Texas Instruments is turning almost 90 cents of each added sales dollar into gross profit

Texas Instruments makes analog and embedded processing chips in its own factories, and management said it did the work to ready them for more demand during the last downturn. That choice is now showing up in the accounts. In the September 2026 quarter revenue rose 28% from a year earlier, and 88.7% of the added revenue showed up as extra gross profit, calculated from the reported revenue and gross profit of both quarters.

The mechanism is ordinary for a chipmaker that owns its plants. Depreciation, staff and the running of clean rooms cost much the same whether the lines are busy or idle, so once demand returns most of each extra sale is left over after costs. Operating margin, operating profit as a share of revenue, reached 47.5% in the quarter, up from 33.3% three quarters earlier. It has risen by several points in each quarter since.

Julie Knecht, the chief financial officer, put most of the gain down to higher revenue, with some help from pricing, from fuller factory loadings and from the mix of products and end markets. She told analysts the right long-term way to model the business is still 75% to 85% fall-through excluding depreciation, so the quarter ran above the company's own rule of thumb. The two measures are not on the same footing, since hers leaves depreciation out, but depreciation rose over the year, which points the comparison the same way.

How much of this lasts depends on which part of the gain it is. Higher volume holds for as long as demand does; fuller loadings and a richer mix can reverse when it slows. Price has done little so far: Haviv Ilan, the chief executive, said prices were flat on a year earlier in the first half and edged up in the second, mainly in analog, which he described as not very significant for this year. The volume is broad. Industrial revenue grew more than 40% from a year earlier, and Ilan said it has only now climbed back to the level it reached four years ago; in July it was still short of that peak.

The guidance suggests the climb is levelling off. Revenue for the quarter landed inside the range the company gave in July, where the two quarters before it had come in above the top of their ranges. For the current quarter management guided revenue of $5.8 billion to $6.3 billion, a midpoint about level with the third quarter's sales. That still runs against the calendar: in the same quarter a year ago revenue fell 6.7% from the quarter before, calculated from the filed results.

Cash shows the same advantage, and also where it comes from. Capital spending, mostly on factory tools, was $463 million in the quarter, well under its level a year earlier. Free cash flow, which the company defines as operating cash flow less capital spending plus CHIPS Act incentives, reached $8.4 billion over the past year, against $2.4 billion in the year before. About $1.6 billion of the latest figure came from those federal incentives, combining the cash grants and tax credits in the release.

That low spending is the part of the story still to be settled. Management kept its guide for this year's capital spending at $2 billion to $3 billion, and Ilan said it may end "maybe on the higher end, if we get that execution as planned". Spending in the first nine months would leave about $847 million for the final quarter even at the midpoint of the range, calculated from the reported quarters, far more than the third quarter's rate. Spending is booked as tools arrive, and Ilan said tool lead times are lengthening, so some of it could slip into next year.

For next year Ilan said spending will follow demand and how fast the company wants to grow, with more detail in February. The high conversion of sales into profit and the jump in free cash flow both describe a company between building cycles, and the size of the next cycle is the number management has chosen to give then.