Texas Instruments - Earnings Call - Q2 2025

Executive Summary

• Q2 revenue $4.45B and EPS $1.41, both above consensus; revenue +9% q/q and +16% y/y, driven by a broad industrial recovery, while auto declined slightly q/q but grew y/y.
• Gross margin expanded 110 bps q/q to ~58% and operating margin reached ~35%; management guided Q3 revenue to $4.45–$4.80B and EPS $1.36–$1.60, implying flattish GM% given higher depreciation.
• Tone turned more cautious vs Q1 as management flagged tariff/geopolitical noise and potential Q2 “pull-ins,” especially in China; still sees cyclical recovery progressing with four of five end markets improving.
• Cash generation remained strong: TTM CFO $6.44B and FCF $1.76B; TI returned $6.71B to owners over TTM; Q3 dividend maintained at $1.36 per share.
• Strategic U.S. manufacturing build-out continues (Sherman, Richardson, Lehi), positioning TI for geopolitically dependable, low-cost 300mm capacity; management expects cash tax rates to be significantly lower for several years due to new U.S. tax law.

What Went Well and What Went Wrong

What Went Well

• Industrial revenue “upper teens” y/y and “mid-teens” q/q with broad-based recovery across sectors; China industrial led growth, contributing to overall sequential strength.
• Enterprise systems grew ~40% y/y (about 10% q/q), with data center demand strong; management highlighted >50% growth and new SiGe-based capabilities ramping in Sherman.
• Gross margin increased 110 bps q/q to ~58%, aided by higher revenue and mix, despite rising depreciation; operating margin reached ~35%.

What Went Wrong

• Automotive was down low single digits q/q and only mid-single digits y/y growth, with recovery described as “shallow,” consistent across U.S., Europe, and China.
• Management described Q2 as “noisy,” attributing part of strength to tariff-related inventory “pull-ins” in early quarter, normalizing later; hence more conservative Q3 guide relative to Q2 beat.
• Net of OI&E and interest expected to be ~$20M unfavorable in Q3 as cash levels declined and interest expense rose, tempering EPS fall-through despite revenue growth.

Transcript

Speaker 3

Welcome to the Texas Instruments second 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. 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 of what we are seeing with respect to our end markets. Lastly, Rafael will cover financial results, give an update on capital management, as well as share the guidance for third quarter 2025. With that, let me turn it over to Haviv.

Speaker 0

Thanks, Mike. Let me start with a quick overview of the second quarter. Revenue came in about as expected at $4.4 billion, an increase of 9% sequentially, and an increase of 16% year over year. Both Analog and Embedded grew year-on-year and sequentially. Analog revenue grew 18% year over year, and Embedded Processing grew 10%. Our other segment grew 14% from the year-ago quarter. Let me provide some comments on the current environment and what we saw in the second quarter. We continue to see two distinct dynamics at play. First, tariffs and geopolitics are disrupting and reshaping global supply chains. As we work closely with our customers, we are leveraging our global manufacturing capabilities to support their needs. We have flexibility and are prepared to navigate as things evolve. Second, the semiconductor cycle is playing out. Cyclical recovery is continuing while customer inventories remain at low levels.

In times like this, it is important to have capacity and inventory, and we are well positioned. Now, I'll share some additional insights into second quarter revenue by end market. First, the industrial market increased upper teens year-on-year and mid-teens sequentially, with recovery across all sectors. The automotive market increased mid-single digits year-on-year and decreased low single digits sequentially. Personal electronics grew around 25% year-on-year and grew upper single digits sequentially. Enterprise systems grew about 40% year-on-year and grew about 10% sequentially. Lastly, communications equipment grew more than 50% year-on-year and was up about 10% sequentially. With that, let me turn it over to Rafael to review profitability and capital management.

Speaker 1

Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, second quarter revenue was $4.4 billion. Gross profit in the quarter was $2.6 billion, or 58% of revenue. Sequentially, gross profit margin increased 110 basis points. Operating expenses in the quarter were $1 billion, up 5% 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 $1.6 billion in the quarter, or 35% of revenue, and was up 25% from the year-ago quarter. Net income in the quarter was $1.3 billion, or $1.41 per share. Earnings per share included a 2-cent benefit not in our original guidance. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.9 billion in the quarter and $6.4 billion on a trailing 12-month basis.

Capital expenditures were $1.3 billion in the quarter and $4.9 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.8 billion. In the quarter, we paid $1.2 billion in dividends and repurchased $302 million of our stock. In total, we returned $6.7 billion to our owners in the past 12 months. Our balance sheet remained strong with $5.4 billion of cash and short-term investments at the end of the second quarter. In the quarter, we issued $1.2 billion of debt. Total debt outstanding is $14.15 billion, with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.8 billion, up $125 million from the prior quarter, and days were 231, down 9 days sequentially. Turning to our outlook for the third quarter, we expect TI's revenue in the range of $4.45-$4.80 billion.

And earnings per share to be in the range of $1.36-$1.60. Our earnings per share outlook does not include changes related to recently enacted U.S. tax legislation and assumes an effective tax rate of about 12%-13%. In closing, as we transition into the second half of 2025 and going into 2026, we're prepared for a range of scenarios. We are and will remain flexible to navigate, especially in the immediate term. 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.

Speaker 3

Thanks, Rafael. 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?

Speaker 4

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.

Hi, guys. Thanks for taking my questions. First, if I think how your tone sounded last quarter, and frankly, even how you sounded kind of mid-quarter, you seemed really confident that the cyclical recovery was here and we were kind of off to the races. Now I'm hearing you kind of saying you're staying flexible to go after a range of scenarios. Even in the quarter, auto was down sequentially. I guess, what's going on? How is your, I guess, outlook and feeling about where things are? How has that changed over the last three months? Because you sound, I guess, just based on tone and everything else, it doesn't sound maybe quite as exuberant as maybe you sounded a few months ago. What's going on?

Speaker 0

Hey, Stacy. I'll take this one. First, as I said in my prepared remarks, we are seeing two dynamics at play, and one of them is the cyclical recovery. I think we talked through it in the second quarter call back in April. The discussion was all about industrial is joining the pack. We are now one more quarter in, and this is the third quarter that we see a signal of industrial recovering. It's actually accelerated. I can say we support five markets. We now have, it started with PE, then enterprise and comms joined, and industrial is already in. We have four out of five markets recovering in a nice pace. This is part of the reason we've added commentary on year-over-year performance to just show the dynamics over there.

In terms of automotive, to your question, look, automotive, let's just remember that it's kind of a year delayed versus industrial, right? Industrial peaked, for us at least, in the third quarter of 2022. Automotive peaked one year later in the third quarter of 2023. One could expect automotive to be joining last. The automotive recovery has been shallow, meaning we are running single digits versus the peak. We are running year-over-year. We are actually having some growth in the second quarter from a year-over-year perspective, but at a very low level. I will say that automotive has not recovered yet. Because of content growth, I think the cycle here is going to be less pronounced and more shallow. The second point related to getting ready, look, we had some taste of it in the beginning of the second quarter, and we talked through it a lot during the call.

I think all this situation of tariffs and geopolitics disrupting supply chains, I think that's not over, right? It's true that there is pause right now on the semiconductor tariffs, both in the U.S. and in China. We have to be prepared for what the future may hold. We want to make sure, and this is also the message to our customers, that we'll remain flexible and we'll know how to support our customers whatever the environment is moving forward.

Speaker 3

Do you have a follow-up, Stacy?

I do, thanks. Maybe just a follow-up. Actually, I think I want to ask about gross margins. We'll go there. If I just back into the guidance for next quarter, it seems like you're guiding gross margins probably down sequentially implicitly on revenue growth. I guess, is that the case? What is that? Is that just depreciation? I know depreciation went up in the quarter. Is it just depreciation going up further, or is something else going on on the gross margin line or what?

Yeah, Stacy, so I'll take that. To help you and everyone with their models, where you should be landing given our guidance is GPM % about flat despite the higher depreciation that we're going to have going into third quarter. OpEx about flat. What you're probably missing is the net of other income and expense and interest expense. That's going to be unfavorable, about $20 million as we have lower cash levels, interest is lower, while debt interest expense has continued to increase. That's the part that's probably missing to round out your model. All right. Thanks, Stacy.

That's helpful. Thank you.

Move on to our next caller.

Thank you. Our next question comes from the line of Harlan Suhr with JP Morgan. Please proceed with your question.

Hey, good afternoon. Thanks for taking my question. One of the signs of cyclical recovery is improvement in your turns business. Did the team see turns business grow sequentially in Q2, both in dollars and % of revenues, and was it broad-based across both your industrial and auto businesses?

Speaker 0

Yeah, let me start, and maybe Mike, you can comment right after. I think, yeah, from a turns perspective, we see a continuation of that dynamic. We saw again acceleration in the second quarter. We continue to invest in our inventory. Our lead times are at the lowest level. Customer inventories are very low. We've seen that continuing. Mike, maybe you want to provide some more color here?

Speaker 3

Yeah, I think we've talked about in previous quarters. That's something that late last year and in the first quarter began to build. We continue to see that into the second quarter as well.

Perfect. For my follow-up question, good to see the continued sequential and year-over-year recovery in the industrial segment. It is quite diverse, right? Ten subsegments, but the largest subsegment, industrial automation, which is tied to manufacturing activity, is pretty sensitive to trade and tariffs. Just wondering if this segment is relatively weaker due to tariff concerns, or are you seeing shipment and order recovery here as well, especially among your China-based industrial customers?

Yeah, maybe I'll take that one. What we actually saw in industrial was recovery was broad, and it was across all sectors. I'd say that, yeah, it's a continuation of the recovery we saw in first quarter. That's where we are. I'll move on to the next caller. Thank you.

Thank you. Our next question comes from the line of Raj Seymour with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for letting me ask a question. Kind of going back to the first question, just kind of the tone, and it seems like a little bit of a tone change on our side, maybe not so much to you, but maybe I'll try to ask it a different way. You highlighted the uncertainties about the tariff side of things, but then endorsed the cycle was coming. Last quarter, you guided significantly above normal seasonality. You seemed to lean in on the cycle side and didn't really say that tariffs were doing much. Did something change on either the strength of the cycle or the uncertainty around the tariff to lead you to guide to more of a typical seasonal quarter for 3Q?

Speaker 0

Yeah, let me put some more color into it, Rod. I think it's a great question. Remember, when we met here in April, we dealt with reciprocal tariffs on both sides. The U.S. was exempting semis, but China had a 125% tariff rate on semis during the call, right? Just a different situation versus where we are now. Now tariffs are put on hold. A little bit of a different environment. I will say that. I think I mentioned it also during the last call. When there is a change of dynamics, like tariffs are being added, and I go back to April, customers are sitting on very low inventories. I think it's a good assumption to make that customers will want to have a little bit more inventory. We did see that phenomenon.

We did see that in the early part of the quarter, there was an acceleration of demand. As expected, when customers are sitting on no inventories and there is a lot of noise around tariffs, that has normalized through the quarter. We are kind of back to right now what drives our day-to-day is just a cyclical recovery. Now, as we forecast into Q3 and given the fact that we have a lot of real-time turns business that we have to kind of assess for the future, I think it's prudent to have a little bit of, or to remember that what we saw in Q2 is probably a combination of customers wanting to have a little bit more inventory because of tariffs and also the cyclical recovery. When customers make orders, they do not tell us why they want more parts.

I would assume that some of it was for building a little bit of inventory on their shelves to protect themselves from tariffs, if you will. That is my assumption. Again, I do not know how the third quarter will play out. That is part of the way we are forecasting Q3.

Speaker 3

Ross, do you have a follow-up?

I do. Switching over to Rafael, just kind of on the Capex side of things. How should we think, or is there any update on the Capex and depreciation framework that you've given us for the annual numbers for this year and next year, especially given where you are in phase two, maybe going to phase three on the Capex side? Just wanted to see if there's any incremental color there.

Yeah, no, happy to do that. The bottom line, there's no change, but let me go through those so that everybody has those. On Capex, for this year, 2025, we continue to expect to spend $5 billion. For 2026, it's going to be between $2 billion and $5 billion, depending on revenue and growth expectations at that time. We will update you on narrowing that Capex window most likely later this year. Okay? On depreciation, switching to depreciation, for 2025, we continue to expect $1.8 billion-$2 billion. For 2026, we continue to expect $2.3 billion-$2.7 billion and likely to be at the lower side of that range. Okay. We'll move on to our next caller.

Thank you.

Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question.

Thanks for doing my question. Haviv, sorry to go back to this tone change, because it's not just from the last earnings call. It's at the end of a conference at the end of May, I think you had suggested that every remaining quarter of 2025 will accelerate from the first half up 13%, but your Q3 sales gap is up only 11%. So my question is that versus that reference point, which end market has softened? Is it that the industrial normalization is done? Is it that auto right was a little weaker? Or is that just extra conservatism on TI's part? Because the tone change is, as I mentioned, not just from earnings, but from the end of May.

Speaker 0

Yeah, again, I do not control probably tone level, but that is you guys are hearing it.

No, but you quantified it, Haviv. You quantified it. It was not just tone.

Sorry, directly to your question, Vivek, I would say that. In the second quarter, we have seen industrial, in my opinion, running very hot, right? What were the numbers sequentially?

Speaker 3

It was up.

Speaker 0

Mid-teens, I think.

Speaker 3

Upper teens, yeah.

Speaker 0

It grew significantly year over year in the second quarter, close to 20%, right? In that sense, I do believe it ran a little hot. This is where I want to be a little bit more cautious into Q3. We also saw, and I will let Mike comment about geographies, we also saw a little bit of higher pull from China in the second quarter. We will have it in the queue when it comes out, but Mike, maybe you can give a little bit of a China.

Speaker 3

Sure.

Speaker 0

By region, maybe, not only China behavior in Q.Q.

Speaker 3

Sure, yeah. China, it was up about 19% sequentially, grew about 32% year over year. All end markets grew there with the exception of automotive. Auto was pretty consistent with our overall results there. Industrial did lead the growth there in China. Just as a reminder, our China headquarter customers represent about 20% of our overall revenue.

Speaker 0

Vivek, that information gives you a little bit of why I want to be cautious for Q3, right? We have seen China running, again, a little bit hot in Q2. It was not across all markets, meaning on the automotive side, it behaved very similarly to the rest of the world. It was not across the board. We give you the data that it's hard to decipher what exactly or to decouple what was related to "pull-ins" or what was related to cyclical recovery. I think both are happening. That's the data we have right now, and that's what guides our third quarter as we plan for Q3.

Speaker 3

Do you have a follow-up, Vivek?

Yes, thank you, Mike. For my follow-up, given everything we have heard, Viv, I know you typically don't guide the quarter out, but how would you advise us to start thinking about Q4? Should we assume a similar conservative tone and assume something that is usually your seasonality is, I think, down sequentially or flat sequentially? If you could remind us of that in Q4? Given everything we have heard, how should we just conceptually think about the move into Q4? Thank you.

Speaker 0

Vivek, as you know, we are a one-quarter of the time company specifically on guidance. So I will just say, let's let the third quarter play out. Mike, do you want to comment about seasonality?

Speaker 3

Yeah. Historically, second and third are typically stronger quarters. Fourth and first are typically seasonally lower. Yeah, we will have to let third quarter play out before we are going to be ready to talk about fourth. Maybe we will move on to our next caller. Thanks, Vivek.

Thank you, Mike.

Thank you. Our next question comes from the line of CJ Mews with JP Morgan. Please proceed with your question.

Yeah, good afternoon. Thank you for taking the question. I was hoping to revisit gross margins. You indicated flat roughly sequentially. I guess within that, could you speak to your plans for utilization? Are there any sort of changes in mix? If we were to normalize to kind of your more typical 80% kind of fall through, that would be an incremental maybe $25-$27 million. Is kind of the pause in gross margin uplift 100% due to that increase in depreciation, or are there other factors that we should be thinking about?

Speaker 0

Yeah, no, just to give you a few more. Information there, as I said earlier and you restated, we expect third quarter gross margin to be about flat to second quarter. That is with higher revenue, but also higher depreciation. In terms of loadings and inventory, we expect to run loadings about the same in third quarter as we did in second quarter, as we are well positioned with inventory to support a wide range of cyclical recovery scenarios. Inventory, I expect to grow, but at a slower rate than the growth we just had in second quarter. So. Hopefully that gives you—and then on the fall through, we guide 75-85%. That is over the long term. That is over year to year, not any one quarter.

We should be close to that fall through. We will speak more about that when we have actuals and we will have better information to provide. You should continue to think of 75-85% as a good number to use over the long term.

Speaker 3

CJ, do you have a follow-up?

I do, thank you. With the ICC going from 25% to 35%, I'm curious if you can comment on your thoughts on impact to your net Capex into 2026, 2027, and is there any sort of movement or thought process that we should have around the impact of depreciation? Thanks so much.

Speaker 0

Okay, no, thanks for that question. Let's talk about that legislation that just passed. First, we're very pleased with the changes resulting from the passage of the recently enacted U.S. federal tax law. It includes expenses of U.S. R&D and eligible capital expenditures, an increase to the ITC from 25% to 35%, and changes to other tax provisions such as making FDII permanent. The effects of the new tax law are not reflected in the statement that we just released, in the financials that we just released since the passage of that law happened in July. We are currently evaluating the changes on the legislation we are going to have on future financial statements. That's why in the guide that we gave, we did not incorporate it. We need additional time to do a full evaluation.

However, I would tell you that based on our initial assessment, what we expect, what would likely happen is our GAAP tax rate will increase in third quarter and 2025. However, it will decrease in 2026 and beyond. More importantly, from a cash flow standpoint, we expect significantly lower cash tax rates for the next several years. Again, we're very pleased with that legislation. Let me speak real quickly. You mentioned you asked about CapEx plans specifically. Our CapEx plans remain consistent with what we shared in February and will depend on revenue.

Speaker 3

All right. We'll move on to our next caller.

Thank you. Our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Good afternoon. Thanks for taking my question. Maybe following up on some of the other questions that were asked, could you maybe comment on some of the end markets, whether it be personal electronics or enterprise systems or otherwise, that you think may have gotten a little bit ahead of themselves or maybe run a little bit hotter into Q2, and which ones you think are sort of at risk of reverting a little bit in Q3 and Q4? Thank you.

Speaker 0

Yeah, let me take that. Remember that when we talk about the PE market and also enterprise and CE, they're all kind of running at different phases on their cyclical recovery. It started with really PE, then followed by enterprise and comms, and then industrial joined later. As I mentioned before, the automotive market, again, very shallow cycle, but we haven't seen enough signs of true broad recovery over there. Now, regarding the—if you go back to second quarter, where we saw a little bit, I would say, markets that ran higher than expected was on the industrial. We did expect the cyclical recovery in industrial, but it did grow 15% sequentially, which is a little bit unnatural. When you add on top of it the geography footprint, this is where I have a little bit of more cautiousness.

I wouldn't mark anything else that behaved differently in second quarter, Mike. Would you agree?

Speaker 3

That's the right assessment.

Speaker 0

Yeah, that's a market where we saw a little bit of—I think I wouldn't say anxiety, but customers just preferring to just have more parts. We did see normalization through the quarter. Think about the front end of the quarter was running faster than the second half of the quarter. We think we left the quarter at a normal rate, but it's very hard to assess right now. We keep watching it. That's the market where I want to be more cautious when I think about Q3.

Speaker 3

All right. Do you have a follow-up?

Yes, I do. Thank you. Relative to capital allocation, you mentioned about the cash tax benefits that you expect that will positively impact free cash flow next year and beyond. You reiterated the Capex guidance, but can you maybe kind of speak to the capital return portion of this? Obviously, if free cash flow is better, then what might you do differently or more on buybacks or dividends?

Speaker 0

Yeah, no, that's a good question. It's going to depend. It's going to depend on a number of factors. For instance, right now, we're still in the middle of a high CapEx environment. We'll see how long that lasts. As we said, next year, we do have a range of two to five. That's still, even at the low end, a meaningful amount of CapEx. We need to be ready for that. There are other factors: cash on the balance sheet, the price of the stock, that also plays into our decision. We'll take that all into account. At the end of the day, our objective remains the same when it comes to returning capital to owners, and that is to return all free cash flow through dividends and buybacks.

Speaker 3

All right. Thanks, Jim. Let's move on to our next caller.

Thank you. Our next question comes from the line of Chris Caso with Wolf Research. Please proceed with your question.

Yes, thank you. Good afternoon. The question is about fab loading and what your intentions are as we go through the back end of the year into next year. I guess in light of some of the caution that you expressed, any changes you're making to fab loading. Basically where you want your internal inventories to sit as you exit the year?

Speaker 0

Yeah, I tell you, in an ideal world, what we would want to do—and of course, the world is not ideal, and we'll have to navigate through that—in an ideal world, what we would do is manage the operations so that the loadings are relatively stable, relatively flat over time. What happens during a cyclical upturn, we actually drain some inventory. Then during a cyclical downturn, we actually build some inventory. That is how you get the factories to run effectively constant over that time. Of course, it is not an ideal environment. You never quite know when you are at peak, when you are at trough. We will have to add some guardrails to that to make sure that we maximize the opportunity and maintain flexibility. At a high level, that is how we would like to run the company.

Speaker 3

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

I do, thanks. My follow-up is I could dig into auto a little bit more deeply. It sounds like what you're saying there is auto hasn't really changed but hasn't recovered yet. That's a market where if you've got a few customers that you speak to there, what's their tone right now, given all the macro uncertainty? What are they doing with inventory levels and preparing now? Is it just sort of in a holding pattern right now with regard to auto?

Speaker 0

Yeah, I think that's a good description. In a way. Again, I look at my graph here in front of me. Automotive, again, peaked for us in the third quarter of 2023. In the last, I would say, sixth quarter, a little bit up, a little bit down, but hovering around a certain level of high single digit down versus that number. Think about the automotive customers. Those who ship into the U.S., they have tariffs to deal with. I do not think they want to—I think they are being cautious right now. I think the orders we get are only when they really need it. I do not think there is any inventory replenishment there, not only at the OEMs, but also at the Tier 1 level. Everything is almost real time. We have our lead times so low, and most of our automotive customers are on consignment.

We just get it real time. To your point, we have not seen yet the recovery. Remember, industrial peaked in the third quarter of 2022, and we saw the recovery starting in Q4 of 2024. You can argue that automotive could be maybe a year later if you just keep the same duration. Is it going to be same time in the second half of the year? We will just have to see real time.

Speaker 3

Okay. Chris, thank you for the questions. Let's move on to the next caller.

Thank you. Our next question comes from the line of Joshua Buchalter with TD Cowan. Please proceed with your question.

Speaker 1

Hey, guys. Thank you for taking my question. Maybe following up on Chris's previous one. When you spoke about China, it was clear that auto was sort of the outlier there and was down in line with your broader auto business. I mean, it seems like China auto trends have been positive year to date, including in Q2. It does not sound like there is de-stocking going on. Can you maybe explain what is going on specifically in China auto? Is there any element of share loss happening there, or do you think it is more inventory dynamics? Thank you.

Speaker 0

Yeah, I think it's a good question. I think it's more the latter. Automotive ran very hot last year in China, and there was enough news out there that there was a little bit of a caution coming or guidance, say, slow down. Some of the price wars over there. I think we saw some of the dynamics. I think automotive business in China is doing well. I think from a year-over-year perspective, we grew the automotive business in Q2, but China was ahead of the rest of the market simply because, again, first in, first out. We saw the recovery in China starting in 2024. I think it takes a little bit of a breather right now, but I think it's related to inventory correction on their side.

Speaker 3

I'll just add, if you look across the major regions for us in auto, U.S., Europe, China, they more or less perform pretty similarly on a sequential basis. They weren't vastly one stuck out differently than the others. Now, when you look on a year-on-year, that's where China now is going to be leading.

Speaker 0

I would say China and Asia ahead, and then you go to Europe and Japan behind. Very coherent with what we've seen in other markets.

Speaker 3

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

Speaker 1

Yes, please. Similarly, when you talked about China, it sounds like there was some element of potential pull-ins that were impacting QQ. You guys have talked for a while about having geopolitically dependable supply for the West. Are you seeing that on your customers outside of China at all? Have they changed their behaviors? When should we expect sort of the share gains that you expect because of your US-based manufacturing to start to flow through the model? Thank you.

Speaker 0

Yeah, so let me start with just—you mentioned the pull-ins. We don't know. I just want to repeat that point. We just have to make assumptions. Customers don't tell us why they order. We just go through the data and try to decipher it, right? We just can't rule out the possibility. We say there likely could have been some. When you see such a strong behavior in Q2 versus Q1, you have to attribute some of it to the tariff environment. Also, remember that in China, the automotive market is more like what we call assigned accounts. We talk to the customers. We can explain to them the options. We have many industrial customers, just hard to get to everyone at once. I think it just takes longer to let customers know that TI has a diverse manufacturing footprint, and we've got their back.

I think that's part of what we've seen during the second quarter, plus the tariffs that took a breather after a month or so. Now, regarding the overall discussion on tariffs and our US manufacturing footprint, I think that's an important point. We've spent a lot of time during the last call talking about the challenges made in China and how we're navigating it. Remember that the environment is dynamic. Things are changing regularly, and tariffs and geopolitics will continue to evolve. As I said in the preferred remark, reshape the supply chain. I think some of it is going to be a little bit more permanent. Our customers are increasingly valuing our geopolitically dependable capacity. In the US, I think TI—I think first, let me say, our global manufacturing footprint is optimized to support all of our customers worldwide.

If you go into the US, I do believe that the US will make semis. US semis will be increasingly incentivized in the US. We do have a unique position. These are not investments that were made during the last quarter. We have been working on it for the past five years. Again, not because we foreseen tariffs. We just wanted to control our destiny, and the best way for us, or the best efficiency for us to build our manufacturing footprint was in the US. I think that hasn't played out yet. We do have a few customers—you could probably count them on one hand—that are savvy and knowing what the plans, how the plans could evolve. They're already shifting and getting closer to us. I think there is a lot of confusion at the broad customer base.

People don't exactly understand the difference between reciprocal tariffs and sectoral tariffs and what's going to come and when. There is a little bit of a wait and see. By the way, we don't know as well how things will evolve in the second half of the year. I will say that I believe our opportunity is greater than our challenge. While we are well equipped and the diversity of our supply, of our manufacturing footprint and supply chain is high, and we've proven it to our customers in Asia and specifically in China in the second quarter, I think TI is unique in the fact that we have a manufacturing footprint in the U.S. If U.S. chips are indeed becoming incentivized in whatever ways they choose to do that, TI has a unique answer.

Not only that, we have the scale and the size of the required capacity, it's also very affordable. It's low cost, very competitive. That opportunity has not played out yet, but we are ready for whatever changes we are going to meet in the second half of the year and beyond.

Speaker 3

All right. Thanks, Josh. We'll move on to our last caller.

Thank you. Our last question comes from the line of William Stein with Truist Securities. Please proceed with your question.

Great. Thanks for taking my question. It's a variation on the theme that we've listened to tonight. In, I think it was the past call, and if not, certainly during the quarter, Haviv, I think you characterized the environment as cyclical recovery is the signal and that tariffs and geopolitics are more noise and that the signal-to-noise ratio is very high. I think there was an expectation that the momentum that we saw in the first half of the year was going to extend. Yet the guidance is sort of confusing in light of that view. Specifically, you just delivered a plus 16.5% result year over year, and I think you're guiding to plus 11.5%. How do I reconcile this? Is the environment just much more noisy than what you had characterized a quarter ago, or did something else change?

Is there another way to describe what happened in the last quarter?

Speaker 0

No, I think regarding a bit what happened—sorry—what happened in Q2, I think we were very open about it. As I said, we did see some dynamics within the quarter. It was more noisy, if you will, in the second half of the quarter. It is very hard for us to, as I said, to Vivek and others, to quantify. How much of. And when you make guidance into the third quarter with the data we see right now, we just want to take a responsible approach. That is the data we have right now. That is the way we call it. I think during the last call, everybody was pushing back, "How could it be that TI will grow 7% sequentially?" I think we have upsided there, right? I think right now, maybe the expectations were higher, but we are just calling the forecast the way we see it.

We have to let it play out. I will reiterate that I believe the cyclical recovery is strong. Even if it is masked a little bit by this tariff environment, I think we now have four out of the five markets already in. I expect automotive to join. I just do not see it yet. Once we have all five markets pointing in the right direction, we will be complete. This recovery is very, very different from any previous one. You can see it also at the slope of the recovery. When you look at overall WSTS without memory trend, you can see a not very sharp return to trendline. We are still running 12 or 13% below trendline. There is a lot of. Usually when a cycle establishes itself, you first have to get to trendline and then you have to establish the next peak.

We are still running double digits percentage-wise on units below trendline. I think that is what we are seeing. We are not different than the rest of the market, I believe. We will just have to continue to let it play out. That would be my answer to your question, Will.

Speaker 3

Do you have a follow-up?

Yeah, if I can follow up one area that I hope might be a little bit more optimistic. In enterprise, I think you had a good quarter, and I'm wondering if you can remind us or update us as to your current and maybe future anticipated exposure to the rapid growth AI markets. Thank you.

Speaker 0

Yeah, very well. Our enterprise market is mainly, I think the largest sector over there for us is data center, data center compute. But it's not only data center. We also have, for example, large printers or enterprise printers over there and also projection devices. We probably want to clarify that over time. If I just focus on data center, it's mainly today inside the enterprise market for TI, but also a little bit of the optical communication inside the comms. When I kind of cut out and I look at our data center story, that's behaving very well this year. It's growing very nicely at a very high level, above that 50% that I've mentioned before. The future has a large opportunity for TI because we are seeing ourselves playing in more sockets over time.

Currently, our footprint on the data center side is more with our general purpose part. We have a large share over there, but we're also working closely with some key customers to expand our positions there to more application-specific opportunities. This is based on our new technology that is ramping right now in Sherman, Texas. We already have samples, and we are competing to win share over there. That's more of a tailwind, a potential tailwind for us in 2026 and beyond. That's our data center story. Thanks for that question, Will.

Speaker 3

Thank you.

Speaker 0

Okay. Let me wrap up with what we've said previously. At our core, we are engineers, and technology is the foundation of our company. Ultimately, our objective and best metric to measure progress and generate value to owners is the long-term growth of free cash flow per share. With that, thank you, and have a good evening.

Speaker 3

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.