Texas Instruments (NASDAQ:TXN) said in a conference call with analysts on Tuesday that it anticipates a significant increase in free cash flow (FCF) by 2026, driven by a rebound in demand and a more disciplined approach to capital spending, following pressure from activist investor Elliott Investment Management.
In recent years, Texas Instruments has focused on expanding its manufacturing capacity to avoid the kind of chip shortages experienced during the pandemic and to meet future demand.
However, this strategy has attracted scrutiny from investors, as the associated expenses have put a strain on cash flow.
The company now forecasts FCF per share to reach between $8 and $12 by 2026 according to a report from Reuters, surpassing the $6.91 consensus estimate.
This projection comes after a significant drop in FCF per share to $1.47 in 2023.
Elliott Investment Management, which revealed a $2.5 billion stake in Texas Instruments in May, has previously urged the company to optimize its spending and adjust production capacity in response to fluctuating demand. Elliott had suggested that these measures could boost FCF to $9 per share by 2026.
Reuters added that the company is currently working on bringing more production in-house, with three new chip manufacturing facilities under construction amid improving market conditions.
During the conference call with analysts, Reuters said that CEO Haviv Ilan explained that the expected growth in FCF is largely due to the structured expansion of 300 million production capacity.
This transition is expected to be completed by 2026, allowing the company to reduce its investments.
Reuters added that for 2026, Texas Instruments projects revenue to be between $20 billion and $26 billion, with capital expenditures estimated at $2 billion to $5 billion, down from its previous plan to spend around $5 billion annually through 2026.
The company will maintain its $5 billion capital expenditure through 2025 and is also set to receive up to $1.6 billion for new facility construction under the U.S. CHIPS and Science Act.
Following the news, Elliott said in a statement that it commends Texas Instruments on the capital-allocation update, which re-affirms the company's "long-standing commitment to shareholders that long-term growth of free cash flow per share is the company's true north."
"As detailed in our May 28 letter to the Board, we are supportive of TI's strategy to build the world's largest footprint of US-based, 300-mm analog semiconductor capacity, and we believe today's update is well aligned with Elliott's proposed approach," Elliott added.
"We appreciate our ongoing, constructive dialogue with Texas Instruments, and we believe today's off-cycle capital-management event is another positive step toward the goal of long-term value creation for all shareholders."
Texas Instrument's shares are up around 0.3% at the time of writing.