TXN — Q3 2026 Financial Report Analysis

Revenue up 28%, profit up 78%: the factories are now full enough to pay off

Texas Instruments, the largest maker of analog chips (the parts that manage power and convert real-world signals like temperature, sound and motion into data), reported third-quarter 2026 revenue of $6.055 billion. That is 27.7% more than a year earlier and 10.8% more than the second quarter. Net income rose 77.8% to $2.425 billion, and diluted earnings per share rose 77.0% to $2.62. CEO Haviv Ilan attributed the quarter to "continued broad growth in industrial, automotive and data center."

This analysis is based on TI's earnings release, filed with the SEC on October 21, 2026. The full quarterly report (10-Q) is not filed yet, so the regional revenue split and management's detailed discussion of results are not available here.

The numbers

Gross margin is the share of revenue left after the direct cost of making the chips. Operating margin is what's left after research and selling costs as well, but before interest and tax. "YoY" means compared with the same quarter a year earlier.

Why profit grew almost three times as fast as sales

TI makes most of its chips in its own factories, so a large part of its costs (equipment depreciation, staff, buildings) is fixed. When more chips go through the same factories, each one carries a smaller share of that fixed cost. This quarter shows the effect clearly:

• Revenue rose $1.313 billion from a year ago, but cost of revenue rose only $149 million (+7.4%, to $2.168 billion). That is despite depreciation (the yearly accounting charge for wear on factory equipment) rising 11.7% to $555 million as new 300mm fabs came into service. Gross profit therefore rose $1.164 billion, which means 88.7% of the extra revenue became gross profit.
• Compared with Q2 the pattern holds: revenue rose $592 million and gross profit rose $535 million, a 90% drop-through.
• Operating costs barely moved. Research and development was $530 million (+2.3%) and selling and administrative costs were $476 million (+4.2%). Together they took 16.6% of revenue, down from 20.6% a year ago and slightly lower in dollars than Q2's $1.025 billion.

The two changes added up to an operating margin of 47.5%, up 5.2 points from Q2's 42.3% in a single quarter.

Segments: analog leads, embedded catches up on margin

Analog is 81% of revenue and grew fastest: up 32% from a year ago and 12.5% from Q2's $4.365 billion. Its operating margin passed 50% for the quarter. Embedded Processing grew more slowly (up 21% from a year ago, 8.9% from Q2) but more than doubled its operating profit, from $108 million to $227 million. In our Q2 report we noted TI's 10-Q explanation for this: the Lehi, Utah fab "primarily supports our Embedded Processing business," so as that factory fills up, Embedded's costs are spread over more output. The margin moved from 21.3% in Q2 to 26.5% in Q3, so that loading effect is still under way.

The "Other" line's profit is not comparable year over year (n/m). It carries company-wide one-off charges: $85 million of restructuring a year ago, and $7 million of acquisition charges this quarter.

What the headline numbers hide

The quarter is mostly clean. The items that matter:

• The year-ago base was depressed by a one-off. Q3 2025 included $85 million of restructuring charges. Without them, last year's operating profit would have been about $1.748 billion (a 36.9% margin), and operating profit growth would be about 64% instead of 73%. On our rough after-tax estimate (about $73 million, or 8 cents a share), underlying EPS growth is closer to 68% than 77%. That is still exceptional, but smaller than the headline.
• Taxes and share count did not do the work this time. Pre-tax income rose 77.1% and net income 77.8%, so the tax line added less than a point. The discrete tax benefit (one-time items, mostly tied to stock compensation) was only $10 million, against $29 million a year ago and $51 million in Q2. Diluted shares rose 0.8% to 921 million, so buybacks did not lift EPS either. TI says EPS "included a 1-cent reduction that was not in the company's original guidance," but the release does not say what caused it.
• Cash conversion was strong, with a timing effect. Cash from operations of $3.419 billion was 141% of net income. Part of that is ordinary for a chipmaker, since $555 million of depreciation is a non-cash charge. Another $319 million came from income taxes that were recorded but not yet paid, which reverses when the tax is paid. A further $79 million is a US CHIPS Act investment tax credit used to reduce taxes owed.
• The 249% free cash flow growth figure includes government money. TI's trailing-12-month free cash flow of $8.422 billion (vs $2.415 billion) adds back $1.104 billion of CHIPS Act grant proceeds by definition. Without them, the figure is $7.318 billion against $2.080 billion. That is still a large improvement, driven by capex falling from $4.817 billion to $2.578 billion and operating cash flow rising 43%. In Q3 itself there were no CHIPS proceeds, so the quarter's $2.956 billion is clean.
• Working capital looks healthy. Receivables of $2.620 billion rose 27.1% from a year ago, in line with revenue (+27.7%), so sales are not being pulled forward on easy credit terms. Inventory was $4.672 billion, down 3.3% from a year ago and up $67 million from Q2. That works out to about 197 days of production cost. Finished goods (chips ready to ship) fell to $1.693 billion from $1.938 billion a year ago. TI deliberately holds a large inventory, but the stock of unsold product is shrinking while sales rise.

Did last time's read hold up?

Our Q2 report took a cautious line. It said TI's Q3 guidance implied year-over-year growth roughly halving to about 15%. It warned that rising depreciation from new fabs would require continued volume growth to keep gross margin rising. It called Q2's 42.3% operating margin "closer to the favorable end of that cycle than the middle of it."

That was too cautious. Growth sped up to 28% instead of slowing, revenue landed in the top half of the guidance range, and EPS of $2.62 beat the $2.57 top of the EPS guidance. Volume growth did outrun depreciation: depreciation rose 11.7%, but gross margin still widened 6.8 points to 64.2%. The other two things we flagged did play out as described. The tax benefit that inflated Q2 shrank, and Embedded Processing's margin kept rising as its fab loaded up.

Takeaway: TI is getting nearly 90 cents of gross profit from each additional dollar of sales, and Q4 guidance assumes revenue holds at this level. That combination implies the factories are running well above where they were a year ago. The flip side has not changed: with depreciation still rising, any revenue decline would hit margins just as quickly as this quarter's growth lifted them.

Balance sheet, cash returns and the pending acquisition

Cash plus short-term investments reached $8.142 billion, up from $7.00 billion at the end of Q2 and $5.186 billion a year ago. Total debt was $13.555 billion after a $500 million repayment during the quarter. TI paid $1.298 billion in dividends, with the quarterly dividend at $1.42 per share (up 4.4% from $1.36). It bought back only $48 million of stock, against $119 million a year ago. Over 12 months, buybacks fell 61% to $636 million while dividends rose 5%.

Our Q2 report linked the near-halt in buybacks to TI's pending cash acquisition of Silicon Labs, announced in February 2026 and described in the Q2 10-Q as expected to close in the first half of 2027. This release does not discuss the deal. The $7 million of acquisition charges and the build-up of cash are consistent with saving cash for it.

Nine-month capital spending is $1.653 billion ($1.190 billion in the first half plus $463 million in Q3). At the time of the Q2 10-Q, TI expected $2–3 billion for full-year 2026, so it is on track for the lower part of that range.

Outlook

TI guided fourth-quarter revenue to $5.80–6.30 billion and EPS to $2.45–2.79. The $6.05 billion midpoint is flat with Q3, and the $2.62 EPS midpoint equals Q3's EPS. A year ago, Q4 2025 revenue was about $4.42 billion. We derived that figure from the release's $20.766 billion trailing-12-month revenue minus Q3, Q2 and Q1 2026. On that basis the midpoint implies about 37% year-over-year growth, against a weak comparison.

Holding revenue flat is notable because TI's own filings describe Q2 and Q3 as its seasonally stronger quarters. Normally Q4 steps down. Guiding flat suggests that order demand in industrial, automotive and data center chips is offsetting the usual seasonal dip.

Our view: the remaining profit driver from here is mainly volume, not cost. Operating costs are already only about 17% of sales, capital spending is near its low point, and gross margin is already above 64%. Further big margin jumps would need revenue to keep climbing. Over the next two reports, watch three things: whether Q4 actually holds near $6 billion; whether inventory starts building faster than sales (which would mean factories are running ahead of demand); and how much cash and debt TI commits when Silicon Labs closes. The 10-Q, due within days, should also show whether China and other regions grew as broadly as they did in Q2.