Texas Instruments Incorporated (TXN) | The Buildout — AI Infrastructure

The Verdict

Texas Instruments makes the analog and embedded chips that sit inside other companies' equipment. Analog chips condition, amplify and convert real-world signals and manage power; embedded chips are the digital brains that handle specific tasks. In AI infrastructure that work shows up in the data-center power tree — every voltage conversion stage between the grid and a processor is a place analog and embedded silicon is needed, and management describes TI as able to fill almost every analog socket on a rack. It does not make AI compute chips, and it does not break out how much of its revenue comes from data centers. Its role is a supplier to the build-out, not a driver of it.

Earnings Beat

Q2 2026 revenue was $5.46B, up 13% sequentially and 23% year-on-year, above the guided range. Gross margin was 61.4%, up 340 bps sequentially, and operating margin was 42% of revenue on operating profit up 48% year-on-year. EPS was $2.14, including a $0.05 discrete tax benefit that was not in the original guidance. Analog grew 26% year-on-year and Embedded Processing 16%, while the Other segment fell 2%.

Management tone: Management's tone shifted toward greater confidence on demand breadth between the April and July 2026 calls. On automotive they moved from "It's too soon to call it" to "I think we are in the start of a cycle that is very, very broad," and on pricing from saying increases were likely and case-by-case to "We have started executing price increases, yes." They kept a balanced risk frame, volunteering the 2025 "head-fake" caveat and the fact that Q3's pricing contribution is "almost insignificant," and they declined to quantify the data-center growth rate.

Management Guidance

For Q3 2026 management guided the revenue range above and EPS of $2.23–$2.57, with an effective tax rate of about 13%. It said operating expenses, net other income and expense, and acquisition charges should all be flat from Q2 to Q3, and gave a gross-margin fall-through placeholder of 70%–85% excluding depreciation. The 2026 capital expenditure plan is $2B–$3B with a bias toward the higher end of the midpoint, and 2026 depreciation is $2.2B–$2.4B. The free cash flow framework of $8–9B at $20B of revenue and $9–10B at $22B was reaffirmed, and management reiterated acquisition charges of about $17M per quarter until the Silicon Labs deal closes.

Trajectory

Revenue is accelerating on the quarterly series: $4,742M in Q3 FY2025, $4,423M in Q4 FY2025, $4,825M in Q1 FY2026 and $5,463M in Q2 FY2026, with the last two quarters up 9.1% and 13.2% sequentially. Gross margin moved from 58.0% to 61.4% over those two quarters. Margins are still below the 70.2% gross margin the company posted in Q1 FY2022; depreciation is the stated drag, guided to $2.2–2.4B in 2026 with continued upward pressure in 2027. Free cash flow, which was negative in Q1 FY2024 and Q1 FY2025, reached $2,189M in Q2 FY2026.

The Model

The model projects FY+1 revenue of $22,188M with EBITDA of $11,693M, a 52.7% margin, and FY+2 revenue of $25,300M with EBITDA of $13,788M, a 54.5% margin. The near term is anchored on the Q3 2026 revenue guide and on the breadth management described for Q2 — industrial, data center and automotive growing at the same time. FY+2 depends on whether data-center application-specific design-ins move from design-in to revenue, whether the 800V power transition adds conversion stages and content, and whether pricing holds above its historical annual decline.

Projections are the median of 5 independent model runs. The model’s revenue sits 10.3% above analyst consensus.

For Q3 2026 management guided the revenue range above and EPS of $2.23–$2.57, with an effective tax rate of about 13%. It said operating expenses, net other income and expense, and acquisition charges should all be flat from Q2 to Q3, and gave a gross-margin fall-through placeholder of 70%–85% excluding depreciation. The 2026 capital expenditure plan is $2B–$3B with a bias toward the higher end of the midpoint, and 2026 depreciation is $2.2B–$2.4B. The free cash flow framework of $8–9B at $20B of revenue and $9–10B at $22B was reaffirmed, and management reiterated acquisition charges of about $17M per quarter until the Silicon Labs deal closes.

What Could Go Right — and Wrong

Looking Ahead

The next twelve months turn on three things the source sets up: whether the above-seasonal Q3 2026 guide is met with durable demand, whether pricing builds from an "almost insignificant" Q3 contribution into the Q4 annual discussions and 2027, and whether data-center application-specific design-ins convert to revenue in the second half of 2026 and into 2027. Also on the calendar: the Lehi 2 shell at the end of 2026, a capital management call in February 2027 for 2027 capital expenditure and capacity beyond three years, the Silicon Labs close targeted for H1 2027, and GE Appliances production starting in 2027.

Financials

Annual Summary

Key Ratios (Trailing)

The Company

Texas Instruments designs and manufactures semiconductors that it sells to electronics designers and manufacturers worldwide, reporting in two segments: Analog and Embedded Processing. Analog changes real-world signals — sound, temperature, pressure, light — by conditioning, amplifying and often converting them to digital, and manages power in equipment by converting, distributing, storing, discharging, isolating and measuring energy. Embedded Processing supplies the digital brains of many equipment types through microcontrollers, processors, wireless connectivity and radar. In AI infrastructure the disclosed link is the data-center power tree: TI sells power conversion and management chips, multiphase power delivery for high-performance compute, GaN power devices and general-purpose catalog analog into server racks. Management does not use the word "AI" on either call in the source set, and the company does not report data-center revenue as a share of the total.

The company manufactures at scale on 300mm wafers, runs internal assembly and test, and sells direct to market rather than through distribution — which management says gives it real-time demand and pricing visibility. Named sites in the FY2025 10-K plant table include North Texas (Dallas, Richardson, Sherman), Santa Clara (leased), Kuala Lumpur (portions leased), Aguascalientes (leased), and Baguio and Pampanga (Clark) in the Philippines (portions leased). Management says the heavy clean-room phase is behind it — "we are good for the next 3 years" — so growth comes from installing equipment rather than building new shells, with a long-term rule of thumb of capital expenditure at about 1.2x the growth rate. In 2025 the company generated $17.68B of revenue.

Business Segments

Competitive Landscape

TI competes across a long tail of analog and embedded sockets with Analog Devices, Microchip, NXP, ON, Infineon, Renesas, STMicro and others. In data-center power, the fastest-growing part of its market, specialized suppliers are growing faster off smaller bases: Monolithic Power raised its full-year enterprise-data growth floor from 85% to 130%, and ON expects its AI data-center business to more than double in 2026. On its own call, Monolithic Power named TI and Analog Devices as its competitive set in optical-transceiver power and claimed power-density leadership there. TI itself declined to quantify its data-center growth rate, saying only that its objective is to outgrow the market.

Supply Chain

TI supplies the analog and embedded chips that manage power and signals inside other companies' data-center racks. Most relationships in the supply-chain map are inferred rather than documented; UMC is the exception, listing TI among its primary customers.