Operating income is drifting lower while buybacks hold EPS up
The question is whether operating leverage and a shrinking share count are driving per-share growth. On the reported figures, the operating line is not growing. Operating income fell from $1,488M in Q1 2026 to $1,427M in Q2 and $1,402M in Q3. Revenue was $8,353M, $8,682M and $8,584M over the same quarters, so the top line is essentially flat and slightly down from its Q2 peak. The operating margin, derived from those line items, went from 17.8% to 16.4% to 16.3%. That is compression, not leverage.
| Line item (FY2026) | Q1 | Q2 | Q3 |
|---|---|---|---|
| Revenue ($M) | 8,353 | 8,682 | 8,584 |
| Operating income ($M) | 1,488 | 1,427 | 1,402 |
| Operating margin (derived) | 17.8% | 16.4% | 16.3% |
| Non-operating income/expense ($M) | -95 | -117 | -28 |
| Pre-tax income (derived, $M) | 1,393 | 1,310 | 1,374 |
| Income tax expense ($M) | 280 | 206 | 301 |
| Net income ($M) | 1,113 | 1,104 | 1,073 |
| Diluted weighted shares (M) | 920 | 882 | 858 |
| Diluted EPS ($) | 1.21 | 1.25 | 1.25 |
How much of EPS is the share count
Diluted shares fell from 920M in Q1 to 858M in Q3, a reduction of about 6.7%. Net income went the other way, from $1,113M to $1,073M, a decline of about 3.6%. Diluted EPS rose from $1.21 to $1.25, about 3.3%. Holding Q3 shares constant, Q1 earnings would have produced roughly $1.30 per share, so the buyback is the whole reason the EPS line moved up at all. Year over year the picture is weaker: FY2025 quarterly diluted EPS was $1.29, $1.29, $1.30 and $1.30 across the quarters, so Q1 2026 ($1.21) and Q3 2026 ($1.25) are both below the same quarters a year earlier. The FY2025 repurchase outflow was $6,052M according to the cash flow data, which is the capital behind the share count reduction.
Interest expense and the tax line
Interest expense rose each quarter, from $111M to $126M to $138M, a roughly 24% increase from Q1 to Q3. As a share of operating income it went from about 7.5% to about 9.8%. Because non-operating items also moved (-$95M, -$117M, -$28M), pre-tax income was $1,393M, $1,310M and $1,374M. Q2 is the notable quarter for net income: its effective tax rate, derived as tax over pre-tax income, was about 15.7%, against about 20.1% in Q1 and 21.9% in Q3. A lower Q2 tax charge held net income near the Q1 level even as operating income fell. Net income ran $1,113M, $1,104M and $1,073M, so the trend is down, and the Q2 tax benefit explains why the decline was not sharper earlier in the year.
What would change the reading
The bull case needs revenue growth or margin recovery that the reported quarters do not yet show. Two things would test it. First, operating income stabilising near the Q1 level of $1.49B on a revenue base that grows. Second, interest expense stopping its climb, which would stop the drag on pre-tax income. Without either, buybacks are carrying per-share results while the underlying earnings base shrinks. On valuation, the computed metrics show a P/E of about 11.3, EV/EBIT of about 8.6 and a free-cash-flow yield of about 12.2%. Those multiples are descriptive only; they do not on their own tell a reader whether the share count reduction is a good use of capital, and the reader will need to weigh that against the margin and interest trends above.