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DATE
Tuesday, July 22, 2025 at 4:30 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Haviv Ilan
Chief Financial Officer — Rafael Lizardi
Head of Investor Relations — Mike Beckman
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RISKS
Management noted that the industrial segment "ran a little hot" in Q2 2025, and cited increased caution for future periods, suggesting possible normalization in subsequent quarters.
China's sequential (up about 19%) and year-over-year (up about 32%) revenue spike in Q2 2025 raised management's concern over possible short-term "pull-ins," complicating efforts to distinguish structural from temporary demand.
Management repeatedly identified ongoing tariff and geopolitical risks as disruptive for supply chains, highlighting the unpredictability in customer ordering behavior.
Automotive revenue decreased by low single digits sequentially in Q2 2025, and management described recovery as "shallow," emphasizing continued lack of broad-based rebound in this segment.
TAKEAWAYS
Revenue: $4.4 billion in GAAP revenue for Q2 2025, up 9% sequentially and 16% year over year, with all primary segments posting growth.
Analog Segment: Revenue increased 18% year over year in Q2 2025, leading overall business growth.
Embedded Processing Segment: Revenue grew 10% year over year in the second quarter of 2025, continuing its upward trajectory.
Industrial Market: Revenue increased by upper teens percent year over year and mid-teens sequentially in Q2 2025, with growth reported across all subsegments.
Personal Electronics: Revenue expanded approximately 25% year over year and by upper single digits sequentially for personal electronics in Q2 2025.
Enterprise Systems: Revenue grew about 40% year over year and approximately 10% sequentially in Q2 2025.
Communications Equipment: Revenue rose over 50% year over year and increased about 10% sequentially in the second quarter of 2025.
Automotive Market: Revenue grew by mid-single digits year over year but declined by low single digits sequentially in the second quarter of 2025.
Gross Profit: $2.6 billion, representing 58% of revenue, with gross margin increasing 110 basis points sequentially in Q2 2025.
Operating Expenses: $1 billion, up 5% year over year in Q2 2025; trailing twelve-month operating expenses $3.9 billion, or 23% of revenue.
Operating Profit: $1.6 billion, or 35% of revenue, up 25% year over year in Q2 2025.
Net Income: $1.3 billion, equal to $1.41 per share in Q2 2025 (GAAP); EPS included a $0.02 benefit not in prior guidance for Q2 2025.
Cash Flow from Operations: Cash flow from operations was $1.9 billion in the second quarter of 2025 and $6.4 billion on a trailing twelve-month basis ending Q2 2025.
Capital Expenditures: Capital expenditures were $1.3 billion for Q2 2025 and $4.9 billion on a trailing twelve-month basis ending Q2 2025.
Free Cash Flow: Free cash flow was $1.8 billion on a trailing twelve-month basis ending Q2 2025, reflecting a capital-intensive investment phase.
Capital Return: $1.2 billion paid in dividends and $302 million in share repurchases in Q2 2025; $6.7 billion returned to shareholders trailing twelve months.
Balance Sheet Strength: $5.4 billion in cash and short-term investments at the end of Q2 2025, with $14.15 billion of debt at a 4% weighted average coupon, and $1.2 billion of new debt issued as of Q2 2025.
Inventory: Inventory at the end of Q2 2025 was $4.8 billion, up $125 million sequentially; inventory days 231, down nine days from prior quarter.
Q3 2025 Guidance: Revenue is projected between $4.45 billion and $4.8 billion for Q3 2025; EPS is expected to be between $1.36 and $1.60 for Q3 2025, excluding impacts from recent US tax law changes and assuming a 12%-13% tax rate.
China Revenue: Sequential growth of 19% and year-over-year growth of 32% in China for Q2 2025; primary drivers from industrial with all end-markets except automotive growing.
CapEx Outlook: Company maintains 2025 capital expenditure guidance at $5 billion; 2026 capital expenditures are projected to be in the range of $2 billion to $5 billion, pending further business developments.
Depreciation Guidance: 2025 depreciation is expected to be between $1.8 billion and $2.2 billion (GAAP); 2026 depreciation is projected to be between $2.3 billion and $2.7 billion, likely at the lower end.
Tax Legislation: New US federal tax law not reflected in current guidance; the company expects a higher GAAP tax rate for 2025, followed by significantly lower cash tax rates from 2026 onward.
Capital Return Policy: Management stated intention to continue returning all free cash flow to shareholders via dividends and buybacks.
SUMMARY
Texas Instruments Incorporated (TXN 0.31%) reported double-digit top-line and bottom-line year-over-year growth for fiscal Q2 2025, with each core end market except automotive contributing to sequential revenue expansion. Management highlighted that customer inventories remain low, the industrial segment witnessed unusually high growth both in China and globally in Q2 2025, and geopolitical uncertainties—particularly concerning tariffs—directly influenced customer ordering patterns. While current results signal ongoing cyclical recovery across most markets, management cautioned that some demand in Q2 2025 may reflect temporary inventory loading tied to tariff risks, leading to a conservative tone for near-term guidance.
Management declined to forecast Q4, citing seasonal historical trends of sequential slowing and the need for more real-time data.
CFO Rafael Lizardi clarified that gross margin guidance for Q3 is expected to be flat sequentially despite higher expected depreciation, and operating expenses are expected to remain stable.
The company reiterated that capital allocation priorities are unchanged, but heightened capital expenditures are expected to persist through at least 2026.
CEO Haviv Ilan said, "We are and will remain flexible to navigate, especially in the immediate term." referring to the company's manufacturing and supply chain strategy amid ongoing global uncertainty.
Net free cash flow and tax outflows are expected to benefit from recent US legislation, though impacts are not yet included in official guidance as of Q2 2025.
Management noted delayed recovery in automotive, emphasizing real-time, consignment-driven inventory management and current lack of restocking from OEMs and Tier 1s.
Management expects further gains from ramping new technologies, especially in Sherman, Texas, beginning in 2026.
INDUSTRY GLOSSARY
Turns Business: Semiconductor industry orders delivered in a short window, indicating real-time demand rather than advance booking.
Fab Loading: The degree to which manufacturing plant (fabrication facility) capacity is utilized, impacting inventory and cost structure.
ITC (Investment Tax Credit): US federal tax credit incentivizing capital investment; recent legislation increased the credit percentage for eligible projects.
FDII (Foreign-Derived Intangible Income): US tax provision allowing lower rates on income derived from serving foreign markets, relevant post-2025 tax changes.
Full Conference Call Transcript
Haviv Ilan: 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. And 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.
Rafael Lizardi: 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 twelve-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 $0.02 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 twelve-month basis. Capital expenditures were $1.3 billion in the quarter and $4.9 billion over the last twelve months. Free cash flow on a trailing twelve-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 twelve months. Our balance sheet remains 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 nine days sequentially. Turning to our outlook for the third quarter, we expect Texas Instruments' revenue in the range of $4.45 billion to $4.8 billion and earnings per share to be in the range of $1.36 to $1.60. Our earnings per share outlook does not include changes related to recently enacted US tax legislation and assumes an effective tax rate of about 12 to 13%. In closing, as we transition into 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.
Mike Beckman: 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?
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we pull for questions. Our first question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.
Stacy Rasgon: 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. And now I'm hearing you kinda saying you're staying flexible, like, to go a range of scenarios. And, like, even in the quarter, like, auto was down sequentially. I guess, like, what's going on? Like, how is your I guess, outlook and feeling about where things are? How has that changed, like, over the last three months?
Because it you sound I guess, based on tone and everything else, it doesn't sound maybe quite exuberant as maybe you sounded a few months ago. Like, what's going on?
Haviv Ilan: Hey, Stacy. I'll I'll take this one. So 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 May back in April. And the discussion was all about, you know, 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. So I can say we support five markets. We now have it started with PE, then enterprise and comp. Joined, and industrial is already in.
We have four out of five markets recovering in a in a nice pace. And 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 let's just remember that it's it's kind of a year delayed versus industrial. Right? Industrial fixed for us at least in the third quarter of, of twenty two, automotive peaked one year later in the third quarter of twenty three. So one could expect automotive to be joining last The automotive recovery has been shallow, meaning we are running, you know, single digits versus the peak. Are running year over year.
We are actually having some growth in second quarter. From a near over year perspective, but at a very low level. So I will say that automotive is not recovered yet. But because of, you know, content growth, I think the cycle here is gonna 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. But I think all the situation of tariffs and geopolitics is rough supply chains, I think that's that's not over. Right? True that we pause right now on the semiconductor tariffs, both in The US and in China.
But, you know, we have to be prepared for what the future may hold. So we wanna 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. Have a follow-up, Stacy?
Stacy Rasgon: I do. Thanks. Maybe just a follow-up. Actually, I think I wanna ask you 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? And like 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 the gross margin line or what?
Rafael Lizardi: Yeah. Stacy, I'll take that. So to help you and everyone with their mom, would their models, where should be landing given our guidance GPM percent about flat, despite the higher depreciation that we're going to have going into third quarter. OpEx about flat And then you're what you're probably missing is the net of other income and expense and interest expense. That's gonna be unfavorable, about $20 million as we have lower cash levels, interest is lower while debt interest expense has continued to increase. So that's the part that's probably missing to round out the your model.
Mike Beckman: Alright. Thanks, Stacy. It looks
Stacy Rasgon: That's helpful. Thank you.
Mike Beckman: Move on to our next caller.
Operator: Thank you. Our next question comes from the line of Harlan Sur with JPMorgan. Please proceed with your question.
Harlan Sur: Hey. Good afternoon. Thanks for taking my question. You know, 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 percent of revenues? And was it broad based across both your industrial and auto businesses?
Haviv Ilan: Yes. Let me start, and maybe, Mike, you can comment right after. So I think, yes, from a turn 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, our the lowest level Customer inventories are very low, so we've seen that continue. Again, Mike, maybe you wanna provide some more color here?
Mike Beckman: Yeah. I think it was we've talked about in previous quarters. You know, that's something that you know, late last year and in the first quarter, you know, began to build. We continue to see that into second quarter as well.
Harlan Sur: Perfect. And then for my follow-up question, you know, good to see the continued sequential and year over year recovery in the industrial segment. It's quite diverse. Right? 10 subsegments, but the largest subsegment industrial automation, which is tied to manufacturing activity. Is pretty sensitive to trade and tariffs. So just wondering 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?
Mike Beckman: Yeah. I'll maybe I'll take that one. And what we actually saw in industrial was recovery was broad, and it was across all sectors. So I'd say that, yeah, it's continuation of the recovery we saw in first quarter. And that's that's where we are. So Vamil, I'll move on to the next caller. Thank you.
Operator: Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.
Ross Seymore: Hi, guys. Thanks for letting me ask a question. Haviv, kinda going back to the first question just in kind of the tone, and 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 tariff side of things, but then endorsed the cycle was coming. Last quarter, you got significantly above normal seasonality. You seem to lean in on the cycle side and didn't really say that were doing much.
So 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?
Haviv Ilan: Yeah. Let me put some more color into it, Ross. I think it's a it's a great question. So remember, when we met here in April, you know, we dealt with reciprocal tariffs on both sides, US, was exempting semis, but China had a 125% tariff rate on semi during the call. Right? So just the different situation where versus where we are now. Now tariffs are put on hold. So a little bit of a different environment. I will say that, you know, we and I think I mentioned it also in the during the last call.
When there is a change of dynamic, like tariffs are being added, and I go back to April, customers are sitting on very low inventories. I think it a it's a good assumption to make that customers will wanna have a little bit more inventory. And we did see that phenomena. We did see that in the early part of the quarter, there was an acceleration of demand And as expected, when, you know, customers are sitting on no inventories and there is a lot of noise around tariffs, that has normalized through the quarter, and we are kind of back to right now what drives our you know, 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 don't tell us why they want more parts. And, I would assume that some of it was for, you know, building a little bit of a of inventory on those shelves to protect themselves from tariffs, if you will. So that is my assumption.
Again, I don't know how the third quarter will play out But that's part of the way we are forecasting Q3. Ross, do have a follow-up?
Ross Seymore: 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 two, maybe going to phase three on the CapEx side? Just wanted to see if there's any incremental color there.
Rafael Lizardi: Yeah. No. Happy to do that. 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 And for 2026, it's gonna be between $2 billion and $5 billion depending on revenue and growth expectations at that time. And we will update you on those on narrowing that CapEx window most likely later this year. Okay. On depreciation, switching to depreciation, for 2025, we continue to expect $1.8 to $2.2 billion and for 2026, we continue to expect $2.3 billion to $2.7 billion and likely to be at the lower side of that range.
Mike Beckman: Okay. We'll move on to our next caller.
Operator: Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question.
Vivek Arya: Thanks for taking my question. Haviv, sorry to, you know, 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 May, I think you had suggested that every remaining quarter of '25, will accelerate from the first half up 13%, but your Q3 sales guide is up only eleven percent. So my question is that versus that reference point, which end market has, softened? Is it that the industrial normalization? Is, you know, done? Is it that, you know, auto, right, was a little weaker, or is that just, you know, extra conservatism on Texas Instruments' part?
Because the tone changes you know, as I mentioned, not just from earnings, but from the May.
Haviv Ilan: Yeah. And, again, I don't control probably tone level, but that's you guys are hearing that. Quantify that, Hoeem?
Vivek Arya: You quantified it, but wasn't it stone. Direct
Haviv Ilan: sorry. Directly to your question, Vivek, I would say that on the on in the second quarter, we have seen industrial, in my opinion, running very hot, right? What were the numbers sequentially, Mike? Was up mid teens, I think. Upper teens. Yeah. And it grew significantly year over year in the second quarter close to 20%. Right? So in that sense, I do believe it ran a little hot. This is where I wanna be a little bit more cautious into Q3. And we also saw in the let them my comment about geographies. We also saw a little bit of higher pull from China in the second quarter.
We will have it in the in the queue when it comes out, but my maybe you can give a little bit of a China Sure. By, you know, by region maybe, not only China Behavior in two
Mike Beckman: Sure. Yeah. So China, it was up about 19% sequentially. It grew about 32% year over year. And all end markets grew there with the exception of automotive. And auto is pretty consistent with our overall results there in industrial did lead the growth there. In China. And just a as a reminder, our China headquarter customers represent about 20% of our overall revenue.
Haviv Ilan: And 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. So we give you the data that it's how to decipher what exactly or to decouple what was related to quote unquote pull ins or what was related to cyclical recovery. I think both are happening, and that's what that's the data we have right now, and that's what guides our third quarter as we plan. For Q3.
Mike Beckman: Do have a follow-up, Vivek?
Vivek Arya: Yes. Thank you, Mike. For my, you know, follow-up, given everything they have heard, Aviv, I know, you know, you typically don't guide the quarter out, but how would you advise us to start thinking about Q4 that know, should we assume a similar conservative tone and assume something that is you know, usually your seasonality is, I think, down? Sequentially or flat sequentially, if you could remind us of that, in Q4. And given everything we have heard, how should we just conceptually think about Thank you. The move into, Q4?
Haviv Ilan: Vivek, as you know, we are one quarter over time company on specifically on guidance. So I will just say let the third quarter play out. Mike, do you Yeah. I mean do you wanna comment about seasonality?
Mike Beckman: Yeah. So, historically, second and third are typically stronger quarters. Fourth and first are typically seasonally lower, but, yeah, we'll have to let third quarter play out to before we're gonna be ready to talk about fourth. So know, we'll go on to move on to our next caller. Thanks, Vivek.
Vivek Arya: Thank you, Mike.
Operator: Thank you. Our next question comes from the line of CJ Muse with Cantor. Please proceed with your question.
CJ Muse: Yeah. Good afternoon. Thank you for taking the question. I was hoping to revisit gross margins You indicated flat roughly sequentially. And I guess within that, could you speak to your plans for utilization? Are there any sort of changes in mix? And if know, we were to normalize to kinda your typical more typical 80% kind of fall through would be an incremental maybe $2,527,000,000 dollars. So is the kind of the pause in gross margin uplift, you know, a 100% due to that increase in depreciation, or are there other factors that we should be thinking about?
Rafael Lizardi: Yeah. No. Just to give you a few more information there. As I said earlier and you've restated, we expect third quarter gross margin to be about flat to second quarter. That is with higher revenue, but also higher depreciation. On 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 expect to grow, but at a slower than the growth we just had in second quarter.
So hopefully, that gives you and then on the on the fall through we guide 75 to 85% that's over the long term that's over a year a year and not any one quarter but we should be close to that, Paul. So we'll we'll speak more about that when we have actuals, and we'll have a better, you know, information to provide. But you should continue to think of 75, 35% as a good number to use over the long term. CJ, do you have a follow-up?
CJ Muse: I do. Thank you. With the ITC going from 25 to 35 curious if you can comment on your thoughts on impact to your net CapEx into 26, 27? And is there any sort of movement or thought process that we should have around the impact of depreciation? Thanks so much.
Rafael Lizardi: Okay. No. Thanks for that question. So let's 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 US federal tax law. It includes expensing of US R and D, and eligible capital expenditures an increase to the ITC from 25 to 35% and changes to other test tax provisions such as the making FDII permanent. We are the effects of the new tax law are not reflected in the statement that we just released in the financials that we just released in the passage of that law happened in July. We are currently evaluating the changes on the legislation are gonna have on future financial statements.
That's why in the guide that we gave, we did not incorporate it. We want 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, the cash from a cash flow standpoint, we expect significantly lower cash tax rates for the next several years. So, 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.
Mike Beckman: Alright. Move on to our next caller.
Operator: Thank you. Our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.
Jim Schneider: Good afternoon. Thanks for taking my question. Maybe following up on some of the other questions that were asked, can 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 run a little bit hotter into Q2 and which ones, Thank you. Do you think are sort of at risk of reverting a little bit in Q3 and into Q4?
Haviv Ilan: Yeah. Let take that. Remember that when we talk about PE market and also enterprise and CE, they're all 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, we again, very shallow you know, 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 little bit, I would say, market that ran higher than expected was on the industrial.
We did expect a cyclical recovery in the industrial with, you know, it did grow 15% sequentially, which is a little bit unnatural. When you add the on top of it, the geography footprint, this is where I have a little bit of a more cautiousness. I wouldn't mark anything else that behave differently in second quarter, Mike? Would you would you agree?
Mike Beckman: That's the right assessment. Yeah. That's a that's a market that we saw a little bit of you know, I think I don't I wouldn't say anxiety, but customers just preferring to just have more parts. And we did see normalization through the quarter. So 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. So we keep watching it. And that's the market where I wanna be more cautious when I think about Q3.
Jim Schneider: 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, your free cash flow is better than know, what might you do differently or more on buybacks or dividends?
Rafael Lizardi: Yeah. No. That's a good question. It's gonna depend. And it's gonna depend on a on a number of factors. For instance, right now, we're still in the middle of a high CapEx environment. And we'll see how long that lasts. As we said, next year, we do have a range of two to five. So that's still a even at the low end, it's still a meaningful amount of CapEx. And we need to be ready for that. The you know, and there are other factors, cash on the balance sheet, the price of the stock price, the stock that also plays into our decision. So we'll take that into hold into account.
But 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.
Mike Beckman: Alright. Jim. Let's move on to our next caller. Thank you.
Operator: Our next question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question.
Chris Caso: 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? Or, you know, I guess in light of some of the caution that you expressed, you know, any changes you're making to fab loading and, you know, basically, where you want your internal inventories to sit as you exit the year.
Rafael Lizardi: Yeah. As I tell you, on an ideal in an ideal world, what we would wanna do, and of course, the world is not ideal, then we'll have to navigate that. But in an ideal world, what we would do is hold manage the operation so that the loadings are relatively stable relatively flat over time. And what happens during a cyclical upturn, we actually drain some inventory. And then during a cyclical downturn, we actually build some inventory. And that's how you get the factory to run effectively constant over that time. Of course, you know, it's not a it's an ideal environment. You never quite know when you're at peak, when you're at trough.
So we'll have to add some guardrails to that to make sure that we maximize the opportunity and maintain flexibility. But at a high level, that's how we would like to run the company.
Chris Caso: I do. Thanks. And my follow-up is I could dig into auto a little bit more deeply. And it sounds like what you're saying there is auto hasn't really changed, but hasn't recovered yet. You know, that's a market where know, you got a few customers that you speak to there. What's their tone right now, you know, given all the macro uncertainty? You know, 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?
Haviv Ilan: Yeah. I think that's the I think that's a good description. In a way, the and, again, I look at my it's a graph here in front of me. So automotive, again, peaks for us in the third quarter of twenty three. And in the last, I would say, sixth quarter, you know, a little bit up, a little bit down, but hovering around a certain level of high single digit down versus that versus that number. So and think about the automotive customers. They you know, those who ship into The US, they are they have tariffs to deal with. So I don't think they wanna I think they're being cautious. Right now.
And I think the orders we get is only when they really need it. I don't think there is any inventory replenishment there. Not only at the OEMs, but also at the tier one level. So everything is almost real time. And we'll just we have you know, our lead times are so low, and most our automotive customers are on consignment. So we just get it real time. So to your point, we haven't seen yet the recovery. But remember, industrial peaked in the third quarter of twenty two, and we saw the recovery starting in Q4 of twenty four.
So you can you can argue that automotive could be maybe a year later if you just keep the same, you know, duration. So, you know, is it gonna be some time in the second half of the year? We'll we'll just have to see real time.
Mike Beckman: Okay. Chris, thanks for the questions. Let's move on to the next caller.
Operator: Thank you. Our next question comes from the line of Josh Joshua Buchalter with TD Cowen. Please proceed with your question.
Joshua Buchalter: Hey, guys. Thank you for taking my question. Maybe following up on Chris' 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 2Q. It doesn't sound like there's destocking going on. Can you maybe explain what's going on specifically in China auto? Is there any element of share loss happening there? Or do you think more inventory dynamics Thank you.
Haviv Ilan: Yes. I think it's a good question. I think it's more the latter. You know, automotive brand very hot last year in China, and was enough news out there that, you know, there was a little bit of a coming or guidance. They slow down. You know, some of the price wars over there. So I think we saw some of the dynamics. I think our automotive business in China is doing well. I think from a new over year perspective, it's a it you know, we grew the automotive business in Q2, but China was ahead of the rest of the market simply because, again, first in, first out. So 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.
Mike Beckman: Not to add. If you look across the major regions for us in auto, US, Europe, China, they more or less performed pretty similarly on a sequential basis. They weren't vastly one stuck out differently than the others. When you look on a year on year, that's for China now is, you know, believe I would say chance it's China and Asia ahead, and then you go to Europe and Japan behind. Very coherent with what we've seen in other markets. Do you have a follow-up, Josh?
Joshua Buchalter: Yes, please. It's a link similarly, you know, when you talked about China, it sounds like there was some element of potential pull ins that were impacting 2Q. 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? Or have they changed their behaviors? And when would should we expect sort of the share gains that you expect because of your U. S.-based manufacturing start to flow through the model? Thank you.
Haviv Ilan: Yeah. So let me start with just you know, you the pooling. We don't know. I just wanna 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? So we just can't rule out the possibility, and we say there was likely could have been You know? When you when you see such a strong behavior from in Q2 versus Q1, you have to attribute some of it to tariff environment. Also, remember that in China, we have you know, the automotive market is more like what you call a signed account. We talk to the customers.
We can explain to them the options. We have many industrial customers. It's just hard to get to everyone at once. And I think it just takes longer to let customers know that the it's a diverse manufacturing footprint, and we've got their bags. So 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, maybe in China and how we are we are navigating it. But remember that the environment is dynamic.
Things are changing regularly, and tariffs and geopolitics will continue to evolve. And as I said in the prepared remark, reshape the supply chain. I think some of it is be a little bit more permanent. So our customers are increasingly valuing our geopolitically dependable capacity. And in The US, I think Texas Instruments I think first, let me say, our global manufacturing footprint is optimized to support all of our customers. Worldwide. But if you go into The US, I do believe that The US will make semis be you know, US semis will be increasingly incentivized in The US. And 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 we foreseen tariff. We just wanted to control our destiny in the best way for us or the best efficiency for us to build a manufacturing footprint both in The US, And I think that hasn't played out yet. We do have, you know, a few customers. You could probably count them on one hand that are savvy and knowing, you know, what the plan how the plants could evolve, and they're already shifting and getting closer to us. But I think there is a lot of confusion at the broad customer base. People don't exactly understand the difference.
Reciprocal tariffs and sectoral tariffs and what's gonna come and when. There is a little bit of a wait and see. And, 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 is greater than our challenge. While we are well equipped and well the diversity of our supply of our of our manufacturing footprint and supply chain is high, and we have proven it to our customers in Asia and specifically in China in the second quarter.
I think Texas Instruments is unique in the fact that we have a manufacturing footprint in The US, And if US chips are indeed becoming incentivized in whatever ways they choose to do that, Texas Instruments is 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 it's it's low cost, very competitive. And again, that opportunity has not played out yet, but we are ready for whatever changes we are going to meet in the second in the second half of the year and beyond.
Operator: Alright. 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.
William Stein: Great. Thanks for taking my question. It's 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, Aviv, 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. And, you know, I think there was an expectation that the momentum that we saw in the first half of the year was going to extend and yet you know, the guidance is sort of confusing in light of that. View, specifically you just delivered a plus 16 and a half percent result year over year.
And I think you're guiding to plus eleven point five. So how do I reconcile this? Is this is the environment just much more noisy what you would characterize a quarter ago, or did something else change? Is there another way to describe what happened in the last quarter?
Haviv Ilan: No. I think regarding, Bill, what happened Will, sorry. What happened in Q2, I think we were very open about it. I 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. And it's 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, we the with the data we see right now, we just wanna take know, a responsible approach. That's the data we have right now. That's the way we call it.
I think in the during the last call, everybody was pushing back how could it be that Texas Instruments will grow 7% sequentially, and I think we upsided there. Right? So I think right now, maybe the expectations were higher, which we are just calling you know, 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's 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 don't see it yet.
And once we have all five markets pointing in the right direction, we'll 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 the overall WSPS without memory trend, you can see a not very sharp return to trend line. We are still running 12 or 13%, I believe, below trend line, and there is a lot of you know usually, when a cycle establish itself, you first to get a trend line, and then you have to establish the next peak. We are still running double digits on units below trend line. So I think that's what we're seeing.
We are not different than the rest of the market, I believe. We'll just have to continue to let it play out. So that would be my answer to your question. Will. Follow-up?
William Stein: 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.
Haviv Ilan: Yeah. Very well. Your 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, you know, large printers or enterprise printers over there and also projection device So we probably wanna clarify that over time. But if I just focus on data center and it's mainly today inside the enterprise market Texas Instruments, but also a little bit of the, optical communication inside the account. 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. It's a very high level.
Above that 50% that I've mentioned before. And the future has a large opportunity for Texas Instruments 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.
So that's our data center story, and thanks for that question, Thank you.
Haviv Ilan: Okay. So let me wrap up with what we've said previously. Our core, we are engineers. And technology is the foundation of our company. But ultimately, our objective and best metric to measure progress and generate value to owners is a long term growth of free cash flow per share. With that, thank you, and have a good evening.
Operator: Thank you. And this does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.