stages. Our product will also play an important role in the long-term transition to 800-volt DC architectures where our GaN technology will drive higher power density per rack.

To summarize, we're exposed to the best markets. Our revenue has grown from about 43% to about 75% in industrial, automotive and data center, which will be excellent market for our long-term growth. Second, we have a stronger product portfolio. The breadth of our analog and embedded processing products, which span both general purpose and application-specific, combined with our investments in process and package technologies have strengthened our portfolio offering. As a result, our exposure to large, fast-growing markets and our strong product portfolio positions us for growth.

Next, I'd like to spend some time discussing our progress in strengthening our competitive advantages. To start, I'll update you on our manufacturing and technology competitive advantage. I mentioned earlier that for each of our competitive advantages, we work to ensure that they provide tangible benefits and are difficult to replicate. Our investments in manufacturing and technology helped to extend our cost advantage and give us greater control of our supply chain.

Today, we will provide a recap of the progress towards our capacity road map that will support growth over the long term. Before we do that, I'd like to provide some insight into the benefits of owning and controlling our supply chain and the benefits of 300-millimeter. There are several benefits to owning and controlling our supply chain. First, these investments provide the capacity necessary to support growth. Second, we have more control of our supply chain as more than 90% of our wafers and assembly will be manufactured internally. Third, our process technologies, which are focused on 28-nanometer to 130-nanometer, are optimized for analog and embedded processing products. Lastly, we have a structural cost advantage because of our increasing 300-millimeter wafer fab footprint.

All of these benefits allow us to deliver geopolitically dependable capacity with equipment and process technologies that last for decades. This example, which we have shared for many years, is an illustration of the cost benefit of internal 300-millimeter wafer production. In addition to the benefits of moving to 300-millimeter, we also continue to benefit from moving externally sourced products to our internal manufacturing, which are more cost effective. The combination of internal manufacturing along with 300-millimeter wafer production provides lower cost, and we will be increasing both our percentage of wafers produced internally and on 300-millimeter over the next several years.

Now let me remind you of the phases we outlined for our 300-millimeter capacity investments. The focus of Phase 1 was to support 300-millimeter transfers and incremental growth by equipping RFAB2 and LFAB1. Phase 2 was focused on new fab preparation and primarily included long lead time work that spans several years before a fab can produce a single wafer. This is what allows us to be in a position of modular capacity expansion or Phase 3. In Phase 3, we will equip and ramp fabs according to customer demand without any requalifications. We have executed well on this road map, delivering on time, on budget with high levels of efficiency and have transitioned into Phase II across the majority of our manufacturing sites. This will allow us to scale CapEx according to demand and deliver free cash flow per share growth across a range of market conditions.

Our 300-millimeter wafer fab manufacturing investment spans across three sites in Richardson, Lehi and Sherman. Here, you can see more information about each fab. In RFAB2, we completed transfers from our 150-millimeter fabs and RFAB2 is ramping towards full build-out, more than doubling the capacity of RFAB1. LFAB1 continues to ramp with new products in 45-nanometer to 65-nanometer process technologies as well as transfers from external foundries. In addition, qualification of our latest 28-nanometer process technology is underway. As a reminder, in the future, LFAB will play an important role in manufacturing products from Silicon Labs following closing of the acquisition. Lastly, the SM1 clean room is complete with production underway. It will ramp according to customer demand. The SM2 shell is also complete, which eliminates construction lead time for future expansion. This 300-millimeter footprint in combination with our existing 200-millimeter wafer fabs and back-end assembly and test facilities provides our customers with geopolitically dependable capacity.

Our CapEx investments over the last several years have been important to position the company for growth. As we are nearing completion of our 300-millimeter capacity expansions, we are reducing our CapEx and expect to spend about $2 billion to $3 billion in 2026. As a reminder, these CapEx figures do not include CHIPS Act benefits. To date, we have received $630 million in direct funding, including $555 million this quarter based on completion of milestones related to our U.S.-based capacity expansions. In 2027 and beyond, CapEx will be determined based on revenue levels and expected revenue growth.

Finally, at the bottom of the slide, we have highlighted several key metrics that this road map is already beginning to deliver, which will continue through the end of the decade. In 2025, we continue to make progress on growing the percentage of wafers and assembly manufactured internally. By 2030, we expect more than 95% of our wafers to be sourced internally with more than 80% on 300-millimeter. We also expect to assemble more than 90% internally. Overall, this will provide us with lower costs and greater control of our supply chain and provides our customers with geopolitically dependable capacity.

Now I'd like to make a few comments about R&D. We allocate our R&D investments to growth opportunities to strengthen our technology and product portfolio while improving diversity and longevity. On this slide, we summarize the current direction of our R&D investments and our revenue breakdown by end market. For the revenue breakdown, we have provided data for 2013, 2024 and 2025, so you can get a sense of how the portfolio has changed over the longer term as well as compared to last year. We can find great investment opportunities in all of these markets.

As shown in the second column, the direction of our R&D investments is consistent with prior years. Our investments in R&D are biased towards industrial, automotive and the data center end markets and continue to be up broadly. This reflects our belief that these end markets will be large and fast growing due to semiconductor content growth in industrial and automotive and the overall investments and growth in the data center market. Personal electronics and communications investments remained steady.

Here, you can see the strategic progress we have made in industrial, automotive and data center. In 2025, those markets combined represented about 75% of TI's revenue compared to just 43% back in 2013. Success in these 3 markets require a long-term commitment and the willingness to invest broadly across sectors and product categories, both of which we have done and continue to do.

I'll now turn it over to Rafael to discuss free cash flow per share growth and cash returns.

Thanks, Haviv. First, it is helpful to consider how our operating cash flows are enabling our long-term investments. Specifically, operating cash flow in 2025 was $7.2 billion, an increase of about 13% from last year as we began to see recovery across our end markets. At the same time, CapEx was $4.6 billion or 26% of revenue. As shared previously, in 2026, we are reducing CapEx as we near completion of our capacity expansions. We have often said that the best measure to judge a company's performance over time is the growth of free cash flow per share as that is what drives long-term value for our owners.

Here, we are showing our 2004 to 2022 free cash flow per share trend line continuing at the same rate through the end of the decade. In 2025, free cash flow was $3.23 per share, an increase of 97% from 2024. As you can see, free cash flow per share is trending up and beginning to approach the trend line in 2026 as growth returns and CapEx begins to moderate. We are on track to deliver more than $8 per share of free cash flow in 2026. After 2026, free cash flow per share growth will be driven by revenue growth and our CapEx strategy. This underscores the strength of our business model, including the scalability of CapEx with modular capacity. This will allow us to deliver free cash flow per share growth aligned with the long-term trend line. And finally, long-term free cash flow per share growth will continue to guide our capital allocation decisions. As mentioned before, our long-term objective is to provide a sustainable and growing dividend to appeal to a broad set of owners.

For 22 consecutive years, we have steadily increased our dividend, including a 4% increase in 4Q 2025. These increases represent 8% for five-year and 15% for 10-year compound annual growth rates. As of February 20, 2026, the dividend yield was 2.58%. Our objective in repurchasing shares is the accretive capture of future free cash flow for long-term owners. While the ultimate assessment of return on investment of these purchases depends on the future cash flow stream, the track record of this approach is encouraging. We have reduced shares outstanding 47% since 2004. We ended 2025 with about $20 billion in open authorizations, having bought back about $1.5 billion worth of stock in 2025, a 59% increase from the prior year.

With respect to cash returns, in 2025, we returned $7.13 per share. Over the last 10 years, we have returned a total of 130% of free cash flow. Returns have grown at 13% since 2004. The strength of our balance sheet will allow us to maintain our commitment and track record of returning all free cash flow over time. It may be helpful to frame our performance versus others in the S&P 500. Our free cash flow generation puts TI in the 52nd percentile and is a reflection of our decisions to invest to make the company stronger for the long term. Underlying this is our operating cash generation as a percent of revenue, where we rank in the 87th percentile. Our cash returns puts us in the 94th percentile and return on invested capital in the 70th percentile when compared to the S&P 500.

We believe our performance versus the S&P 500 is a reflection of our focus on growing free cash flow per share over the long term and the three elements of our strategy. First, a great business model that is built on our four competitive advantages, advantages in which we are continuing to invest and make even stronger. Second, discipline in how we allocate our resources, focusing on the best product opportunities as well as areas that strengthen and leverage our competitive advantages. And third, striving to constantly increase our efficiency, which is about achieving more output for every dollar of input. We believe if we can continue to do these three things well, we should be able to grow free cash flow per share for a long time into the future.

With that, let me turn it back over to Haviv.

Thanks, Rafael. Let me wrap up my prepared remarks with a few summary comments. As engineers, it's a privilege to get to pursue our passion of creating a better world by making electronics more affordable through semiconductors. We were fortunate that our founders had the foresight to know that passion alone was not enough. Building a great company required a special culture to thrive for the long term, and we continue to build this culture stronger every day. We will remain focused on the belief that long-term growth of free cash flow per share is the ultimate measure to generate value. We will invest to strengthen our competitive advantages, be disciplined in capital allocation and stay diligent in our pursuit of efficiencies.

You can count on us to stay true to our ambitions to think like owners for the long term, adapt and succeed in a world that's ever changing and behave in a way that makes us and our stakeholders proud. When we are successful, our employees, customers, communities and shareholders all win.

Thank you. With that, I'll turn it over to Mike.

Thanks, Haviv. 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 will provide you with an opportunity for an additional follow-up. Operator?

[Operator Instructions] Our first question comes from the line of James Schneider with Goldman Sachs.

I was wondering if you could maybe talk a little bit about how you're expecting 2026 to shape up from both a free cash flow and inventory perspective beyond what you commented on the slides. I think you talked about at least $8 in free cash flow in 2026 at the current revenue consensus. I think your slide sort of shows a wider range extending to $11 or $12 at the top end. Maybe just kind of frame how you're thinking about sort of the low and high end of that and your confidence in achieving over $8 this year.

Thanks, Jim. I'll start, and Rafael, maybe can provide a little bit more color. First, the -- at a very high level, it depends on revenue. And we are not going to call the revenue for the year. We are one quarter at a time. We gave the guidance for Q1. And I think in Q1, the year-over-year growth is about 10% at the midpoint. And of course, we need to let it play out. We are just out of Chinese New Year, and we'll have more visibility as we go into March.

Having said that, as we put it on the slide, our confidence is high. The company needs to grow, obviously, to reach $8 of free cash flow per share in 2026, but it doesn't need to grow a lot. Once you get into this kind of mid- to single-digit growth to maybe 10%, we should be in that range. But we also are prepared for other scenarios. If the market wants to really grow fast in 2026, and we'll have to see how it develops, we can react to that and then free cash flow per share will be higher.

On the CapEx side, and again, this is where Rafael can provide more color. As long as the growth is similar to last year, I would say it should be more on the lower side, maybe close to $2 billion for 2026. But if we see high growth developing during the year, we would, of course, want to be ready, and we will take it to the higher level, maybe closer to the $3 billion. So that's why you see a range over there.

Rafael, anything else to add?

Just beyond that, that $8 that we talked about in the prepared remarks that is based on revenue on consensus for the year. So you can do the math if you want to model higher or lower, just use 75% to 85% fall-through on revenue to do that, and then you can model that away.

You mentioned -- Haviv already addressed CapEx. You also mentioned inventory. We're pleased with our inventory position, and we'll just continue to adjust that depending on expectations for demand.

James, do you have a follow-up?

Yes. Just a clarification on Rafael, what you just said. Just in terms of the inventory range now being 250 days at the high end. I believe last quarter, you sort of indicated that you wanted to take factory loadings down a little bit. I think your inventory is around 208 days, if I recall correctly. So I'm kind of curious, under what circumstances would you want to run sort of at the higher end of the range if you thought 208 days was a little bit too much.

Yes. Just to clarify, that comment that you attributed to me, that was two quarters ago. That was the October call. And in the last call, we said we're comfortable with our inventory position, and we'll continue to operate there.

And to try to answer your question, the days, that's probably more of a function of when you're in -- where you are in the cycle, whether you're in the upturn, the downturn, the peak or the trough, and that kind of drives your inventory days more than anything else.

All right. Jim, thanks for the question. We'll move on to our next caller, please.

Our next question comes from the line of Harlan Sur with JPMorgan.

Thanks for hosting this call. Haviv, with the renewed focus on embedded over the past sort of five to six years, you obviously added to that embedded capability with the recent acquisition of Silicon Labs. But as you've expanded your mass market strategy embedded, what's been TI's recent track record of attaching analog and power management products to new embedded opportunities and vice versa, right? Any way to quantify analog and power dollar content attached to new embedded opportunities?

Yes. I will provide, Harlan, a similar answer to the one I provided during the call we had earlier this month related to the Silicon Labs acquisition. It's always good to start from the embedded processing socket, whether it's a wireless connectivity solution, whether it's an MCU, a low-power MCU or a very advanced high-performing MCU all the way to low-power processors and DSPs, right?

So, as I mentioned, customers always like to start with the center of the board. And in many cases of our applications across the analog and embedded market, that is the embedded processor. And we are seeing definitely with the growing portfolio of our embedded processing parts, and we are just releasing to market every year more and more parts. I think we are now at a 6x rate versus six years ago. We are seeing more opportunities to attach the periphery, mainly analog parts, whether it's power or signal chain around that, what I call Alpha socket, right? So we are seeing this opportunity. We are seeing this on our assigned accounts, where usually the first discussion with the customer is around that embedded processing socket.

But also on ti.com, we are seeing more and more looks into our system solutions that are displayed over there. We also have some -- a whole product portfolio that provides software, application code, sometimes even the whole module or board that we provide to our customers, and we are seeing an uptick there. I will also say to me, it's only the beginning, right? Our embedded processing strategy has pivoted 6 years ago, but we have so much work to do. I mean the backlog here, the creative backlog we have in front of us is very, very broad. And we are getting our machine to become more and more efficient to go after it.

Do you have a follow-up, Harlan? We'll move on to our next caller, please.

Yes. So with SM1 cleanroom complete, Qs complete, early ramp this year, SM2 shell complete, LFAB2 clean room continued build-out, you're obviously executing to a number of CHIPS Act milestones, right? You've got the CHIPS Act ITC, which is 35%, still have $1.6 billion in direct funding or grants to capture. I think last year, you guys captured about $335 million of CHIPS Act incentives. If you hit your build-out and ramp targets for this year, how much in CHIPS Act incentives do you target to capture in calendar '26?

We don't have a forecast per se for '26, but let me first kind of review the actuals, what I can tell you. In '25, we received cash benefits of about $670 million. That is primarily ITC. There was some direct funding there, about $75 million of direct funding and direct funding meaning the grant. Moving forward, we expect -- we continue to expect ITC now at 35% because last year and the years prior to that was 25%. So now it's 35%. And the remaining up to $1.6 billion in direct funding, including what we released in the most recent 10-K that we just received $555 million this quarter, in first quarter from the grants. So, beyond that, what I could tell you is going to depend on CapEx, and U.S. CapEx. So the ITC is 35% of U.S. CapEx, and then the direct funding, the remaining of the $1.6 billion minus the $75 million and $555 million that we already received.

Thanks for the question, Harlan. We'll move on to our next caller, please.

Our next question comes from the line of Stacy Rasgon with Bernstein Research.

Haviv, you talked about thresholds or criteria for acquisitions, strategic as well as financial. I was wondering if you could go into a little bit into those financial conditions. I guess, how do they compare now versus what you used to talk about those in the past? I have to assume that the returns that you're willing to live with today are lower than they were before. And I guess how does SLAB like fit into those financial criteria? Like what is it about SLAB that actually meets those?

Yes. First, just I would say that the threshold has not changed. I think the position of the company has changed, Stacy. And we always said from our point of view, acquisitions will be centered around analog and mixed signal. I would put Si Labs in the mixed-signal bucket. And first, it has to make sense strategically. And as we discussed earlier this month, we love the portfolio that we saw from Si Labs. We love the position they have. Both market position, 85% in industrial across many, many end equipment. And at a very nice rate of growth of 15% at the market that I believe is still in early phases of adopting this technology. There is a secular growth around wireless connectivity as people are adding more and more information into their system. And the best way to deliver that information on already installed infrastructure is wirelessly, as you know.

We also love the assets in terms of the technology. I mean, the engineers, the offering across hardware, software, application code tools, which is something that we wanted always to augment in our embedded processing.

Now this is where Rafael keeps us very honest on every acquisition we look at, it has to make sense financially, and it was hard to make the numbers work five years ago when we had to keep these wafers running out of the foundries in Taiwan. So, in that sense, that's the main change that happened in the last few years. I have been, again, looking at Silicon Labs for many years. but it didn't make sense before. And now when you add OpEx efficiencies to the OpEx efficiencies, the COGS efficiencies, the number just add up.

And I'll let Rafael comment a little bit more on that.

Yes. I'll just add that we have always looked at an acquisition on the financial side from a lens of return on cost of capital and that it's accretive to cost of capital. So, within three to five years, and that is the case here. And return accretive to cost of capital, very simply, our weighted average cost of capital is about 10%. If the acquisition is $100, can we get $10 of free cash flow on a consistent basis starting on year three, four, five. And that is the case here with our expectations that we will get at and above and then above our cost of capital within that time frame.

Do you have a follow-up, Stacy? Stacy, do you have a follow-up?

Apologies. Yes. I wanted to just clarify just so I know -- have a good feeling where the loadings are. So, RFAB2, I guess, is now in full production given the 150-millimeter transition. It sounds like LFAB1 is in full production and Sherman 1, the shell is done and you've got pilot production and everything else is shells, I guess, LFAB2 and Sherman 2 and everything else. Can you just clarify, do I just have that right?

Not exactly. Maybe at full production to the installed 2, okay? If you go to RFAB2, we've installed, I think, more than 75% of it, close to 80% or 85%, but we still have a little bit of clean room over there, Stacy. And this is where we are in Phase III between RFAB2 and then SM1. We have the clean room, and we will install tools as demand picks up, okay? So that's on the RFAB2 case.

On LFAB1, we are still in the process. We have a big chunk of our revenue is in 45-nanometer, okay? So over there, there is actually more clean room available for us. And I think you know our 45-nanometer footprint is mainly on automotive, ADAS, high functional safety type of product. It just takes longer. That work is moving well and is scheduled to complete by the end of the year. So that allows us to continue to fill the clean room in LFAB1 according to demand. And just when we do that, and it depends, of course, on demand, LFAB2, shell is going to be ready towards the end of this year, beginning of next. And then we can build into it without further qualification. So that would put Lehi in Phase 3 as well. Hopefully, that helps.

Thanks, Stacy. We'll move on to our next caller, please.

Our next question comes from the line of Vivek Arya with Bank of America.

So, let's say, if you grow sales 10% this year and 10% in '27, what is conceptually the CapEx for '27?

Yes. I think I've answered it for 2026, Vivek, and it's going to be very close to that $2 billion number, as I mentioned, simply because we have always some -- we don't run the fabs at 100%, and I mentioned some of the clean room available. So -- that would be the lower number.

Again, if you look at 10% this year and even 10% next year, that's not a huge load on our company in terms of capacity expansion. Some of it maybe we will have to go into the back-end factories where we are more tight because the lead times on the back end are always lower to get tools. But in terms of the fabs, I think it's still going to be probably at similar levels in 2027 and maybe even lower. I think we'd have to leave that for next year's discussion.

Do you have a follow-up, Vivek?

Yes. And second question is, what is your inventory optimization strategy? Is the goal to keep inventory kind of at this constant, I think, $4.8 billion or so and then the days are -- whatever the days are. And then as demand increases, you push up utilization, but you still kind of keep at this $4.8 billion. You raised the target number, so I understand the goal is to be prepared for any kind of growth. But still $4.8 billion is a lot of inventory to have. So, I'm curious, are you targeting days? Or are you trying to make sure that you always have about this $4.8 billion of inventory on the balance sheet?

Let me start. I think Rafael touched upon it, and just from a high level, and Rafael can be maybe more precise than me.

But in general, we think about it as days rather than revenue first. And the second thing I would say you see a range. And again, nothing -- no cycle is a perfect sign wave going into -- up into the right, right, Vivek. But the way I think about it high level, you build inventory on the down cycle to a higher level of days just because you want to prepare for the future. And then as demand ramps, now it depends on the slope, you deplete it. You deplete because there is cycle time on the fab that is like three to six, sometimes nine months to get the chip out.

So the inventory serves for the surge of demand. As I reminded so far, the -- if you go back to the trough in 2024, it's not been a very strong recovery. It's moderate, right? So right now, we are not challenged, and you still see the days high, but who knows what 2026 needs to do. So this is why you see the 150 to 250, and I'll let Rafael provide more color on the mechanics.

Yes. I'll just add a couple of things. Remember, the key is our inventory objectives, which are to maintain high levels of customer service, keep lead times stable and minimize obsolescence. Keep in mind that we're a different company than we were a few years ago. We have more industrial, automotive and data center. We have more direct business, and we have now more internal loadings, right? So all of that supports higher levels of inventory, everything else being equal. So we're very comfortable with the levels of inventory that we have now.

Thanks for the question, Vivek. We'll move on to our next caller, please.

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Appreciate you guys hosting the call. I wanted to start with a big picture one. So you've posted the metrics on Slide 10 a few years in a row now. Can you maybe just walk us through why you think this recovery has been more gradual than others? And what sort of signals that you guys are looking for and we should be looking for of when we would get that sharper recovery where shipments can actually start hitting that trend line?

Yes. I think the why is related to what happened before the recovery, right? Think about the cycle of COVID, probably the most pronounced or a very strong rate of demand growth in the -- coming out of COVID with a trough in 2019 and then a boom in '21, '22. Then a very -- customers got anxious, built a lot of inventory and I guess, more than we even thought originally, although they all swore that it's not double ordered and they did it for real products. We saw a very large and prolonged inventory correction. That's just the size of it is historic. The second thing is the asynchronous nature. We all talked about it. It's a very unique cycle because markets behave differently simply because the way we consumed electronics during COVID, that's kind of dispersed the behavior. I think that's what makes everything longer and more moderate.

And where we are right now, high level, we are, in essence, industrial automotive, data center company. That's our focus is 75% of revenue. As we said, although automotive was late to the cycle, there is so much content growth in automotive. the peak to trough was single digits, if you will, high single digits. And we already hit the level of the previous peak back in, I think, Q3 of 2023 -- sorry, 2025. And it's just doing well. Of course, we'll have to see how 2026 behaves, but we are continuing -- as I said in my prepared remarks, we are continuing to see generation to generation, just more features per vehicle. It doesn't matter what the powertrain is. We're just seeing that secular growth continues, and I think it still has a lot of runway in front of us. That's on the automotive side.

Industrial is a big unknown. It's a big unknown because it's still with all the -- it grew nicely in 2025, I think double-digit growth, about 12%. It grew nicely in Q4, close to 20%, but I think it has a lot of room to go, okay? We are still trending about 25% from the peak. And in our case, other than -- we have about 10 sectors other than aerospace and defense, they are all like 30%, 35% away from the peak. So, to me, there is -- that's the big opportunity, if you will, in 2026. And I think we said it also in January. We are seeing some of it coming in, right? Our booking accelerated in Q4. So far, Q1 trended as expected on the industrial side. So I think there is a lot of opportunity here because, again, secular growth in industrial is continuing and maybe in early innings.

The last one, I would say, data center is unique in the sense of it's just growing, right? I don't think we need to think about the cycle here. This is a secular growth because of the investment in data centers. As long as CapEx continues to grow and customers care about just the energy and energy efficiency and energy density, you will start -- you will continue to see a big opportunity there. We left Q4 with data center running at about $450 million, about 10% of our revenue, but the pace is very high. So I think this continues into the foreseeable future as long as AI and what it can bring in terms of efficiency to the economy continues, I see that as that trend continues. Hopefully, that helps. Mike, anything else on this one or...

Josh, do you have a follow-up?

Yes, please. Thank you for all the color there, Haviv. As we get out of Phase 2, I was hoping you could maybe comment on what's a reasonable floor for CapEx. So if I look back from 2015 to 2020, your average CapEx per year was around below $750 million. I mean, obviously, costs have gone up. But if we got into an environment where growth was slower than you guys anticipated and you didn't need to put in incremental capacity for Phase 3, what's a reasonable floor for how low CapEx could get in that environment as we think about a floor for free cash flow?

Yes. Again, first, Rafael, I think, made some important points about how much we've internalized our capacity, right? This is not only on the front end, also on the back end. And I call it maintenance CapEx. But even when you don't grow your overall revenue, there is always a mix change. And there is always one package you need more and the other package, you have what you need. So that is why I call it, there's always going to be some sort of a floor of CapEx. I kind of said I think 4% to 5% is a good number of revenue, but you don't need to grow just because you have to maintain your tools. You continue of course to go after packages and specific wafers that you are a little short about. There is always hotspots in our operations. And in general, we do -- we are going to do more than 90% internally. I think 95% or more on the wafers and probably a similar number on the assembly and test. So this is why you will see us running at probably that "floor".

Rafael, anything else to add here?

No, I agree.

All right. Thanks.

Thank you, Josh. We'll move on to our next caller, please.

Our next question comes from the line of Tore Svanberg with Stifel.

Thank you for hosting the call. Maybe to follow up on the last question instead of perhaps dialing into a specific number, I think in the past, you've talked about maybe CapEx being around 3% to 5% of total revenues. I assume maintenance CapEx is kind of what that means, right, in relation to your revenue. So is that kind of the ballpark number we should think about, about 3% to 5% of revenues per year, obviously, starting in '27?

No, I think just to clarify, again, when I talked about, let's call it, 4% of revenue is when you don't need to support your growth, right? When we need to support the growth, I will let Rafael -- I think there is almost an equation that we can give you when you think about long-term growth and what CapEx needs to do. Rafael will comment on that.

But when you just have to run your factories, because we are now more -- running more of our capacity internally, we kind of modeled it internally at 4%. It could be, as you said, maybe a little higher, maybe a little lower. We'll have to see. Just because you have to maintain customer support, there is always areas where customers need more of certain parts, certain technologies, certain package types, modules, whatever you can think about the different permutations of our portfolio. And we will have to serve it. And of course, you have to maintain your factories to operate at a high level and some of it is just replacement and maintenance.

And Rafael, can you talk about what -- how to model long-term growth on the related CapEx?

Yes. So, as we've said before, over time, as we run in Phase 3, the modularity phase, what -- the way you should model our CapEx is taking our growth rate, long-term growth rate over years and multiply that times 1.2 to get your CapEx as a percent of revenue. So, for example, 10% growth rate would equate with 12% CapEx as a percent of revenue. And now keep in mind that, that 12% in that example, that is gross CapEx before ITC benefits and before DFA.

And just to remind everyone, this is not a math, right? There is always lumpy, but it gives you -- if you put it over the long term, that's what you will get, Josh, okay?

Thanks, Tore. Do you have a follow-up?

Yes. No, that was very helpful. And as my follow-up, could you just square the circle with your segments? I think you pulled some percentages out of communications to sort of adjust for the enterprise system versus data center. Was that kind of more communications exclusively related to data center infrastructure?

Yes, absolutely. And there is a Slide 11 that shows that for you, so you can actually see the -- from two, okay, slide. But in general, when you think about comms equipment, it was all about optical communication within the walls of the data center. People can choose how to define it. We define data center that everything within the building, okay? The same we do for automotive inside the car, there is communication technology also going as we know, right? But the way we define the new market is the clarity is whatever goes inside the data center, okay?

So comms, it used to be 5%, now it's 3%. That's a move on the optical communication technology moving into data center. You see industrial "losing a point". This is because of power delivery. The power supplies that we used to have under industrial in power delivery are now very unique for the data center. and they're not general purpose PSUs, and this is why it's smart to move it inside there.

And the last one was enterprise, right? Most of the data center revenue was already in enterprise. Most of it was what we call enterprise compute. But now you see data center at 9% of revenue simply because of the contribution from comms and industrial. Hopefully, that makes sense.

I would just add that there was a small portion that moved out of enterprise. There was multifunction printer, enterprise machine projectors that moved into personal electronics, which is why you see it went up a little bit.

Tore, thank you for the questions. We move on to next caller, please.

Our next question comes from the line of Matthew Prisco with Cantor Fitzgerald.

I guess to open, I would like to start on your thoughts on evolving customer relationships, potentially shifting to more system-level solutions versus historically more discrete kind of as you talked about with your ti.com and what you're seeing. TI, obviously, great product breadth. But how do you think about the ability to provide those more full stack solutions, including the software and tools where you can work with customers to actually solve a problem? And are there any changes in R&D focus that we should be thinking about around this dynamic?

We will always -- there is no change here because we've been always selling a complete solution. I think the evolvement of our portfolio is very helpful. We've talked about it around the embedded processing question before. It's always good to start from the big socket, right? If you have a processor, if you have a DSP, if you have a wireless connectivity solution, if you have an MCU, that's always a good start.

But I also would caution all of us that you need to have the best parts. Everybody can talk about solutions, but customers will take the best part for the socket. Even if you have the complete solution, they are not looking for -- to cut their R&D. They want to add value, and they will always select the best socket. Even in general purpose parts, if you don't have the right interface part at the lower size at the lowest power at a very affordable cost, customers will take you out of the solution. So I always caution my team that we cannot just rely on system selling. We do have to refresh our general purpose parts.

Of course, they usually get refreshed not as often, but you want to have the best in terms of size, power, cost. And the same on the application specific. The fact that you have a complete board doesn't mean that you get selected. The best part still wins. So that's the way we think about it almost in three vectors: customer, part, system. And that's the way we go after business in TI. That's been the case for more than 10 or 15 years now.

Do you have a follow-up, Matt?

Yes. Last quarter, you talked about depreciation being higher year-over-year. It would be great to hear if you have any quantification you can offer there. And then as we just think a little bit longer term, I mean, I think you have a roll-off of the RFAB2 and LFAB1 equipment, the initial installs there. But at the same time, you're bringing on new capacity. So does depreciation -- does that become a tailwind to margins at some point in the near term as we kind of see those dynamics play out?

Yes. So I'll -- let me restate what I said at the last earnings call, it's the same. No change in that guidance, but it's -- our actual for 2025 came in at $1.9 billion, about as expected. For 2026, we expect $2.2 billion to $2.4 billion. That range. That range is lower than what we had told you before, but it's what I mentioned in January. And then for 2027, we expect upward pressure on that number, but at a lower rate of increase. So $1.9 billion going up to $2.2 billion to $2.4 billion, take that midpoint, that $2.3 billion, that's a $400 million increase. We expect another increase, but at a lower rate than that going into 2027. And beyond that, it's going to depend on CapEx, right? So it depends the more CapEx we spend, then there will be more depreciation. But of course, we will spend that CapEx only to support longer-term revenue growth.

Matt, thanks for the questions. We'll move on to our last caller.

Our last question comes from the line of William Stein with Truist Securities.

First question is about the M&A strategy. Of course, that's a very important use of CapEx that we've seen come up recently with the Silicon Labs deal. The question I'd like to ask about it, someone asked earlier about the financial hurdles and how they might have changed, and I think you said they haven't. But in terms of the strategic hurdles, I'd really like to understand how potential deals enter the funnel because it's my understanding that this deal came about after another company bid on Silicon Labs and that triggered TI's involvement, which I found sort of odd considering the very long duration between this deal and the prior one. Maybe talk about how TI strategically thinks about deals and the process through which they get into your funnel of potential deals? And then I have a follow-up, if I can.

Yes. So, again, I think I mentioned before, and I'll let Silicon Labs disclose what exactly happened in this case. I don't want to comment about that. I would just say that I've been looking at this asset for a while, and the interest was growing over time as we brought our own wireless connectivity and MCUs internally into Lehi and really like the results. And the asset, as we said, is a very high quality.

Now regarding timing, you can never be -- it's never perfect, right? So it's something that you have to look at each opportunity case by case. And you if it makes sense strategically and to the owners of the company in terms of the financial impact. So, both criteria were met, and this is why we decided to make the deal.

Will, do you have a follow-up?

Yes, please. On another topic, you talk about investments in R&D, and that's very helpful. But one area that we haven't heard very much about is how TI could use artificial intelligence to either accelerate revenue growth or reduce costs. For example, I could imagine in product development where analog is known to be sort of talent constrained. Can you perhaps highlight for us how you're using AI internally at TI to improve your business?

Yes. I think -- again, I think we mentioned it maybe in previous calls, but I will just give you the three big ones that we -- I'm running at my level. Of course, there are many, many other smaller projects in the company. But I think the most interesting one for us is the top line growth, right? We have a very broad portfolio, and we call directly on less than 2,000 customers. So we have about 200,000 other customers that we never see. And this is where think about the technology that we have, the data, think about ti.com, the amount of just actions and people coming on our website and looking for parts to make sense of all of it, you really need these AI tools.

I think it has been done in many, many other industries before semis, but I think we have the scale to exactly do that. That's part of the reason we've offered all these e-commerce capabilities in the last several years. It gives us more, I call it, golden data that you can act upon. So we are already running projects here, and we are seeing a clear ROI, if you will, on this investment on product recommenders and how you can do system selling for the customers you don't call upon.

Now you can argue that over time, they can also do a better job than your sales team. But so far, it's not there, okay? So far, when we call on a customer, we do a great job. I would like the agents, if you will, to get to at least to show an improvement, and I think we are seeing that. So early phases of that, that's top line growth.

The second one is related to CapEx efficiency. Look, there is so much data collected in our fabs and ATs that we couldn't act upon many years ago, just too much information. And we are seeing already how you route the fab, how you do your start plans, how you maintain machines. Let's just quantify it. If you spend $5 billion a year on CapEx and now you get a throughput improvement of 10%, that's $500 million a year in terms of CapEx cost reduction, right? So we are seeing that these projects are coming to fruition.

I think we also alluded to it in one of our calls. We used to talk about 1.5x ratio between revenue growth and CapEx in terms of percentage of revenue. We are now talking about 1.2x. Rafael mentioned it before. That's really because of the efficiency we are gaining from the modern tools and the data that you can feed them. And I will say also that we are still seeing opportunities here. We are in the beginning of our learning cycle. We are seeing results, but more to come.

The last one is related to OpEx. To me, the way I look at it, very high level. Look, there is a certain level of OpEx and R&D you can afford. So our creative backlog is always large and interesting. So if I can get more output from the same, call it, R&D, that's very, very interesting, right? So we are looking at that. We're already seeing it in software design, a little bit on the RTL, but still not on the analog side.

On the analog side, we haven't seen great throughput improvement, but I think we are in early phases. I don't think the AI agent replaces a design engineer in the foreseeable future, but can we get more throughput from our dollar invested related to our efficiency, if you will, part of our strategy. That's something we always strive to achieve. I think there is something there.

On the SG&A side, I think we can -- we have a great service. Can we do it for less money? That's always an interesting area for us. So we are in early phases there. And I think that's also something that could be interesting. So think about top line growth, CapEx efficiency and OpEx. These are the three big projects that we are looking at the company right now.

Thanks for the questions, Will. So, before we wrap up, Haviv, do you want to make a few comments?

Yes. To finish the call, I want to thank all of you for taking time today to go through our capital management update. Let me emphasize a few points. First, we remain focused on consistent execution of how we manage capital. Our disciplined allocation of R&D is delivering growth from the best general purpose and application-specific products in analog and embedded processing. Our manufacturing strategy is a unique advantage and will continue to benefit TI for the long term. And lastly, we remain committed to returning all free cash flow over time to our owners. Mike?

Thank you all for joining us today. A replay of this call will be available on our website as well as the slides that were used on this call. Have a great day.

Good morning, everyone. Thank you for joining us today to discuss TI's acquisition of Silicon Labs. I'm Mike Beckman, Head of Investor Relations for Texas Instruments, and I'm joined by TI's Chairman, President and Chief Executive Officer, Haviv Ilan; Silicon Labs' President and Chief Executive Officer, Matt Johnson; and TI's Chief Financial Officer, Rafael Lizardi.

For any of you who have not yet read the press release, you can find it on our website at ti.com/ir. 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, along with the presentation and transcript for your convenience.

This call will include forward-looking statements, including expectations or predictions of financial and business performance, industry outlook and timing of completion of the transaction, each of which are based on current expectations and assumptions and that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. These constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act. We encourage you to review the notice regarding forward-looking statements contained in the transaction press release published today as well as TI's most recent SEC filings for a more complete description.

With that, I'll now turn the call over to Haviv.

Thank you, Mike. It is great to be with you all this morning. Earlier today, we announced an agreement for Texas Instruments to acquire Silicon Labs, a leader in embedded wireless connectivity solutions with a broad portfolio, deep engineering expertise and long-standing customer relationships. This transaction represents an important milestone for our company and accelerates the embedded processing strategy we've been executing over the last several years. As many of you know, Silicon Labs has a strong portfolio in mixed signal solutions and low-power wireless connectivity and has demonstrated double-digit growth in the last decade. By combining Silicon Labs' wireless connectivity IP and engineering expertise with TI's internally-owned technology and manufacturing and reach of market channels, TI will enhance its global leadership in embedded wireless connectivity solutions.

I'll now take a moment to share why this transaction with Silicon Labs is strategically and financially compelling and why now is the right time.

To begin, this transaction enhances our global leadership in embedded wireless connectivity solutions and expands TI's portfolio with 1,200 additional products that support a variety of wireless connectivity standards. Wireless connectivity is a fast-growing space with more devices getting connected every day. Silicon Labs has a large and diverse customer base and has delivered about 15% revenue CAGR since 2014. This transaction also utilizes TI's industry-leading dependable, low-cost manufacturing capacity to provide customers with greater assurance of supply. We've also found a strong cultural fit. Our teams share the same high-performing culture and I respect Silicon Labs' technical expertise, winning spirit and strong results. Together, our teams will deliver cutting-edge products and technologies to meet our customers' needs.

Finally, from a financial perspective, we expect the transaction to generate compelling annual manufacturing and operational synergies of more than $450 million within 3 years after close. We expect the transaction to be accretive to earnings per share, excluding transaction-related costs in the first full year post close. TI is a great business model built around 4 sustainable competitive advantages. As a reminder, TI's competitive advantages are a strong foundation of manufacturing and technology, a broad portfolio of analog and embedded processing products, the reach of our market channels and diversity and longevity of our products, markets and customer positions. The acquisition of Silicon Labs will further strengthen all of TI's competitive advantages and drive free cash flow per share growth over the long term. In addition, Silicon Labs' comprehensive platform, including hardware, software, tools and services has earned them a strong reputation in the industry and a loyal customer base. Silicon Labs' strong engineering culture is expected to further advance TI's technology leadership. By combining Silicon Labs' comprehensive portfolio with TI's scale and competitive advantages, we will be better positioned to serve more customers and accelerate growth.

I would now like to turn the call over to Matt, who will share more about why this is an exciting opportunity.

Thanks, Haviv. It's great to be here today and have the opportunity to address you all. I share Haviv's enthusiasm for this transaction and truly believe TI is the ideal partner to accelerate Silicon Labs growth. It's an honor to be combining Silicon Labs with a partner with such a storied place in our industry, and I'd like to thank the entire Silicon Labs team for the sustained execution and dedication that made today's announcement possible.

Turning to our company for a moment. You've heard Haviv say that Silicon Labs has an intense commitment to engineering and innovation, and you can see that in the composition of our team. Approximately 70% of our employees are engineers, allocated across software and hardware disciplines. From my conversations with TI, it's clear that they deeply value the expertise that Silicon Labs brings to the table and that they are highly focused on identifying opportunities to scale our operations and optimize our manufacturing processes to better serve new and existing customers. Our focus on engineering, innovative products has earned us a strong reputation in the industry and we've built a loyal customer base, especially across industrial applications. Not only are we proud of the growth we've achieved over more than a decade, we've also worked hard to build a high-quality revenue base across thousands of customers. We've established diverse and long-lived positions across the industrial market in a broad set of end equipments. There are significant growth opportunities available and these will be further enhanced with TI's dependable and low-cost manufacturing capabilities and extensive reach of channels.

Thank you for the time today. And with that said, I'd like to turn the call back to Haviv.

Thanks, Matt. As I said before, Silicon Labs has delivered about 15% revenue CAGR over the past decade. We see additional opportunity for growth as part of TI, supported by increased customer access, manufacturing capacity and cross-sell opportunities. Silicon Labs' extensive wireless connectivity portfolio is an important part of the increasingly connected world, where we see secular content growth in areas like industrial automation, medical and energy infrastructure, just to name a few. With our direct customer relationships, sales force, website and e-commerce capabilities, we believe we can further accelerate growth. Manufacturing is a key differentiator for TI and is a core value driver for this transaction. Our manufacturing footprint includes low-cost 300-millimeter wafer fabs as well as internal assembly and test capabilities. This footprint will allow us to transfer Silicon Labs manufacturing from external foundries and outside assembly and tests into TI's facilities, providing their customers with dependable and affordable supply at scale. Specifically, TI's defined process technologies are optimized for Silicon Labs wireless connectivity portfolio, including our latest 28-nanometer process node. We expect the transaction to deliver meaningful synergies with efficiencies across TI's wafer fabs with optimized process technologies, low-cost assembly and test and our direct market channels. The transaction is expected to drive more than $450 million of annual manufacturing and operational synergies within 3 years post close. We expect this transaction to be accretive to TI's earnings per share, excluding transaction-related costs in the first full year post close.

I'll now turn it over to Rafael to recap the details of the transaction.

Thanks, Haviv. Let me now provide a brief summary of the transaction details. Silicon Labs shareholders will receive $231 per share in cash. We plan to fund the transaction with cash on hand and by raising additional debt. And importantly, we remain committed to our capital return strategy to return 100% of free cash flow to shareholders over time via dividends and share repurchases. We expect to close in the first half of 2027. The transaction is subject to regulatory approvals, Silicon Labs shareholder approval and other customary closing conditions.

With that, I'll turn it back over to Haviv.

Thanks, Rafael. In closing, this acquisition enhances our global leadership in embedded wireless connectivity solutions. It leverages each company's strength to better serve our combined customers and deliver sustained long-term value for TI's shareholders.

With that, let me turn it back over to Mike.

Thanks, Haviv. Operator, you can now open the lines for questions. [Operator Instructions] Operator?

[Operator Instructions] our first question today is coming from Timothy Arcuri from UBS.

Haviv, you've talked about cost synergies, but are there any revenue synergies? I mean it seems like SLAB has a very diversified customer base. Is there sort of anything unique in the portfolio that's synergistic with yours that unlocks revenue in your embedded portfolio?

Thanks, Tim. First, let me answer that what we presented today, the $450 million of synergies by 3 years after the deal, you can think about 2030 as a good time to think about that. That does not include any revenue synergies. Just to be fair, I think they are hard to measure, and I decided I want to run the math without any revenue synergies. Having said that, I think we will see some opportunities based on our very large sales force and ti.com. A wireless connectivity chip is what we call, I call an alpha socket, right? This is where customers are making one of the first choices on the board. But once you get that early look and you get selected, there is a great opportunity to cross-sell power, the sensing signal chain, et cetera. So I do believe the synergies are there, and our sales team is tasked to bring them on once we close the deal, but they are not assumed in the financial model.

Do you have a follow-up, Tim?

I do, yes. I think SLAB has a next-generation 22-nanometer process. How will you bring that internally? I think Lehi goes down to 28-nanometer.

Yes. So let me start first with what we have internally, and then I'll let Matt talk about their view from their perspective. First, TI is now -- 28-nanometer process is now in development. We are starting to see test chips coming out, I would say, the end of last year and more in 2026. I think it's a great time to offer that technology to the Si Labs engineers immediately after close. Now our 28-nanometer process is developed ground up for these type of products. If you think about the memory options, if you think about the way we've designed cost versus power versus performance, this is not a logic, I would say, first type of process development task. It's really done for TIs MCUs, wireless connectivity solutions, high-speed mixed signal analog and will serve very well the IP of Si Labs. I do believe that Si Labs proved over the years that they are very capable of moving between fabs. We've seen some of that -- some of these examples during our thorough due diligence. And I'll let Matt say a few words about that.

Yes, sure. Thanks, Haviv. Yes, I think the way to think of it is, our Series 2 platform is still early days in its life cycle and pretty experienced there and doing multi-foundry, multi-fab on that platform. And we're just starting to ramp Series 3, which is already expected to be multi-foundry, multi-fab as well. What's key about that is, as Haviv said, what TI has from a manufacturing perspective is extremely attractive to what Silicon Labs does. You have a process technology that's optimized for the exact type of products we do, which is incredibly exciting. So I think there's a tremendous opportunity to port in multiple areas. And given that we develop on a platform, you can port a few devices and really start to impact a lot of volume quickly. So it's a really awesome combination, and that's one of the reasons we're so excited.

Next question is coming from Vivek Arya from Bank of America.

I think the acquisition is a surprise because the narrative has been that TI prefers catalog analog and that your embedded business had been fixed after undergrowing for many years. I mean Si Labs is a great business, but it is not catalog analog. And I imagine there is some level of product overlap in Microcontrollers and connectivity. So the question is, what does Si Lab give you that your embedded business isn't able to do now or in the next 1 or 2 years? And does your internal road map get impacted? Are there any dissynergies that we have to worry about before this deal is able to close?

Vivek, thanks for the question. Let me say a few words first about our embedded journey. If you go back to maybe 10 years ago, as you remember, Vivek, all of our embedded products were done externally. We were focused more on a big chip type of big SoC type of solutions, maybe remnants of our old days of running big SoCs for wireless and also base stations. We have transitioned this business between 2019 and 2025 tremendously towards a more mixed signal type of business. Think about low-power MCUs with a lot of analog content. Think about real-time control with DSPs and for power conversion or for motor drive. And of course, our radar sensing solutions and wireless connectivity. I look at wireless connectivity as almost a twinner between analog and embedded. It is -- the content, if you look at the die of a solution, it is dominated by a lot of analog RF, power management and yes, some digital. This is a great fit to what we are building internally. So if you think about what happened in '22 and '23, we have acquired the site in Lehi for Micron. We have transitioned it from a memory fab into an analog mixed-signal EP fab, really focusing on 65-nanometer and now ramping -- starting to ramp 28-nanometer in terms of R&D and in production by the end of this year. If you look at the fit of the products, as Matt mentioned before, into that technology, we see a great fit. And we also have now experience of transitioning some of our portfolio from the foundries mainly in Taiwan into Lehi. We love the yield we are seeing. We love the throughput we are getting out of the fab. And that's an asset we never had 10 years ago. So to me, right now is the perfect time to go and look at more options to add into our portfolio, utilizing our competitive advantages. Specifically to your wireless connectivity question and the overlap, if at all, look, TI's wireless connectivity business is growing. It's growing slower than Si Labs, and it's also focused -- most of the momentum we see right now is coming from the automotive market. Si Labs automotive business is less than 5% of the revenue. They don't operate in wireless BMS, car entry, wireless TPS, et cetera, but they have a very strong position in the garage door opener in the car that we don't do. If you go to the industrial market, this is where you see a ton of momentum coming from Si Labs. They have done the work to build the stack of chips, software and firmware application level to support hundreds of end equipments. And we are very excited about that. This is something that would take TI, I would say, decades to replicate in order to be able to be a leader in this market. I think we could have, but it would have taken too long. So when you look at the footprint of Si Labs, that 85% of their business in industrial with such a rich portfolio of software suite and tools that are tailored to each and every application with a variety of standards that TI does not have, I think it's a great complementary portfolio.

Do you have a follow-up, Vivek?

Yes. Very helpful answer, Haviv. For my follow-up, just kind of a few clarifications. What is kind of the next few milestones from a shareholder or a regulatory perspective that we should keep in mind? And when is the earliest you can get Si Lab products onto your own fabs?

Yes. So again, when we -- let me start with the second part of the question, Vivek, and I will tell -- I will let Rafael also talk a little bit about what we expect in terms of time. But in terms of the 2030 COGS synergies that you see on the presentation, we have been busy in the last several years, transitioning a couple of 6-inch fabs into our own 300 wafer fabs internally. And we have learned what it takes. Luckily, in the case of Si Labs, we don't need to move hundreds of dies from one process to another. Actually, we talk about somewhere between 10 and 15 dies, which is actually very efficient. So that work can start immediately after close. And we believe that our plan presents, I would say, a nominal to conservative time to complete all that work by 2030. My expectation is that we hit the ground running as soon as we can, and we can do it even quicker, but that's going to be a little bit of upside to the COGS plan we showed you today. So I expect the teams -- and again, during the due diligence work that we've done, we see the fit of the platform and the team is eager to start to work as soon as we can. And I'm expecting us to meet or beat our execution plan. A little bit about the next milestone, Rafael, anything there?

Yes. So of course, the Si Lab shareholders need to approve this. That should happen within a few months. And then we need regulatory approval from multiple countries, and that's what takes until about the first half of 2027, as we said during the prepared remarks.

Our next question today is coming from Joshua Buchalter from TD Cowen.

This is Sam on for Josh. Congrats to both teams on the deal announcement. Building on an earlier question, am I correct in hearing that you're able to substantially bring the entire portfolio in-house? Or are there still going to be some products and processes that will remain at foundry?

I would say the answer is the vast majority, I think about Series 2 and Series 3. Matt has -- every company has some very nice, call it, legacy but very profitable tail of the portfolio. But I would say about 75% of the revenue of 2030 would be moving inside the TI. Matt, anything to add there?

Easy way to think of it is exactly that, and all the growth can move inside quite quickly.

Sam, do you have a follow-up?

Yes, I do. And then a quick one. Will this change how TI looks at their distribution strategy as it is today? Or are we going to kind of operate legacy TI in terms of how you use the channel or don't use the channel?

Look, in a high level, Sam, we see the channel as an advantage for the combination of the companies, right? Some of the customers that -- and we've reviewed, of course, during the due diligence, the customer base of Si Labs, and we are very impressed by it. But some of the customers they have, we support direct. And there is always a benefit in our opinion, to support customers direct in terms of the -- just the transparency, the information flow, the level of support we can bring in. And of course, also, there is a little bit of synergies on the margin that we can take into TI. All of that is, is part of the plan. There are customers that have continued to be supported for TI and for Si Labs by the disti partners, and I think that will continue. Our main disti partners continue to be the plan of record for us moving forward.

Our next question today is coming from Matthew Prisco from Cantor Fitzgerald.

Maybe to start, can you help break down that expected $450 million in manufacturing and operational synergies? How should we think about linearity of that synergy recognition here? Can you offer some more color on the primary drivers?

Yes. Again, I think we show a chart -- we showed a chart in our presentation. More than 50% of the synergies will come from COGS. And the more you weigh, the better it gets because by 2030, we don't complete the entire COGS transition, but I would say most of it. I think by 2031 or 2032, it's all done. So you can think about this as a growing number in terms of percentages. Of course, it's not immediate. We will try to do whatever we can, as soon as we can, but it takes time to develop the die, to qualify it to get customer approvals and qualification. And as I said before, we have a lot of experience with that. We've done it for 2 fabs with tens and thousands of customers and hundreds of dies, okay? This effort here is going to be, I believe, more focused, as I mentioned, 10 to 15 dies. And I would say the OpEx synergies are more immediate. Of course, TI is a very large company. Si Labs doesn't have the same scale of TI. So there are some natural synergies, obviously, on the SG&A side. But even some of the fixed R&D functions, if you think about areas like IT and your test team or your process definition or design team, that type of synergies are straightforward, and I think the Si Labs team will enjoy them from day 1. I don't know if that is the color you were looking for.

That's perfect. Yes. And then as a follow-up, maybe how should we be thinking about potential for incremental investment required by you guys in the front end to bring SLAB products in-house? And then maybe on the back end, how should we be thinking about your capacity to support SLAB needs and then potential further investments there?

Yes. So when we looked at the -- Si Labs run at a pretty good efficiency of revenue per wafer. Their cost of wafer is pretty high, but they still have a respectable GPM, I think, above 60% right now. So in terms of the load on our fabs, I would say, we just absorb it. You would not see a material change, if at all, on the -- our CapEx plan in the next 5 years. That would be my high-level answer. The same is for the assembly and test. Our volumes are well above 10 billion units a quarter. And we've looked at the volume of Silicon Labs, again, very efficient revenue per [ P ], as we call it, portfolio that would be easily absorbed in our existing assembly and test facilities. And the packages they use, namely QFN and a little bit of WCSP, we have the internal capacity there. So you can imagine or you can model "0 delta investment from our side".

Our next question is coming from Joe Quatrochi from Wells Fargo.

I was wondering if you could maybe just share a little bit more thoughts on just how you think about just the mix of cash and debt that's required for the deal. And obviously, you're going to generate a lot of free cash flow between now and deal close, but also talking about committing still 100% of free cash flow to dividends and share repos. So just any kind of help there in terms of how we should think about that? And maybe how much cash should you -- we think about you need to have on the balance sheet?

Yes. Let me take that. So first, as we said in the prepared remarks, we will use cash on hand and incremental debt right now. And while we do that, to answer your second question, we're committed to continue to return all free cash flow to owners of the company over the long term as we have been doing for many, many years. So with that combination of things, we'll issue incremental debt, probably in the neighborhood of $7 billion or so. That will be a combination of investment-grade bonds and then some corporate -- some commercial paper. And we'll issue that probably later this year, the investment-grade debt in order to -- and then the commercial paper will be closer to when the deal will close. I'll also add that the combined entity is expected to be leverage neutral within 18 to 24 months post close.

Do you have a follow-up?

Yes, that's helpful. Maybe just -- you talked about regulatory approval across multiple countries. I assume China is one of those?

Yes. We expect that to be one of the countries that we'll have to go through. Our business, as a reminder, in China-headquartered companies is about 20% of our revenue. I think, Matt, for you guys, it's a little bit less than 15%?

Right.

And we are planning to go through it. Again, I believe this is something that can also serve our China customers that allows Si Labs to be competitive across the geographies. China is always a market that is very -- the cost and leadership is very important to succeed there. And I think that our customers in China will value the combination. I do believe that we will get that through. I have high confidence that, as we said by the first half of '27, we'll get that approved.

Our next question is coming from Jim Schneider from Goldman Sachs.

I was wondering if you already addressed, I think, fairly clearly the synergy you expect from a portfolio perspective with Silicon Labs industrial presence in wireless connectivity and what that means to TI. Can you maybe tell or talk about any of the Texas Instruments native product portfolio that is going to be particularly synergistic in terms of Silicon Labs designs, think about the other way around.

Yes. Again, as I said before, Jim, if you think about some of the applications that we looked at some of the boards that they run. In the center of the board, you will see, I call it a wireless MCU, right? It's almost like the -- if you think about the servers, the main chip is the CPU or the GPU. In many of the applications where Si Labs is playing, the host, the master of the system is that wireless connectivity solution. So for us, it means great news. It gives you -- usually when customers design a board or a new system, they start with what I call this alpha part. And this alpha part will be the wireless connectivity in many, many applications. I'll let Matt say a few words about it in a minute. What we are excited about is everything around. Power management, obviously, many of the applications are battery based. There is also battery management that TI is a market leader in that will be important. Many times, the wireless solution collects information. So there is a sensing signal chain attached to the wireless MCU. We think that will let us a very early look into that and will help us to sell more sockets per board. And in some cases, the wireless connectivity solution is like -- it behaves like a front end and then you need a higher level processor or a higher performing MCU that can drive that. We have that also in our embedded portfolio. So Overall, I am excited about the cross-selling opportunity. But as I said, to be prudent and not to justify the deal on revenue synergies, it's currently valued in our Excel sheet at 0. We think it's going to be much higher. Maybe, Matt, you can talk a little bit about the applications you operate in and what happens when a customer selects your solution?

Yes, absolutely. Just the first thing I do is reiterate what Haviv said that at Silicon Labs, we've had more opportunity than we can keep up with in the core wireless space for a long time. And we've seen a lot of opportunity around the silicon in the areas that were just mentioned, but we had to focus on that one area. However, there's literally silicon all around that can support and not only support it, but can also, over time, allow further differentiation on the application and solution as well. So there's really something there that we just haven't been able to get to, but we will be able to do now. That's exciting. And if you just look across a few example applications, what Haviv said, pick applications that Silicon Labs has talked about historically, take in health care like continuous glucose monitors where you have core silicon, but you also have an analog front end that's right there that's supporting it. You put those together, you can do something special, and that's a huge opportunity. Same in electronic shelf labels. Think of metering, where there's this position across gas, water and electric, where if you can combine not only the compute and wireless, but all supporting analog and power management, you have a complete solution for customers literally. So there's quite a bit of excitement around this. And I think we're just seeing the tip of the iceberg of what's possible there over time.

Jim, do you have a follow-up?

Yes. Just quickly to clarify, would you expect to discontinue TI's sort of organic efforts or product lines in connectivity after closing this deal?

No. The short answer is, no. Again, we are -- the momentum we are building right now is predominantly on the automotive market. This is where we see the highest growth. Our revenue there is about 50% of our overall revenue. Our revenue is lower than Si Labs. Of course, once we get together, we can attack the -- look, the industrial market, we say industrial, but we are talking about hundreds of end equipments. And even when I talk with Matt, they themselves cannot attack all of them. So there's going to be some, I would say, better partitioning to utilize our joint R&D force. I'm also -- I want to add one more point that I think is very helpful for the synergies. Si Labs has a great software team that has been able to deliver not only the wireless stack, which is the bare minimum, which we do today, they also have a higher level of software that many application builders need. So you will see again that software suite running in the future on TI's portfolio. So there is not going to be a shutdown of activities or road map items in TI. There's going to be an acceleration of how we attack this broad market.

Our next question is coming from Stacy Rasgon from Bernstein Research.

For my first one, look, I'm probably characterizing this too harshly, so I apologize in advance. But the signal that I think you're sending -- and it seems like manufacturing is the key driver of this. So the signal that seems to be emerging for this is we built all this capacity, we thought we could fill it. We can't fill it and so we're buying stuff to fill it. So I guess why is that not a fair characterization, number one? And number two, the SLAB isn't actually that big. So maybe that's the answer they can't fill it. But I mean, should we be expecting more deals like this to leverage the capacity footprint that you have?

I think you've answered it in your question. That's not going to move the needle anyhow, Stacy. I think the reason we buy Si Labs is their position and their portfolio. And if you look at our pitch, I don't know if you had a chance to look at the beginning of today's call, that's what drove the excitement, that's what drove the enthusiasm of us going after this asset. I will say that every deal has to make sense financially. And the reason it does is mainly built on COGS, but that's not the reason we are doing this. As you said, in terms of wafers per day versus our overall footprint, because Si Labs is such -- has such a high-performing lucrative margin or revenue per wafer, it doesn't move the needle. But I do believe, and I'll let Rafael comment here that every deal has to make sense financially. And we are happy that our synergies are built on tangible. We have an exact plan die by die, how we're going to do it in the next coming years. I think that's very important. Many times deals are justified on revenue synergies that are harder to measure. I think the fact that we can do it in a very tangible way is very important.

Yes. No, this...

This is not a test case is what you're saying?

Say that again, Stacy?

I said this is not a test case.

No. I mean that I've been looking at Si Labs for many, many years. I think we were not ready internally based on our execution plan on embedded to go after it. But then I think about our embedded portfolio, Stacy, and I always mentioned low-power MCU, I mentioned real-time control. I mentioned wireless connectivity. I mentioned radar systems, right? I want to be a leader, TI should be a leader over the long term in all areas. We got to the conclusion that the best way to be a leader in wireless connectivity is with this asset. And I think we will certainly be once the deal closes. In terms of real-time control, I think we are heading there. We're seeing a ton of momentum on our DSPs on power conversion and motor control. In terms of radar, I think we are on our way to be there as well. It's just going to take several more years. The last point, and you said it's not a test case, if you -- maybe you are alluding to MCUs. I think MCUs in general, are harder to bring in. When you look at an MCU company, you look at tens of different architectures, probably thousands, if not tens of thousands of dies. When I talk with [indiscernible] and the team, this one we have to do organically. And it's going to take time. But we plan to be a leader in the low-power MCU market. I think we will do it inorganically -- organically rather than inorganically because doing it inorganically, it's, I think, impossible. So hopefully, that gives you a little bit of more color on the way we think about our future, Stacy.

Stacy, thanks for the questions. Moving on to the next call and our last [ caller ] for the call today.

Our final question today is coming from Chris Caso from Wolfe Research.

Rafael, just one quick clarification for you on something you said earlier. So if the plan is to borrow $7 billion against the deal, then is it right to conclude that this transaction wouldn't really affect TI's buyback that -- in terms of cash return to investors?

No, it will not. We'll continue to return all free cash flow to owners through dividends and buybacks over time. What the deal does is that we issue the debt in order to fund the deal, that way, the free cash flow stays available to return. And of course, this deal makes sense financially. So over time, we're going to grow free cash flow. We're going to accelerate the growth of free cash flow versus a stand-alone basis. So then we'll have more free cash flow to return to the owners of the company.

I think that's a very important point. I just I want to reiterate because that's how we review the deal with the Board. When we look at 2030, for example, of TI's free cash flow with and without Si Labs, it's obvious that our free cash flow per share will be higher with Si Labs. Moreover, we will have a great portfolio and a leadership in Wireless Connectivity. So that combination is a very attractive one.

Chris, you have a follow-up?

I do. And I guess just pointing out that this is the first significant acquisition that TI has made since, I guess, it was National Semiconductor, which is a while ago. So perhaps you could just talk about, has the philosophy changed here with regard to M&A? How are you thinking about that going forward? And what's changed in TI's thinking? And was it particularly Silicon Labs? Or is it perhaps a rethink in TI's position in M&A in general?

Short answer is no, no change. We always talked about analog and mixed signal as a target. I explained why we think an MCU portfolio is very hard to bring in because it's usually so diverse and dispersed among architectures and software suites and very, very hard to achieve the efficiency of the synergy when you bring it in. As I said, wireless connectivity or side, we land at our embedded processing organization. But I see it as a twinner between analog and embedded really a mixed signal solution, very diverse customer base on a very diverse set of applications on a very efficient die base. This is why we like the deal here, and this is why we'll continue to look at the future deal with the same criteria that we've looked at in the last 10 years.

Chris, thank you for the questions, and thank you all for joining us today. A replay of this call will be available on our website as well as the slides that were used on this call. With that, have a great day.

Welcome to the Texas Instruments' Fourth Quarter 2025 Earnings Conference Call. I'm Mike Beckman, Head of Investor Relations, and I'm joined by our Chairman, President and Chief Executive Officer, Haviv Ilan; and our Chief Financial Officer, Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir.

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.

I would like to provide you some information that is important for your calendars. On Tuesday, February 24, at 10:00 a.m. Central Time, we will have our Capital Management Call. Similar to what we've done in the past, Haviv, Rafael and I will share our approach to capital allocation and summarize our progress as we prepare for the opportunity ahead.

Moving on. Today, we'll provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into fourth quarter revenue results with some details of what we are seeing in our end markets. Haviv will then provide the annual summary of revenue breakout by end market. Lastly, Rafael will cover the financial results and our guidance for first quarter 2026.

With that, let me turn it over to Haviv.

Thanks, Mike. Let me start with a quick overview of the fourth quarter. Revenue came in about as expected at $4.4 billion, a decrease of 7% sequentially and an increase of 10% from the same quarter a year ago. Analog revenue grew 14% year-over-year. Embedded Processing grew 8%, and our Other segment declined from the year-ago quarter. The overall semiconductor market recovery is continuing, and we are well positioned with inventory and capacity to meet immediate customer demand.

Before I walk through our results, I'd like to share an update we've made to our end markets. To better reflect the growth opportunities we see for our Analog and Embedded products, we reorganized our end markets to include data center which includes sectors related to data center compute, data center networking and [ rack ] power and thermal management. As such, our end markets are now industrial, automotive, data center, personal electronics and communications equipment. With that as a backdrop, I'll now provide some insight into our fourth quarter revenue by end market.

First, the industrial market was up high teens year-on-year with recovery continuing broadly across sectors and was down mid-single digits sequentially. The automotive market increased upper single digits year-on-year and was down low single digits sequentially. Data center grew around 70% year-on-year and mid-single digits sequentially. Personal electronics declined upper teens year-on-year and mid-teens sequentially. Lastly, communications equipment declined low single digits year-on-year and mid-teens sequentially. In addition, as we do at the end of each calendar year, I'll describe our estimated 2025 revenue by end market.

Industrial was $5.8 billion, up 12% year-on-year and was 33% of revenue. Automotive was $5.8 billion, up 6% year-on-year and was 33% of revenue. Data center was $1.5 billion, up 64% year-on-year and was 9% of revenue. Personal electronics was $3.7 billion, up 7% year-on-year and was 21% of revenue. Communications equipment was about $500 million, up about 20% year-on-year and was 3% of revenue.

In summary, industrial, automotive and data center combined made up about 75% of TI's revenue in 2025, up from about 43% in [ 2013. ] We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial, automotive and data center. Our customers across all regions are increasingly turning to Analog and Embedded technology to make their end products more reliable, more affordable and lower in power. This drives growing chip content per application or secular content growth, which will likely continue to provide faster growth in these end markets.

Rafael will now review profitability, capital management and our outlook.

Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, fourth quarter revenue was $4.4 billion. Gross profit in the quarter was $2.5 billion or 56% of revenue. Sequentially, gross profit margin decreased 150 basis points. Operating expenses in the quarter were $967 million, up 3% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.9 billion or 22% of revenue. Operating profit was $1.5 billion in the quarter or 33% of revenue and was up 7% from the year-ago quarter. Net income in the fourth quarter was $1.2 billion or $1.27 per share. Earnings per share included a $0.06 reduction not in our original guidance related to the noncash impairment of goodwill in our Other segment and other tax-related items.

Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.3 billion in the quarter. Capital expenditures were $925 million in the quarter. In the quarter, we paid $1.3 billion in dividends and repurchased $403 million of our stock. We also increased our dividend per share by 4% in the fourth quarter to $1.42 per share, marking our 22nd consecutive year of dividend increases. In total, we have returned $6.5 billion in the past 12 months to owners.

Our balance sheet remains strong with $4.9 billion of cash and short-term investments at the end of the fourth quarter. Total debt outstanding was $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.8 billion, down $25 million from the prior quarter and days were 222, up 7 days sequentially.

Now let's look at some of these results for the year. In 2025, cash flow from operations was $7.2 billion and capital expenditures were $4.6 billion, as we continue to make progress on our capacity expansions. We're nearing the end of a 6-year elevated CapEx cycle that uniquely positions TI to deliver dependable low-cost 300-millimeter capacity at scale.

Free cash flow for 2025 was $2.9 billion or 17% of revenue, representing an increase of 96% from 2024. Our free cash flow growth reflects the strength of our business model as well as our decisions to invest in 300-millimeter manufacturing assets and inventory. This supports our overall objective to maximize long-term free cash flow per share growth, which we believe is the primary driver of long-term value. In 2025, we received that $670 million cash benefit related to CHIPS Act incentives.

Turning to our outlook for the first quarter. We expect TI revenue in the range of $4.32 billion to $4.68 billion and earnings per share to be in the range of $1.22 to $1.48. We continue to expect our effective tax rate for 2026 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 and technology, a broad product portfolio, reach of our channels and diverse and long-lived positions. We will continue to strengthen disadvantages 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, Rafael. Operator, you can now open the lines for questions. [Operator Instructions] Operator? .

[Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank.

I guess my first question is the first quarter guidance is significantly stronger than seasonal. And if my math is right, it seems like it's the first time you've guided up sequentially since right after the financial crisis. 15 years ago roughly. So is there anything unique going on by either end market or geography that's given you such an optimistic view versus relative or normal seasonality? .

Ross, thanks for the question. I'll take it, and I'll let Mike add some more color as needed. First, let's start with the fourth quarter. We have seen a typical fourth quarter, revenue came in as expected. But if you look at the [ year on year ] results, we are seeing recovery continuing in industrial. It grew close to 20%. I think it was 18% year-over-year. And remember that on the industrial market, we still have a lot of room to go when you think about the previous peak. So if you will, the compare is still easy for industrial to continue to recover.

The other market that I will highlight is the continued strength in data center. We are seeing this market now becoming a little bit more substantial as a percentage of our revenue. I expect this market to continue to grow in Q1. It's been growing for now 7 quarters in a row for us. And we left the year at about $450 million a quarter revenue footprint, and I think that continues as we move forward.

The last point I would say, we did see orders improving throughout the quarter. And what guides our guidance is the stronger bookings. Mike, I don't know if you want to add anything?

Yes. So we did see linearity revenue linearity through the quarter improve. So month 1 to month 2 to month 3, we did see it continue to build. Same with backlog, we saw that continue to build through the quarter. And also, as we've talked in previous quarters, turns business or when a customer comes in, wants an order shipped right away, we continue to see that run as well at higher levels. So that's factored into the guidance. Do you have a follow-up, Ross?

Yes, I do. Just a question on the gross margin implications given what you guys are talking about with revenue, it seems like you had a nice beat at least versus what I was expecting in the fourth quarter. Rafael, can you just talk a little bit about the puts and takes on gross margin in your first quarter guidance maybe throughout the year. If utilization is changing, if inventory levels are where you want it or if they need to rise, anything on that would be helpful.

Yes, sure. Let me start with fourth quarter, EPS came in a little better than expected. And once you account for that $0.06 reduction that we talked about in the prepared remarks, and that was a combination of revenue was a little better, mix -- and market mix was a little better, loadings was a little better and OpEx was a little better. So it was a combination of multiple things there.

On first quarter, we gave you the range on EPS and the range on revenue. I would tell you, assume OpEx is up low single digits, and you should get into a reasonable number for gross margin in the loadings will depend on demand and we'll adjust those as needed. Thank you.

Our next question comes from the line of Jim Schneider with Goldman Sachs. .

I was wondering if you could maybe relative to your prior comments, maybe address inventory levels and where you expect those to go? You talked about taking loadings down a little bit to bring inventories down and you accomplished that in the quarter. Do you think inventories are at a pretty good place either from a days or dollars basis would you expect to want to take them down a little bit further at this point?

Let me start, and I'll give -- I'll let Rafael add some color on this, James. So again, I think we said it along the fourth quarter when we had the chance that we are very pleased with the inventory position we have built. We are very proud of how we got there. It's across all of our technologies at the right level. So from a high level, the inventory, we are -- we have right now. That's an asset that allows us to serve customers, especially in the current environment, when we see a lot of real time just-in-time demand, the turns business, as Mike mentioned before, is high, and it allows us to support customers at a high level. Rafael, any more color on how you want to manage inventory moving forward.

No, that's it.

Yes. I mean, clearly, industrial and automotive are doing very well right now and that plus data center or your main focus. Can you maybe talk about sort of the prospects of a return to growth or a turnaround in the personal electronics and communications end markets and maybe some of the product areas like Embedded Processing associated with those.

Yes. So just on the -- maybe on the personal electronics market, it did grow for the year, right? The business grew at -- for the full year at around, I think, 7% for PE. And we just saw a little bit of a weak Q4, I would say, below typical seasonality. Maybe, Mike, you can add a little bit more color on what we've seen there in Q4.

Yes. So if you look inside the sectors there, home theater, entertainment, TV declined the most. On the other end of the spectrum, mobile phones actually performed the best out of that group. So it varied within, probably not inconsistent with what you've probably seen around subsidies expiring around in China for things like appliances and TVs. So -- it's also if you think about where personal electronics is and its timing of the cycle and where it is, it was one of the first to correct and also go through its recovery. So there's also a tougher compare than it probably has compared to some of the other end markets.

Our next question comes from the line of Harlan Sur with JPMorgan.

Good to see the strong double-digit year-over-year growth in industrial. Haviv, last quarter, you talked about seeing some hesitation by customers in your industrial business, especially around manufacturing activity, things like factory automation, which is one of the largest segments of your industrial business. Are you still seeing that hesitancy that sort of wait-and-see posture by customers? Or is the order activity there starting to now pick up, especially among your China-based industrial customers?

Yes, it's a great question. I think from a high-level perspective, let's remember, industrial when I look at the quarterly revenue, even if I go back to Q3, which was, I think, the highest industrial quarter for 2025, it was still about 25% from the previous peaks in year 2022, right? So I do believe that the secular growth continues in industrial. We are looking at end equipment and generation to generation, we see just more content growth per system. So I expect industrial to establish new highs in the future. This is why I talked in the last quarter about maybe a more moderate recovery, especially on the industrial side.

And it did behave kind of seasonally in Q4. But as Mike alluded to, we are seeing a little bit of a pickup in orders, including in industrial. And I can't tell you why. We'll have to see how it plays out. But we have seen some noise in the last several months on some issues regarding a certain supplier. And sometimes, we all know about the memory shortages. So I don't know what makes the customers order more. We'll just have to look and see. I do want to remind us all that earlier in 2025, I would say, the first half of '25, we saw a pickup of industrial and then it kind of came down. We want to see how sustainable this wake up in orders is. And Mike, anything to add on the industrial side?

I think you covered it well. I wouldn't add anything to that.

Yes. [indiscernible] the last question. You also have previously mentioned the team is ahead on the [ Sherman ] fab build-outs and on track to complete the build-out of fab 2 this year. Can you guys just give us an update here?

And then on the potential of $2 billion to $3 billion of gross CapEx this year, I'm not sure if you guys are willing to articulate what that could be. But what is the size of the potential offsets, right? You've got ITC, goes up 35%, and you still have $1.6 billion in direct funding or grants to capture. Just wondering if you can maybe quantify that capture this year?

Yes, I'll start regarding the execution on the buildup of the fabs, and I'll let Rafael comment the rest of the topics, although we want to save something for the February call, Harlan. But first on the past year, we are very pleased about the execution in [ Sherman. ] It's actually ramped ahead of schedule, high yields. We also see with the new equipment that we have, really, the factory is more capable than we originally hoped. So a high level of throughput is being planned for this factory. So I'm very pleased with that execution.

And that will help us support our customers for the next 5 and 10 years. We have a clean room in [ Sherman ] 1 that is already have some production lines running. But remember, we also have the shell in [ Sherman ] 2, and we can build into this capacity if the -- if demand wants to be very strong, I think we can be in a great position to support it.

On the [indiscernible] side, also on schedule, I'm very pleased with the transition or the in-sourcing progress from our foundry wafers into [indiscernible] that's mainly an Embedded Processing comment that tailwind will continue for us in 2026. I think I've mentioned in '25, we've completed our 65-nanometer transition and they are yielding at the same level as they used to in the foundries. And now we are busy with our 45-nanometer technology, mainly supporting our automotive radar business, that's also progressing well in [indiscernible]. Rafael, anything on the ITC?

Sure. Yes. No. So Harlan, you asked about 5 or 6 questions in one, but let me see if we can -- Haviv addressed a couple. Let me address the next few. First on CapEx. We continue to expect CapEx for 2026 between $2 billion and $3 billion. So that's consistent with what we said before. On depreciation for '26, let me give you a new number. We now expect $2.2 billion to $2.4 billion on depreciation in 2026. And for 2027, we expect an upward pressure on that number but at a slower rate of increase. So if you look at what we've increased the last few years, just it will increase again, but slower.

You asked about ITC and direct funding. Direct funding did not change. We expect up to $1.6 billion as we -- in several milestones as we reach those milestones. And on ITC, investment tax credit, it is now 35% as of January 1 of '26. So anything that we put in place, any CapEx we put in place, both equipment, building, clean room in 2026, we get back 35% on the ITC credit.

Our next question comes from the line of Vivek Arya with Bank of America Securities.

For the first one, Haviv, what do you think is driving this above seasonal Q1? First of all, how much above seasonal is it? And then what role is the pricing playing in that because there is some discussion about price increases from some of your peers. So is TI raising prices in Q1? Is that part of what's driving? And how would you characterize this? How much above seasonal is it? And what's kind of the main driver of that?

Yes. Let me just say for the second part of the question, the answer is no, it's not pricing related. Regarding the seasonality, it's more or less maybe a little bit about seasonal, right? We usually see low single digit to flat quarter. I think we've guided what?

Low single-digit decline...

And again, the reason, Vivek, is orders, we are just seeing growing orders, and it behaved the same through the quarter. I can't speculate on what, but I do know the industrial market, there needs to be a correction. And the second point is data center is now a bigger part of our business, so it starts to move the numbers for us, right? This is a market that is now growing every quarter, and it's not insignificant. So I think that also helps to change the guide compared to previous years. Mike, anything else on the seasonality?

No. I think you called it out on seasonality.

Yes. For my second question, there's a lot of talk of higher memory pricing impacting demand for consumer electronics, PCs, phones, automotive. Have you seen it already? Have you heard that as a concern from your customers? And how are you thinking about the auto market right now? And just is memory pricing a headwind at all for your businesses that are exposed to consumers?

High level, we -- I would say that we haven't seen any implications although then that would be a speculation on my side, but it could be that when customers are seeing some issues on the memory side. Do they want to replenish some of their inventory. That could be always the case. And Mike, I don't know if you've seen any examples of...

Yes. But all I would add though is -- and we've heard about it, obviously. And I think not necessarily specifically that scenario, but it could be that, but also when a customer doesn't necessarily have everything need to complete their bill of materials, when they finally have those parts they need, sometimes they'll come in very quickly and want to order parts. We did see some of that where customers come in the last minute, want product [indiscernible] right away because they've just completed a bill of materials, could be related to that or other different things.

Our next question comes from the line of Timothy Arcuri with UBS.

Rafael, I wanted to also ask on CapEx and sort of how quickly it's going to fall off. I think you said this year, $2 billion to $3 billion, but the math would then say you're going to kind of exit the year like run rating something like $1.5 billion. So the question is then, can it go lower than that? Because I seem to recall a comment at our conference in December that it could go like lower than 5% of revenue next year. So that would put it down to like $1 billion in that -- like that kind of being a floor. So can you kind of talk about that? Could it go that low next year?

Tim, let me start with the second half, and then I'll let Rafael answer the first part. I made the comment because I was asked about maintenance CapEx, what is maintenance. We always have to spend money to fix equipment, to buy replacement parts, et cetera. So I characterized it as kind of mid-single digit or revenue, that's always kind of a run rate you can think about. There's never 0 in an [indiscernible] like TI. That was my point. This is when you don't have growth, right? Now I'll let Rafael talk about CapEx beyond the maintenance.

No. So for this year, for 2026, $2 billion to $3 billion, and there's a range there. So if we go through the year, we'll update you on on that number.

And then beyond that, what we've said it's about 1.2x long-term revenue growth. So you pick a number for revenue growth, you do 1.2x, so 10%, you get to 12% CapEx intensity, but that's a gross number before ITC benefit. So once you get those ITC benefits, you essentially get back to one-to-one that growth rate. So whatever growth rate you assume you kind of get back to a net capital intensity of about the same level.

So I also wanted to ask about loadings. It looks like cash gross margin is up like 50 basis points or something in March. So that would kind of suggest that loadings are going up just a smidge. And the bigger question is sort of are you thinking about loading that you want to keep inventory sort of in this [ 4.8 ] range and you just want to match loadings with demand from here? Or do you want to bring inventory down over time versus that [ 4.8 ] number.

As Haviv said earlier, we're very pleased with inventory levels. That's good inventory in a number of fronts on the buffers that we have and the position that we have to support potential revenue growth. The same goes with capacity. We are well positioned with capacity. So we'll adjust those loadings as needed, depending on what we see for demand for the rest of the year.

Our next question comes from the line of Thomas O'Malley with Barclays.

Haviv, in your outlook for March, you talked about strength in data center, recovery in industrial continues and bookings are improving, turns are good. There was no mention of auto there. You guys have said previously, maybe the auto business is a little bit slower off the bottom than industrial. Any update on the auto business and how that trended through the quarter and kind of your updated view there.

Yes, great question. On the automotive market, I think we -- I think in Q4, we were slightly down. And we did see strength in the automotive in the second half of this year, right, in Q3 and Q4. It's back to the level more or less of the peak, somewhere in 2023. This is an automotive peak. Remember, automotive was last into the cycle, right? If you go back all the way back to the COVID cycle, they are the last ones to peak. They peaked in Q3 '23.

But the -- I think what's happening in automotive and it continues to happen in secular growth continuing. So generation to generation, model to model, we just see more content per vehicle. Even if it's an ICE, a combustion engine vehicle rather than EVs. Strength in China continued in Q4. And typically, in Q1, if I need to comment about Q1, typically, Q1 is a quarter where, at least in China, we see always -- with Chinese New Year, we always see a seasonally down quarter. I expect that to be the same in Q1. But again, we are -- we've seen a single-digit drop versus the peak in automotive, back to the same levels and I think secular growth continues into the foreseeable future, at least for the next 5 years.

Yes. I just wanted to clarify a comment earlier. You mentioned that pricing didn't have anything to do with the above seasonal margin. You talked more about these end market trends. Is that because you've raised pricing previously, you plan to in the future? The reason the question comes from, your competitors are talking about an increase in pricing early in 2026 and being very clear about that. Do you guys feel like you don't want to do that? Or is it just something you'd rather not comment on?

I think we've been clear along the year, and I'll just repeat it, and Mike, you can add a little bit more color, but -- we said that we expect the pricing -- price -- we have 80,000 products. Prices always go up and down. But for the company, the overall price effect like-for-like in '25, we expected it to be low single digits down. Now we finished '25, it was exactly there. When you say low single digits, think about 2% or 3% down.

That's my assumption for 2026. That's what we expect the market conditions to be. If anything changes with pricing, as you know, we'll see -- of course, TI will respond. But right now, that's our assumption moving forward. That's why I was so convinced that the Q1, I think we have a little sequential growth there. It's not due to pricing. Mike, anything to add there on the pricing side?

No, I think you called it out, a base case assumption of low single-digit decline over time. We'll have to see what the market presents to us, but continue to expect...

Definitely no step function planned in Q1. Actually, usually, Q1 pricing usually goes down a little bit because of yearly negotiations. That's usually what we see in Q1.

Our next question comes from the line of Josh Buchalter with TD Cowen.

I wanted to [indiscernible] little bit more. Any details you can give us on the exposure across power, Embedded and maybe non-power Analog parts and 70% growth is a pretty big number. Any sort of handicap here, what you're willing to give us on what that business could grow over the medium to long term?

Yes, definitely. I can take that. So again, data center has grown nicely, as you said, in 2025. CapEx continues to be invested in data centers. We expect that growth to continue.

In terms of our position, most of our business is based on the Analog side. And there is also -- there is -- between power and [ signal chain, ] I would say it's kind of maybe a little bit more power, but both power and [ signal chain ] are very strong in data center. We see a lot of opportunity a lot of diversity of parts.

I know most people like to talk about a specific socket, if you call it the VRM or the [indiscernible] voltage regulators, that's always a large -- very large socket. But if you look at the [ rack ] and you open it up, there are thousands of different parts, and many of them are analog and embedded parts and TI plays across the board there.

As I've mentioned over the years, we have also invested in our technology to be able to support the higher power, call it, rails. Think about the [indiscernible] this is where a lot of the current going into an accelerated computer or a CPU come from, and TI is building the technology in [ Sherman, ] Texas. This is where our BCD process is serving us very well there. That product is sampling and we expect our opportunity in data center to further expand in the coming years.

So TI plans to play across the different sockets in data center, and I see it as long as CapEx continues into this market, I see the opportunity as an attractive one.

Yes, [indiscernible] interesting several years for the analog industry. And for a while, you talked about the benefits of your U.S.-based [indiscernible]. Do you feel like rapid [indiscernible] a lot of more on inventory, but really at the point where we expect TI can [indiscernible] normal amount yet?

So Josh, I think there was a little trouble on the line, but I'm going to repeat what I believe the question was, and then we'll answer it. So I think it was talking about the cycle and how it's been playing out. And with the capacity that we have in place, are we in a position to be able to get back to market share gains.

And maybe if you want to start with the answer? I can also answer as well.

Was that the question?

Yes, close enough.

Yes. As we said, look, cycle -- this cycle has recovered slowly. We just forget about TI, just look at the overall unit trend. You can look at units without memory. You can look at IC. It's been 1 of the slowest, if not the slowest recovery ever in our history at a time where I think more semis are used in our life. I mentioned the secular growth in automotive. We see that across many, many end equipments in industrial across the board, just more content per system. That's just -- and of course, the investment in data center that are becoming more and more substantial even for the Analog and Embedded Portfolio that we have.

So I do believe that there is going to be a point of time where you -- all this capacity we put in place and the inventory that we've positioned is going to serve us well. We have seen cases where it served us very well with an immediate response to customer needs and our customers value that a lot. And I believe there is more to do here. So let's see how the market wants to continue and develop.

One thing is very clear to me, end equipments are being redesigned with more semis every day. It will continue to be the case in the future. This is why I'm continuing to stay very optimistic and encouraged by the investments we've made in the past several years.

Our next question comes from the line of William Stein with Truist.

First, I'm hoping you can talk a little bit more about the strong bookings you referred to. Would you be able to disclose the book-to-bill to us? And maybe even more interesting, has the duration of your backlog changed at all in the quarter?

So maybe I'll take that one. So well, we did see throughout the quarter backlog did build. And I think, first of all, it's important to remember that we transact most of our revenue direct with our customers, meaning that we don't sell through a channel. So we do see things typically pretty real time. And that's part of the reason you heard us talk about the fact that we have seen our turns business also exhibit strength over the last several quarters.

I don't have a number specifically to provide you for what bookings did, but it is reflected in our guidance. And I think going back to what Haviv said about where our end markets are, industrial is going through recovery. And we saw that in the fourth quarter, you've got a data center end market that is growing for, I think, 7 consecutive quarters. Those are all part of what factor into how we think about our guidance.

Yes. I mean I'll ask maybe the same question a little bit of a different way. Are you seeing either based on customer willingness to place the orders or because of your own lead times to customers, have you seen an extension in the orders further out into the future?

The shorter answer is yes. But again, not because of lead times. Our lead times are very competitive, unchanged, I think, on average, below 13 weeks, many of our parts at 6 weeks. Part of our ambition and objective as we prepare to the next cycle, was to be -- to be able to maintain very competitive lead times across the cycle. So far this cycle has not been very tough to meet, right, as I said, been a slow recovery, but our lead times continue to stay very, very competitive, probably the lowest in the industry, and our inventory position allows us to support customers.

So I don't think customers are placing -- I mean they are placing orders a little bit more forward, but they have the ability to change their opinion even within this quarter. This is what Mike mentioned before. Our terms are very friendly, very customer-friendly. We want customers to be showing us their demand real time and we are willing to carry this inventory, especially when it's so diverse and long-lived to increase customer support. So that would be my high-level comment. Mike, anything else about what we see into the longevity of the inventory?

Well, the inventory that we have in place has incredible longevity.

No, no. But on the orders...

Yes. I'd say that if you look at -- does a customer need to put long-term backlog in place when lead times are stable, they probably don't feel like they have to necessarily. So nothing to spike out that I would say, but what we have seen is a lot of customers wanting to come in, walk product quickly. That isn't something we've seen build over the past several quarters. .

Our last question comes from the line of [indiscernible] with Wolfe Research.

I guess the first question is a clarification of some what you said about factory loadings, and you did say that you'd adjust loadings according to what you saw with demand and take into consideration that you reduced those loadings more recently, are there any plans in place now to increase those loadings? And what would you need to see in order to take those steps?

What I would tell you is that if we had something significant changes like we did back in the third quarter, we would tell you. We are not making any disclosure right now on on which way the loadings are going. So it's just -- there's nothing significant versus where we've been running in the fourth quarter.

And I'd just add that part of that is we have the ability to make those adjustments as we see things occur, and that's part of the flexibility we have in our manufacturing to be able to do that. .

It's related to geographic revenue. You made some comments on China. Obviously, you have the New Year holiday that hits in the first quarter. But if we look at the different regions, how does that stack up against what you would expect for normal seasonality in each one of those regions in the first quarter?

Yes. In general, I think we haven't seen anything specific on -- the only comment I made, Chris, before was that typically, Q1 in China for automotive is lower just because of Chinese New Year. But I think from a where the backlog comes from, it's been pretty even, right, across the geographies, Mike?

And then maybe I'll just talk about last quarter, what we saw and we don't have a guidance by region for the top level. But China came in right about on a sequential basis, pretty much in line with what we saw at the top level, down about 7%. On a year-on-year for fourth quarter, it was up about 16%. So didn't see something on a sequential basis that stood out very differently there compared to the overall top-level results. .

And I want to make -- maybe before we -- I'll let Mike finish the call. I want to make one more comment on the orders and everything. I just want to remind us all that TI has invested in capacity and inventory over the last 3 or 4 years to be exactly ready for this type of environment, right? We've seen a lot of real-time demand coming in, in Q4, which we were able to support. We are seeing a little bit of strengthening in the orders right now in Q1.

And we'll see how long lived it will be. The market has been jittery in the last 12 years -- 12 months, sorry. And we'll just have to see how it plays out. This is also related to Rafael's comments about loading. We have the knobs to turn as needed. And we have the inventory to allow us time to adjust our loading, for example, as we go. So we are in a very good position as we come into 2026. We worked very hard to get to you, and I'm very proud of our execution. And we'll be ready for any scenario that the market wants to present to us. [indiscernible] Mike.

Yes. Thank you, Haviv, and thank you all of you for joining us today. Again, as we mentioned earlier, we look forward to sharing with you our Capital Management Call on Tuesday, February 24, at 10:00 a.m. Central Time. A replay of this call will be available shortly on our website. And with that, have a great evening.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Okay. Good morning, and good afternoon. I'm Tim Arcuri. I'm the semi and semi equipment analyst here at UBS. Very pleased to have Texas Instruments with us next and very pleased to have Haviv Ilan, who is the President and the CEO of TI. So thank you, Haviv.

Thank you, Tim. Good to be here. Thanks for having us.

Great. Well, Haviv, let me just start by a question that I'm sure you're getting all day and I get a lot, too, that your recovery sort of came out of the gates pretty strong. You were above seasonal a few quarters and things have sort of come back to being more seasonal. So can you just talk about some of the drivers and maybe some of the puts and takes that are occurring in each of your bigger end markets?

Yes. When I look at '25, we are in a recovery. If I go back, I think we almost like had a 0 growth in Q4 2024. So finally stopped declining. And then in '25, every quarter, we saw growth. It's in the double digit. I think company at the midpoint for '25 is somewhere around 13% growth. But you are right that it was not smooth. So we have seen a building momentum in the earlier part of the year. Q1 and especially Q2 with all the tariff noise, it was really hard to decouple what is the root cause or what's driving that recovery. But it took a little bit of a step down in Q3. So if I look at it over the last year, we see a recovery. It's a double-digit recovery.

We can also see it on the unit trends when you look at the market, not only TI, -- but it's kind of a slow recovery. It's a moderate one. You can go back to more or less 2000 to see a similar recovery. And I think there's simply a lot of uncertainty in the market right now. And also, there was a little bit of a synchronous behavior during the up cycle that is now playing in a down cycle. So we are trying to stay away from trying to call the shape of the recovery. From now on, we will tell you how we do once we finish the quarter.

But I am pleased to see all markets are recovering right now for us. In some areas, we are seeing a new peaks of revenue established, specifically on data center and also in the automotive market, we got to the same level of 2022, so -- or 2023 in the case of automotive. So I'm pleased with where we are. I think there is more room for the market to catch up and get back to trend line. We are still trending below trend line right now.

And can you just talk about some of the end markets as you look in December? You didn't call out any one end market in particular for your guidance. But maybe speak to some of the relative strength or weakness in industrial, all your different end markets in industrial. And then within autos, any geos that are stronger than others within auto?

Yes. I think, look, our main markets for TI, about 70% of our business are industrial and automotive, and both of them are showing recovery. I think the recovery of industrial is more significant. It's in the double digit. But also, it trough the most, right? We saw a big drop back in '24. And if you look at where we are right now, and I think it's not a TI specific, we have still not established a new revenue peak. I think there is still room to go.

And we can talk about some of the macro issues that are creating that. But we do see industrial recovering fast, but still not at the levels where we saw it in 2022. The automotive market is behaving better in 2 ways. First, when it dropped, it didn't drop a lot. It was a single-digit drop, and now it's growing single digits. But I do like the fact that if I compare to the previous peak, it's at the same level.

And I don't forget that the previous peak was probably helped by some of these inventory buildup. So from an end demand perspective, I do like what we're seeing in automotive. I think it's related to the secular growth in automotive. I know that a lot of folks are concerned about how quickly EVs are getting adopted. But I think every vehicle is adding content from EVs to ICE to hybrids. On the industrial side, I think there is more room to grow. Now if you specifically about geos, I cannot think about the China market for automotive.

This is where EVs are gaining momentum. The OEMs there are doing well, not only in China, but also with the export business. And I think this market still has a lot of potential in terms of content addition. We are seeing a generation to generation. We are seeing just more content added to vehicles. I think this is still a growing trend. And I also like the fact that we are competing at a high level across geos, including China. So in that sense, these markets has been -- or specifically this automotive market has been doing well. Last but not least, I do want to add a little bit of a few comments about the data center market because it's becoming more and more significant.

It's still a single-digit percentage of the TAM, but it's moving very quickly. And I call it somewhere between -- for Analog and Embedded, somewhere around $5 billion to $10 billion, somewhere in between, but moving very, very fast, and I think it has a lot of room to grow in the future. So we also see the momentum over there. And this is where we see a strong momentum like all of our peers. Customers are continuing to invest. This is where there is no hesitation whether to put more CapEx into data center and TI is enjoying that trend among the industry.

And you're going to start to break out data center starting in fiscal '26 as a separate.

Correct. So in January, actually in the earnings call, we'll provide data center as a stand-alone market. You will see TI talking about industrial, automotive, PE or personal electronics, data centers and comms. These are going to be the 5 markets. And we are going to give a little bit of history also. So we'll make it history corrected. So we'll see 2025 and also how fast that market moved over the last years. And we'll report this market going forward every quarter. This is how we run the company. We are putting more emphasis on data center internally, and we also want to share it with the Street and with owners.

Yes. It sounds -- I think you said it's about $1.2 billion right now.

Yes, we are collecting that data. I think last time I checked, it was $1.2 billion. I think it's probably going to end up a little higher than that. Most exciting is the growth rate is well above 50%. And what I like about the market that I think it has more momentum building, right? As we see architectures changing at the rack level, we are seeing that semiconductors are playing a larger and larger role. As long as you believe that data is going to be important in our life, I think this market is going to gain momentum in the future and can one day become a double-digit part of the TAM, if not even 20%. I don't see a reason why it's not over the long term. So very important to break it out, very important to monitor it, very important to report it back to the Street.

Great. I wanted to ask about factory loadings. One of the main issues coming off of last call was that gross margin was guided a little bit below what I think some folks thought. I didn't think it was that much of a surprise, but I think some investors thought that it was a surprise. The guidance implies something like 55% gross margin. It's down about 250 basis points roughly. That's my numbers, not yours. Can you just talk about how you're managing loadings and inventory? It seems like you finally have maybe reached a pain point on inventory where you don't want to build any more. So loadings are going to track demand and you're sort of looking at Q1 and Q1 is not the best quarter seasonally. So loadings come down a little bit in Q4.

Yes, I think you kind of answered it. But remember, taking a bigger picture, Tim, and you know us, we don't think about -- to be fair, we run the company on free cash flow and free cash flow per share. And the reason we are not -- we are stopping building inventory at the same rate because we reached the point where we want to be. So if you think about -- even in Q2, we were a little bit anxious about can we get ahead? Can we build buffers across the entire portfolio? We are, in some cases, we are almost like hand to mouth on some of the technologies. I'm very pleased that by the end of Q3, we reached the level that we want to be at. And now not only that we have capacity of demand, but we also built the inventory level across our portfolio.

And I think about some areas in analog, especially those who are building in Richardson in our fab too, that we're catching up. But you can call it the market was growing not as fast as it could have, and it allowed us to get ahead. Now when you get to the right level of inventory to serve the short-term surges that you might expect, -- of course, you want to -- we manage the company on free cash flow. So you let the cash flow fall through into -- and back to our owners. So we are going to see momentum over there. I think we've seen it in Q3.

I expect that to continue, and that's part of our excitement. We talked about a 6 years process of building capacity and inventory ahead of demand. We finally are getting there. Yes, there is a little bit left over in Lehi to complete LFAB2, but we are done on the analog side. We have the inventory level. It's time to go back and grow our free cash flow per share, both from an inventory buildup perspective, but also from a CapEx perspective. And we are very excited to be in that -- finally in that point.

Yes. So I wanted to ask about CapEx and also free cash flow. So CapEx this year is $5 billion. You said that if revenue is between '20 and '22 that you'd spend between $2 billion and $3 billion next year.

I mean, it seems like revenue probably is on the -- if anything, at the low end of that number. I think you said you can't spend less than $2 billion because of what's going on in LFAB and elsewhere. So you're going to drop at least $2.5 billion, maybe even $3 billion to cash flow next year because CapEx is coming down. So can you just talk about how you think about CapEx? And then into '27, actually, I get asked this a lot. And it would seem like given all your inventory and all your capacity that you could even take CapEx down even in '27, even if there was a modest recovery.

Yes. I think let me just elaborate on what you said. You're right. We do -- we talked about a 6 years investment from 2021 to 2026, and we are 5 years in now. We have actually executed ahead of schedule on Sherman. So if you look at our analog business, both capacity is built, clean room of Sherman 2 is built. We've built the right level of inventory. We are ready. On the Lehi side, we are in the process of getting the shell and the clean room built in LFAB2. We want to be in that position to never repeat the issue we had in the previous cycle where we didn't have brick-and-mortar ready for demand. So we are making progress. I think that we will finish it somewhere in 2026. And that's the main -- the largest ticket item or the big ticket item we have in 2026.

This is what drives our CapEx somewhere around $2 billion to $3 billion. I can't be talking about precision, but we'll try to be a little bit more -- give more information during the capital management call in February. But your estimation is true. There is a $2.5 billion to $3 billion of CapEx opportunity over there because we are where we are. If you look at '27, it depends on revenue. We are going to be in this, what we call Phase 3 of modular capacity. Clean room is built, fabs are qualified, customers are taking the new parts. And now it depends on what revenue wants to do. If revenue wants to grow rapidly, we'll be ready.

But if it doesn't need to and we have enough capacity, that capacity comes into kind of what we call maintenance mode. And people have asked me what does this mean maintenance, but maybe 4% of revenue or something like that is where we used to be when we had the clean room ready at the time when we were kind of ramping our Fab 1. I think it's a good estimate. And we can provide some more color in the future, but that's what I have in mind, not to give a precise number. The last point I would make, and we don't mention that many times, but we also care about our assembly and test. We had a mission to internalize our capacity also on the back-end side.

On the fab, we're already at about 90%. By the end of the decade, we'll be at 95%. On the OSAT, we started at below 60%. And I think we'll finish the year close to 80% and again, with the aspiration to finish the decade at above 90%. And this is something that we are still continuing to do. We are ramping our Melaka II factory. I was just there a couple of weeks ago. Very good progress internalizing part that used to be built in OSAT many times in China into what I call dependable capacity footprint, both in Malaysia and the Philippines. So that's also something that happens in '26, but can take a step backwards in '27.

Great. So I'm sure you get asked this also, and this question is more in relation to China, that the effort to add a lot of manufacturing capacity in the U.S. and have dependable manufacturing capacity, that knife in China potentially could cut both ways because some of the Chinese customers are trying to do to the non-Chinese suppliers what the American customers are not wanting to buy from China given the geopolitical tension. So do you think that having all this U.S. manufacturing capacity, does it put you at a disadvantage in China for the products sold domestically in China?

I don't think so because we have options. China is about 20% of our -- of the market and also about 20% of our business. And can I supply that 20% with the non-U.S. capacity? Of course, I can. TI is not only having manufacturing in the U.S. We have manufacturing in China. We have manufacturing in Europe. We have manufacturing in Japan. And assuming China doesn't want to take manufacture only from China, we have the answer. And this is currently what customers are asking us to have. In case something happens, I want to have a non-U.S. supply, and we are very ready.

On top of it, we are also strengthening our muscle of bringing the right technology into China. So in that sense, our China customers are very happy with TI's ability to build for them even locally in China. We've been tested over the last couple of quarters. There were periods of tariffs in China, and we've done very well. We could divert our wafers into the right supply chain. Our customers felt very secured. And I'm seeing the design-in momentum continue to grow in China based on our ability not only to have a dependable capacity, but also they like our portfolio. They like our level of service. They like the urgency of the company. This is why I see China still as an opportunity rather than a risk. Of course, I don't underestimate the geopolitical tensions that they seem to grow over the years.

But China will stay an important market, not only next year, but I think for the foreseeable future. If I think about the next 5 and 10 years, is there going to be some decoupling between -- some more decoupling between the U.S. and China? It's probably a good estimate to have. But will we be able to ship analog and embedded parts into the China customers' footprint? I think, yes. And both things can live together. So that's how TI is at right now. We see momentum in China. Our business in China is growing nicely this year. It's at the low 30% year-to-date. And I think there is more opportunity moving forward.

Yes. I mean, if they were going to displace you, they've had plenty of opportunity to do that.

And that's not new. We've been competing with the local competition since 2018. So this is something that we've talked about way before it was "in the news. We took a decision, I think it's a strategic one that we want to be very competitive there. And the hard part was not the capacity of manufacturing. The hard part was changing the culture of the company. Can you keep up on the fast-moving treadmill? Can you react at a very fast time to the demand? Can you fulfill the market price? The market price is not set by TI, it's set by the competition. Can you have the right cost structure to make good money when you fulfill these sockets? So I think the answer to all this, we've proven that it's yes. I think also, to be fair, it's helping us across the globe. China is not the only market. And when you get team that is fast moving, that cares about cost, that cares about urgency, that cares about the high customer service. It pays dividends across other geographies. I think that's very important to remember.

Can I just ask about share? So -- and I ask you this a lot. So if I look at your share of the analog market, it peaked at 19%, almost pushing 20% actually. And you've lost roughly from peak to trough, you lost about 400 basis points. You gained about 150 basis points back this year. So you've gained some of that back. but you haven't gained half of that back.

And the share seems to have stalled at least like last quarter, if you look at the SIA data. So are you focusing on regaining that share? Is that a key metric that you're focusing all the salespeople on? And are you compensating the sales force on gaining that share back? And maybe if you can go back and deconstruct, why did you lose that share in the first place?

Yes. First, a quick answer to your last 2 questions is yes and yes. Of course, we measure it. Of course, we -- and again, there are many ways to measure it. We just collect all our competitors and see how we do versus them. And on the analog side, as you mentioned, I think we have some momentum, but we have a lot of room to grow. And that's how we measure the team. That's how we compensate the team.

So definitely, yes. Now to me, the -- and it's part of the learnings that we've discovered back in 2020 that we were not well prepared for the opportunity. If you think about it, and we had the right part, we were on the board, we had a socket. Customers wanted us to ship more. And I think everybody struggled during that time, but I think TI was struggling more simply because our clean room got filled up and the lead time to build new capacity was like 3 years. So that really drove our decision to make this investment cycle in the last 5 years and to do it.

And as I said, we have reached a huge milestone of lots of execution, lots of investment. But when I look at the end of Q3 and where we are, I'm very pleased. Now in terms of how you gain it back, it's a combination of what the market wants to do and also your execution. So I think the market right now has not tested the suppliers. It's a very gradual recovery. Every time there is an accident at one "accident" at one customer or the other, TI always is able to show up and fulfill some of the gaps. I would love to have more opportunities as the market evolves, but I think they'll come. We see secular growth in our market. We see that TI has invested through the cycle. I think this is a unique position that we have. And I'm convinced that the share of gain will continue over the coming years. And of course, we'll continue to monitor it.

Now the other part of our portfolio is the embedded side. This is where the share loss is not related to supply. It's related to our portfolio that weakened and we saw a gradual share loss since 2017. That's more of a strategic issue that is not easy to fix. I think we are in the process of fixing it. We are starting to see early results of a stabilization of our share, but it's still like we lost almost half of it since 2017. We have the opportunity in the coming years, and I'm talking about the second half of the decade to start to make an embedded I would say, momentum buildup towards the second half of the decade. And the reason I say that, that we have built a new portfolio. It's starting to get designed in. We see all our internal metrics showing the right momentum. And I think we will continue to accelerate that in the second half of the decade. The team has to prove it. That's how we are going to measure them. We are going to stay persistent on our mission to rebuild our embedded business, but I think we have -- I give the team a good chance to make it happen.

And can you just sort of deconstruct for people why -- like why did you lose that share in?

Look, I think we talked about it so many times, but I think it's a combination of just where do you want to spend your R&D or what portfolio you want to build. I think we had a lot of legacy business coming from our old wireless days that we did big process or big chips, moving from smartphones, for example, into vehicles. That was not sustainable for TI. So it drove some of the momentum in the previous decade. I think in 2019, we said, look, we want to have a very -- a much higher quality type of business in embedded. Let's put our R&D where we care about low-power MCUs, wireless connectivity, sensing solutions like radar and others. Instead of big SOCs for processor, maybe focused on low-power processors and everything around DSP, drive motors, convert power.

That's kind of where TI's competitive advantages come into play. You can build it internally right now in our new fab that we've acquired in 2021. You can build a broad portfolio, so you can solve many problems on the board. Your channel advantage now is coming into play because now you can touch many, many customers to grow your business.

And that's how you get to this footprint of longevity and diversity. The good news that we are well into it, you can call it bad news, but I think that's part of the quality of the market. It takes time. This is where these are smaller sockets. You won't see it ripping back up, but it will stay once it gets there. I think it's a very sticky type of business. So that's what we've done in Embedded. I'm pleased with the execution, but the team has a very high bar to translate into share gains. So far, okay, you've stabilized your share. Thank you. Now you have to grow it. And that's the mission of the team for 2026 and beyond.

And so just back to your point on share on the analog side, which I think the point you make is great, which I hadn't thought of, is that really it's the tension in the marketplace, you actually need the tension in the marketplace for you to actually gain the share.

No, I don't think -- I think you will see it quicker when there is tension. I think I am very convinced that generation to generation, we are getting the footprint. But right now, let's take factory automation. And this is our largest sector in industrial. I know that we are on the board waiting to be shipped to customers that are going to have automated manufacturing somewhere. But I do see our customers or the customers of our customers hesitating whether to make an investment right now.

And maybe the AI data center is an outlier, but everywhere else in just our people spending a lot of money building new manufacturing new manufacturing footprint, the grid, solar, we see customers are a little bit in a wait-and-see mode, Tim. And this is something that we've noticed. I think that's what industrial needs in order to go back to trend down and beyond. And when it does, we'll see the momentum. So I'm very optimistic about the long term. I think the market so far has moved slowly, and this is why you see the share gains coming in, but not at a rapid pace. If we need to go in and show the muscle of TI, we'll be there.

I want to ask you about M&A. Everyone always says to me, every investor says, well, if TI was ever going to do a deal and buy something, now is the time to do it because you have all this fab capacity. And so my question is, what are the qualifications when you look at doing deals. Everyone seems to think it would be an embedded, but it seems like because of the IP and the process technology, it probably wouldn't be an embedded if you were going to do something. So can you just talk about like the boxes that any deal, if you were to do one would have to check?

Yes. I think the most important part is does it have a good strategic fit for the company. And we always talk about our competitive advantages, not as a slogan, we think that way. So first, can I build that portfolio internally? So of course, when you look at a company that maybe build the foundry, you bring it in, you have the COGS synergy that you would not have if you wouldn't build it in TI, right? So that's always part of the criteria. Does it have a broad portfolio? It's very, very important because broad portfolio and a broad customer base is very important to us.

This is where our channel advantage, whether it's ti.com or our sales channel is very effective because once I already call on a customer, if I can expand my portfolio, by expanding it maybe inorganically, that falls into -- the fall-through is very nice. And last but not least, we do like the business to have this, I call it, diversity and longevity, which is kind of the stickiness of it. So is it mainly on industrial and automotive rather than on PE, -- that would be a criteria. Now regarding the portfolio, I think today, now we build embedded also inside the company, but I think it has to be a good fit in the sense of it should be more analog mixed signal type of thing other than big MCUs or very high level of concentration on processor.

That's not where my head is. My head is more on this analog mixed signal side. And we always look at opportunities. And of course, if something comes up, you will hear us. But we continue to be very focused on organic growth. I think we have an opportunity to continue to expand our portfolio and grow share organically while looking always at opportunities externally.

Great. And then I just wanted to ask you about share repo. They've sort of slowed midyear. They were on a very strong pace in Q4 of '24 and the first quarter of '25, and they slowed a bit recently. However, when I just adjust your CapEx, and I assume you're going to drop at least $2.5 billion to cash flow, possibly $3 billion as the CapEx comes down. I mean you're basically annualizing $750 million in cash right now. And the stock is -- I mean, it's at a very low multiple by historic standards at currently annualized cash flow if you adjust for the CapEx. So it would seem to me that now is the time to lean in and really buy back more stock. I know your long-term commitment to returning 100% of the cash flow. But it seems like now is the time to be maybe a little bit opportunistic.

Tim, you said it yourself. I mean, first, let's build the free cash flow muscle, okay, or rebuild it. And it's really going to come by executing and we are executing. So getting through this investment cycle and then whatever revenue wants to be, I think your assessment is right, probability of below 22% is high next year. So that is a lot of gain on free cash flow, $2 billion to $3 billion, as you mentioned. I will say also that we've been aggressive, right? We've been returning at above 100% where we saw an opportunity. We continue to do it even in 2025. I am excited about next year because we are starting to see the fall through. I think we have more opportunity.

As I think about the trend line of free cash flow per share, and we showed it over, I think, 20 years in our capital management call, -- are we getting there next year? Yes. Do we have a chance to have a new record next year? Yes. And in the case we don't, it's because we see such a huge demand that we have to put more CapEx in, right? So very excited about that. It's a unique point. It's been a long journey to run this company in the last 5 years with Rich through the cycle, keeping a steady hand on our investment. I think it will pay dividends whatever the markets want to do next year. So in that sense, you're right, your math is not wrong. And I think a lot of opportunity ahead on capital allocation, whether it's buybacks, whether it's whatever else.

So you think there's a scenario where next year could be a record free cash flow year for the.

I mean we put a target there of $8 billion to $12 billion, right? I think the $12 billion is a low probability because we need a $26 billion for that. But that $8 billion doesn't sound crazy. Look at the numbers today. You've -- do the math of the CapEx. And yes, we are not going to force it. I said it, I think, in the previous conference. It's not -- you should be 8 next year, but is there a good probability? Of course, there is. Now I assume there's going to be some more growth in the market. That thing can change every quarter. I've given up on trying to call the shape of the recovery. We're just going to report how it went every quarter. But I think this market is still trending below trend line. There is a good chance. And you've heard some of the peers today. I don't know what they said, but there is a good chance for this market to continue to recover and establish new highs. So we'll see.

Great. Well, we've run out of time. Thank you, Haviv.

Thank you.

Welcome to the Texas Instruments Third Quarter 2025 Earnings Conference Call. I'm Mike Beckman, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Haviv Ilan; and our Chief Financial Officer, Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir.

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.

You likely saw last week, we announced that the Board of Directors has elected Haviv Ilan, Chairman of the Board, beginning January 2026. Haviv succeeds Rich Templeton, who will retire as Chairman after a 45-year career with TI. I'm sure you will join me in congratulating them both.

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. Lastly, Rafael will cover the financial results, give an update on capital management as well as share the guidance for fourth quarter 2025.

With that, let me turn it over to Haviv.

Thanks, Mike. I'll start with a quick overview of the third quarter. Revenue came in about as expected at $4.7 billion, an increase of 7% sequentially and an increase of 14% year-over-year. Analog and Embedded both grew year-on-year and sequentially. Analog revenue grew 16% year-over-year and Embedded Processing grew 9%. Our Other segment grew 11% from the year-ago quarter.

Let me provide a few comments about the current market environment. The overall semiconductor market recovery is continuing, though, at a slower pace than prior upturns, likely related to the broader macroeconomic dynamics and overall uncertainty. That said, customer inventories remain at low levels and their inventory depletion appears to be behind us. We are well positioned with capacity and inventory and have flexibility to support a range of scenarios.

Now I'll share some additional insights into third quarter revenue by end market. First, the industrial market increased about 25% year-on-year and was up low single digits sequentially following a strong result in the second quarter. The automotive market increased upper single digits year-on-year and around 10% sequentially with growth across all regions. Personal electronics grew low single digits year-on-year and grew upper single digits sequentially. Enterprise systems grew about 35% year-on-year and grew about 20% sequentially. And lastly, communications equipment grew about 45% year-on-year and was up about 10% sequentially.

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

Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, third quarter revenue was $4.7 billion. Gross profit in the quarter was $2.7 billion or 57% of revenue. Sequentially, gross profit margin decreased 50 basis points.

Operating expenses in the quarter were $975 million, up 6% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.9 billion or 23% of revenue. Operating profit was $1.7 billion in the quarter or 35% of revenue and was up 7% from the year-ago quarter.

Net income in the quarter was $1.4 billion or $1.48 per share. Earnings per share included a $0.10 reduction, not in our original guidance. This includes $0.08 of restructuring charges related to efforts to drive operational efficiencies to support our long-term strategy, including the planned closures of our last 250-millimeter fabs.

Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.2 billion in the quarter and $6.9 billion on a trailing 12-month basis. Capital expenditures were $1.2 billion in the quarter and $4.8 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $2.4 billion. This includes $637 million of CHIPS Act incentives, including a $75 million payment received in the third quarter related to the direct funding agreement.

In the quarter, we paid $1.2 billion in dividends and repurchased $119 million of our stock. In September, we announced we would increase our dividend by 4%, marking our 22nd consecutive year of dividend increases. This reflects our continued commitment to return free cash flow to our owners over time. In total, we returned $6.6 billion to our owners in the past 12 months.

Our balance sheet remains strong with $5.2 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding is $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.8 billion, up $17 million from the prior quarter. And days were 215, down 16 days sequentially. We have executed well on building an inventory position, which we believe will allow us to consistently deliver high levels of customer service.

Turning to our outlook for the fourth quarter. We expect TI's revenue in the range of $4.22 billion to $4.58 billion, and earnings per share to be in the range of $1.13 to $1.39. Our fourth quarter outlook includes changes related to the new U.S. tax legislation and now assumes an effective tax rate of about 13%. In addition, we expect our effective tax rate in 2026 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 and 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, Rafael. Operator, you can now open the line for questions. [Operator Instructions] Operator?

[Operator Instructions] Our first question comes from the line of Timothy Arcuri with UBS.

Haviv, I'm wondering if you can talk about the linearity of bookings through the quarter. I know in the June quarter, things had softened throughout the quarter. But this quarter, it seemed like things got a little better as you moved through the quarter. So can you talk about that as you sort of head into C Q4?

Yes, I'll give some high-level comments, and Mike, please add anything with more details. Yes, this quarter was -- kind of came in as expected and not similar to what we saw in Q2. It was a little bit hectic with the tensions related to trade and tariffs, we saw a lot of change through the quarter. This was more of as expected quarters -- through the quarter in July, August and September. And Mike, anything to add on that one?

We had talked about the turns portion of the business had kind of started out strong at the beginning of second and had moderated near the end. We didn't see that same behavior again. And third, it really -- that portion kind of followed what you'd expect to see in a kind of a cyclical recovery that we saw in third. Do you have a follow-up?

I do. Yes. Rafael, I wanted to ask about loadings that are assumed in the fourth quarter. I know you're usually coming at the high end, but if we assume the midpoint of the guidance, and I assume that depreciation grows like it has the past few quarters. Gross margin, if I exclude the depreciation, so on a cash basis, it's down like sub 67%. So it hasn't been that low in like 10 years. And you are already sitting on a lot of inventory. I don't think you want to build more.

So sort of what's the path to get cash margins on a better path here? I mean, it's below where it was 7 to 8 quarters ago when revenue was $600 million to $700 million lower than where it is today?

Yes. Let me try to answer that. There were several questions there, so let me see if I can hit most of them. First, your question is maybe fundamentally on inventory. So let me start there. We're very pleased with our current inventory position. That -- objective for inventory is to support customers, to keep lead times short and have just great customer delivery, customer satisfaction. So that we are achieving, and we're pleased with where the inventory is.

Now given our revenue -- the midpoint of our revenue in order to continue to maintain those levels of inventory and where we want to be on inventory. We're adjusting the loadings down into fourth quarter. We did some of that in third quarter, and we're going to do some more in the fourth quarter. So as we do that, and as you pointed out, when you look at fourth quarter, you have lower revenue, you have higher depreciation. You have the hit on the lower loadings. So that's how you get to the EPS range that we have listed.

Our next question comes from the line of Chris Danely with Citibank.

Can you just talk a little bit more about the restructuring? Maybe what was the catalyst for it? And then any benefits to expenses, either gross margins or OpEx going forward?

Chris, high level, it's related to actually two things. First, I think we announced several years back that we are winding down our 6-inch fabs or 150-millimeter fabs. We have one in Sherman, the old site -- the old fabs in the site and one in Dallas. Both of them have actually started the last wafer this month. And we will see a gradual reduction in cost related to these two factories through, I think, the first half of '26. We are just taking the hit on the restructuring costs in Q3 as we had predictability, and the amount was clear to us in terms of the size of it.

Regarding the other part of it, this is an ongoing work that we are doing. We always look at efficiency gains. We had some areas where we felt that our R&D machine is not generating the returns that we would expect on the long term, and we decided to consolidate some sites. That is also going to take place in the next couple of quarters for the company.

Do you have a follow-up, Chris?

And Rafael, is there anything that -- just on the OpEx side that you want to mention, Rafael on the...

I would just say, tactically for fourth quarter, I expect OpEx to be about flat to third quarter, and that's, as Haviv alluded to the benefits from the restructuring, they don't all come in immediately. So it just takes a little while for that to happen, and there will be benefits in both COR and well as OpEx.

Do you have a follow-up, Chris?

Yes. I think you guys said industrial was up low single digits sequentially and auto was up, I think it was high singles or something like that sequentially. That sounds like a bit of a change from what you said last quarter and intra-quarter, is that true? And then why do you think industrial is slowing down and auto is a little better than expected?

Let me take -- first, Chris, as you remember, we only guide for the -- at the company level, we don't guide by market. We did say, I think on the industrial side that we had a very strong Q2, so kind of indicated that we assume Q3 will taper off, right? And actually, to me, that low single-digit growth sequentially was good. I'm pleased with the result. Remember, a very strong growth in the second quarter.

On the automotive side, I would say, look, automotive was kind of sequentially up and down and up and down, but all in a very similar level, right? The recovery in automotive, at least for TI, was very -- the trough was shallow, and now it's kind of back to where it used to be. So I would not read too much into it. It came in more or less as expected. And I think, Mike, it grew across the regions in automotive?

It did. Yes. It grew sequentially across all the regions.

So no surprises there, Chris, from our perspective, at least.

Yes. And I'd just add with industrial, a second-to-third transition, usually actually down. If you look across the averages over history, it's actually down a little bit. So -- and up low single digit is actually not an unusual result if you're in a recovery.

Our next question comes from the line of Joe Moore with Morgan Stanley.

Great. I guess I continue to get a lot of questions about pricing for you guys. Anything unusual happening there? I think you alluded to kind of an ongoing learning curve kind of price declines. But anything happening where any markets are sort of different on the pricing side?

Short answer is no. And again, for the year, I think our assumption coming into the year was kind of a low single-digit decline like-for-like on the pricing side and I think that's how we are trending year-to-date. So I expect the year to end at the low single-digit price reduction in 2025.

Do you have a follow-up, Joe?

Yes. And just your -- any comment on lead times? Are you still in the range that you've talked about? Any areas where lead times are getting longer?

I'd say across the portfolio, very consistent with what it was in the quarter prior. So not much of a change in that. And our lead times right now are competitive. We worked very hard to make sure that our inventory position would allow us to do that. And we're happy with the lead time position that we have. So yes, not a lot of change on a sequential basis.