Dave Pahl:

Welcome to the Texas Instruments Second Quarter 2024 Earnings Conference Call. I'm Dave Pahl, 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'll provide insight into second quarter revenue results with some details of what we're seeing with respect to our end markets. Lastly, Rafael will cover the financial results, give an update on capital management as well as share the guidance for the third quarter of 2024. With that, let me turn it over to Haviv.

Rafael Lizardi:

Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, second-quarter revenue was $3.8 billion. Gross profit in the quarter was $2.2 billion or 58% of revenue. Sequentially, gross profit margin increased 60 basis points, primarily due to higher revenue as well as lower manufacturing unit costs due to increased factory loadings and more manufacturing internally with more wafers on 300-millimeter. Operating expenses in the quarter were $963 million, up 3% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion, or 23% of revenue. Operating profit was $1.2 billion in the quarter, or 33% of revenue, and was down 37% from the year-ago quarter. Net income in the second quarter was $1.1 billion, or $1.22 per share. Earnings per share included a $0.05 benefit for items that were not in our original guidance. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.6 billion in the quarter and $6.4 billion on a trailing 12-month basis. Capital expenditures were $1.1 billion in the quarter and $5 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.5 billion. As a reminder, free cash flow includes benefits from the CHIPS Act investment tax credit, which was $312 million for second quarter. In the quarter, we paid $1.2 billion in dividends and repurchased $71 million of our stock. In total, we returned $4.9 billion to our owners in the past 12 months. Our balance sheet remains strong with $9.7 billion of cash and short-term investments at the end of the second quarter. In the quarter, we repaid $300 million of debt. Total debt outstanding is now $14 billion with a weighted-average coupon of 3.8%. Inventory at the end of the quarter was $4.1 billion, up $23 million from the prior quarter and days were 229, down 6 days sequentially. For the third quarter, we expect TI revenue in the range of $3.94 billion to $4.26 billion and earnings per share to be in the range of $1.24 to $1.48. We continue to expect our effective tax rate to be about 13%. In closing, 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 Dave.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Haviv Ilan:

Thanks, Tim. I'll take that. It's Haviv. First, geopolitical dependable capacity is not a new thing for us. We've started to see these requests coming, I think two or three years ago when tensions started to rise, but as we reflect on it now three years in, it's obvious that there is more and more attention usually at the highest levels of our customers. I'm talking about leadership of CEOs or Chief Purchasing Officers, looking at their supply chain and making sure that they are going to be immune from you know whatever is thrown at them, part of it is geopolitical tensions. And this is where TI is a great answer. We are a very unique supplier in the sense of we can provide the capacity at scale, meaning the amount of wafers and the size of our -- the capacity that we are building is very high. It is a very affordable capacity as building our parts on 300-millimeter wafers allows for a lower cost per chip and then building them internally in our assembly and test houses also provides a very good low-cost structure. And last but not least is this geopolitically dependable capacity, meaning our fabs are being built in the US, mainly in Texas and in Lehi, Utah and we provide a capacity that is at scale, affordable, and dependable. And yes, every time there is some news out there, you know, we are seeing more interest. We've seen that grown over the last several years, and in that sense, our discussions with our customers are providing us more opportunity to win positions in future platforms. I do believe we are taking a bigger share and this is part of our confidence to continue with our investments to serve that opportunity moving forward. Last but not least, you have touched China. Yes, you're right. If I take an example and just on the automotive side, our customers in China do care a lot about their export business. In that sense, our capacity is highly welcomed by them because we can compete at the market price with a very competitive offering, yet have that dependability to serve their customers not only in China but also outside of China for their export business.

Timothy Arcuri:

I do. Yes. Rafael, can you give us an update on CHIPS Act? Do you know how much you're getting yet? And can you kind of talk about that?

Timothy Arcuri:

Great.

Operator:

Thank you. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.

Haviv Ilan:

Thanks for the question. Stacy, I'll start and I'll let Dave add some more color on Q2. So if I go back to the second quarter, yes, if you look at our results, industrial did decline at the low-single digits. Automotive continued to decline at mid-single digits. That was the third quarter in a row of that decline. Although from a year-over-year perspective, it's still doing well, meaning less than 10% of a decline. It declined about 9% in Q2. Yes, there is strength in personal electronics and I do see that market at -- you know it went down through the entire cycle. It troughed sometime in the first quarter of 2023 and we've seen that market strengthening. And again, it grew mid-teens sequentially, but close to 20% year-over-year. So there is definitely strength over there. And I would also say that on the enterprise market, yes, smaller revenue for us, but we are seeing a recovery over there, and I believe that inventory correction is behind us. Regarding the Other business, it grew thanks to our calculator business, as you mentioned, but also our DLP business, which mainly serves the personal electronics market. And Dave, maybe you can add some more color on the sectors as we talked about Q2.

Stacy Rasgon:

I do actually. Maybe to re-ask the same question. So you're guiding a revenue sequentially up close to $300 million. How do I think about that $300 million growth parsing out across the end markets into Q3?

Stacy Rasgon:

Is it TE, is what I'm asking, is it mostly --

Dave Pahl:

I think that's good.

Dave Pahl:

Thank you, Stacy. And we'll go to the next caller.

Operator:

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

Haviv Ilan:

Thanks, Vivek. Let me start with the first part of your question on how the China market did because I think it was a good quarter for our China business. Our China headquarters business grew sequentially at about 20% versus the first quarter. And we've seen the momentum across all markets. I mean, all five markets grew sequentially, I think 15% or 20%. So they all did well. And this is after seven quarters of sequential decline. So if you think about the way I look at the China market and it was exposed to all -- to all market -- to all end-markets for TI, it took seven quarters for this asynchronous cycle to go through starting with PE, Personal Electronics, then spreading to Industrial and Enterprise and just slightly to Automotive. But all of these have now corrected and Q2 was a good quarter for our business. And I believe we are now shipping to end demand, meaning customers have stopped managing their inventories over there. Now in terms of the competition in China, I don't think that's -- I mean, we've been very vocal about it. This is first not new that the competition has intensified over the last -- the past several years and I think it's growing stronger. I think it's a mistake for us to think that these guys are only doing simple parts. These are very ambitious, highly educated competitors. And our job here in TI, and that's what I try to teach the team is to compete. And I will tell you that, yes, the market is more competitive in China, but we can compete and we can win business in very attractive margins. So we are going to continue to do that. Our goal -- objective is to continue and gain market share in China.

Haviv Ilan:

Correct.

Vivek Arya:

Yes. Thank you, Dave. So I know for Q3, you're not giving specific end-market commentary, but just from an industry perspective, how would you describe the supply-demand situation in industrial and automotive semis just because we see such a broad range of data points? Do you think we are past the worst in terms of inventory adjustment and supply issues for those two end markets? And if you could describe the situation in those two markets separately, that would be really, really helpful. Thank you.

Dave Pahl:

Okay. Yes, I think of what we can see, Vivek. Of course, we don't get any data feeds on customer inventory. We don't get any data feeds on customer shipments, but we can look into things like the order patterns, we can look at feeds that we get in consignment. We can see what's happening in with our inventories and our position. So as we've talked about, cancellations as an example, as a measure have continued to come down. Our lead times I described is very stable. We've got immediate availability of almost all of our products. So that does drive a lower visibility with backlog because customers can get product when they need it. And we do believe that some markets PE bottomed up back in first quarter of 2023 and has been more seasonal since then. We've seen some of the other markets that as we've shared earlier, are beginning to grow. So there's likely a bottom forming it with within some of those markets. We've got industrial and automotive that have continued to decline. Now I'd say with industrial, I mentioned earlier, some of the sectors are forming a bottom, others are continuing to decline. And automotive, where we've got three quarter behind us, right. So that's how as we look into where we are positioned today, but we don't have a strong signal that can tell us exactly to be able to answer the question that you asked.

Dave Pahl:

Okay. Thank you, Vivek. We'll go to the next caller, please.

Ross Seymore:

Hi guys. Thanks for letting me ask the question. Haviv, it's great to have you on the call. So I'll ask one for you and maybe Rafael would chime in as well. You guys have given at least Rafael in the past some mid-quarter updates or earnings call updates on capex and depreciation versus your pre-existing plan. So are you still planning to spend $5 billion a year? And is the depreciation ranges, Rafael, you gave before still apply or are we going to have some more flexibility on those metrics going forward?

Rafael Lizardi:

Yes. So I'll just comment on depreciation. Ross, I'm going to narrow that depreciation range a little bit both for 2024 and 2025. So for 2024, we now expect depreciation to be between $1.5 billion and $1.6 billion. And for 2025, we now expect depreciation to be about $2 billion to $2.3 billion.

Ross Seymore:

I do, and thanks for all those details, Haviv, and Rafael. So one for you, Rafael. If I heard you right on the gross margin rising in the second quarter, you mentioned that loadings increased. I thought that they were going to decrease to burn some inventory now that you had that at kind of the $4 billion target. So did something change there? And what's the expectations for utilization going forward?

Ross Seymore:

Thank you, Dave.

Operator:

Thank you. Our next question comes from the line of Chris Danley with Citibank. Please proceed with your question.

Rafael Lizardi:

Sure, sure. I'll be happy. And I'll keep it -- well, at the end of the day, yes, it is possible that is the case. It's all going to depend on revenue, of course. So the main driver is revenue. So as we -- and in addition to revenue, as we bring more executing our strategy to load more 300-millimeter wafers and bring in more external loadings internal, the fall-through excluding depreciation will likely trend more in the range of 75% to 85% on a year-on-year basis. Now, of course, any one quarter, even any one year, you may have puts and takes that you know utilization or factory loadings is one of those that sometimes it goes against you, sometimes it goes in favor. But in general, expect that fall-through in 75% to 85%, not counting depreciation. So you do the math, whatever revenue assumption you want to put over the next several quarters or years, do that fall-through and you can very easily model where -- and then I just gave you the depreciation, right. So you can then model what gross margins can do over the next several years.

Dave Pahl:

Yes. So again, as you look at those things, revenue did increase as well as orders throughout the quarter, which is very typical as that we would see in the second quarter. And certainly, as we've got growth at the midpoint, that would not be unexpected. Again, those other sides of lead times, really on all of our products, having immediate availability and stable lead times, cancellations continuing to decline. All those things, I think point to supply and demand becoming more in balance and that availability. So -- and there was a second part of your question, Chris, that I'm not addressing. I'm not sure what it was. Can you just repeat it for me?

Dave Pahl:

Well, yes, again, I think that we've got half of the sectors that again we can see forming a bottom inside of industrial overall that it's been elongated. But if you look at it sector by sector, it's probably a better view overall. And in auto, this is our third quarter of decline. We're down about 13% from where the revenue peaked. It's a pretty shallow decline compared to how the other markets had behaved so far. So that's what we see. So, thank you, Chris. [Multiple Speakers]

Toshiya Hari:

Thank you. Hi, good afternoon. Thank you so much for taking the question. Haviv, maybe one for you on CapEx and how you're thinking about your long-term revenue growth. You've always had this slide in your capital management call deck where you show revenue supported. I think you have for 2026, you have $30 billion for 2030 at $45 billion. I know you're constantly evaluating your plans and you talked about presenting various scenarios on the August call. But I'm curious, is the $30 billion for 2026 and $45 billion for 2030, are those still kind of the base case scenarios for you, or has there been any change post conversations with customers?

Toshiya Hari:

Understood.

Toshiya Hari:

I do. Thanks, Dave. Just a question on Embedded Processing. Revenue was down sequentially and the year-over-year decline actually accelerated. Analog, we've seen some stabilization. So I'm just curious what you're seeing in the Embedded Processing side. Is this purely volume pressure, or is there a pricing or competitive component here as well? I think operating margins for that business came in a little bit as well sequentially. So just curious. Thank you.

Rafael Lizardi:

Let me just add on the operating profit question or angle that you had. Just as a reminder, as Haviv said, traditionally embedded has relied on external wafers, but we now have -- we're bringing them in and we have -- the Lehi factory is disproportionately will serve embedded, and therefore, embedded has taken a disproportionate amount of the fixed-cost charges there. But just like that is put right now, it will be a tailwind. It's a headwind now, it will be a tailwind in the future as we qualify more and more parts, embedded parts as well as analog at that Lehi factory.

Dave Pahl:

Have a great day. Next caller, please.

Harlan Sur:

Yes. Thank you for taking my question and great to have you on the call, Haviv. Maybe to follow up on the embedded question, right, because this business grew 3% last year versus your analog business, which was down 15%? Yes, year-to-date, it's down about as much as your peers or I would argue slightly better. You've articulated the positive strategy changes previously, right, more catalog, broad market focus. So bottom-line, again, over the past few years, it seems like you've made good improvements in this business. So as the team moves embedded more to internal manufacturing combined with the strategy shift, maybe, Haviv can you just comment on the design-win momentum? What areas are you particularly doing well in? And I'm not sure, Rafael, how should we think about the improvements in embedded margins as you move what was once mostly outsourced to internal manufacturing.

Rafael Lizardi:

Yes, I'll just add on your question on fall-throughs for embedded, of course, we don't give guidance separate for the segment. So the 75% to 85% gross margin fall-through ex-depreciation that I talked about earlier applies to both.

Rafael Lizardi:

Outside of -- if we didn't have Lehi and I'll address that in a second, we didn't have that, I would say generally analog would be at the higher end of that range and better would be at the lower end. But for the next year, two or three because Lehi, all those costs are -- all those fixed costs are already there, including people, we are going to have some nice tailwind and all of the -- a good portion of that will go to embedded. But over the longer timeframe, 75% to 85% ex-depreciation is a good guide to use.

Harlan Sur:

Yes. In terms of channel reach, right, we haven't heard you guys talk about ti.com in quite some time. I think the last data point we've got was it drove about $2 billion in sales in calendar 2022 and it sort of has this additional benefit from a business planning perspective of being a really good sort of leading indicator of demand inflections. As you've sort of potentially past the bottom of sort of the current cycle here, wondering if there's been any notable movement or trends in ti.com. And maybe from a longer-term perspective, like what initiatives has the team put in place to sort of further improve the customer pull to ti.com from a mid to longer-term perspective?

Dave Pahl:

Yes. And as we would -- have expected, orders that are placed through ti.com are down significantly from its peak, just, I think just telling of where we are with availability of product. But the great thing with ti.com is customers connect through APIs and put their planning systems on that. When they do have a shortage, they can look into our inventory, they can see it, some have even automated that process and have products shipped in many cases the same day. So we think the long-term strategic value of ti.com is much higher than the transaction that will cross it here in the short-term. So, thank you, Harlan. We can go to the next caller, please.

Joseph Moore:

Great. Thank you. I wonder just as you kind of think about this longer-term strategy, you've got well over 200 days of inventory, you have relatively low factory utilization. Like do you think this means we won't have shortages down the road that people can look at the capacity that you have, the inventory that you have and they won't have the need to accumulate inventory? Is that part of the thinking? Or do you think it's just inevitable that we'll get back to that at some point?

Dave Pahl:

That's good. Joe, do you have a follow-up?

Haviv Ilan:

Yes. Well, again, I think our capacity and the inventory level that we have built are such that we tend to provide good or very high customer service levels, right. So our intention is to maintain lead times through the cycle. We -- it depends what cycle you throw, you throw at us. There is always going to be that one cycle or that steep cycle that maybe we won't be able to do it. But we have modeled the company in such a way that in most a demand situation, we would be able to maintain a good customer or hike customer service levels through the cycle, which hopefully will keep the lead times short and which I'm pretty sure we will encourage customers not to hoard inventory. That has to be proven, but that's the way we want to prepare for the future.

Joseph Moore:

Very helpful. Thank you.

Operator:

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

Haviv Ilan:

Yes, thanks for the question. So first, I would say that in China, it's a -- there is a very distinct signal that customers have walked down their inventories. And we've seen that you know spreading through a time with the market. If you think about the asynchronous behavior that we have described of the different markets, we saw the same in China. The personal electronics business picked in China somewhere in 2021, enterprise and industrial sometimes in 2022, and then automotive picked sometimes in 2023. So you saw that peak spread over three years, which I think is the reason we saw such an elongated decline of seven quarters in a row and we went backwards to our history and it's been one of the longest, if not the longest cycle we have seen. But I can see clearly that it's mainly played out. Of course, we will always find pockets and a few sectors on the industrial -- in the industrial market that are still going through that, but it's very clear that once you start to shift to end demand, you will see such behavior of, in our case 20% sequential growth and that momentum is being built across the markets. All markets did very well in China, growing between 15% to 20% something percent, okay. So very robust, coherent and that's like a recovery looks like. Now we haven't seen that across the other markets. I will even tell you that areas like you know Europe and Japan are in an early phase and hopefully, it doesn't take seven quarters per geography, but China was kind of the first into the upcycle, the beginning of COVID, the first one to correct on the down and now to me, the first one kind of raising a very strong sequential growth with momentum. So that's the way I would summarize it without trying to imply that we'll see the same behavior in each and every other market.

Chris Caso:

I do. Thanks. And just a quick follow-up and I'm sure this is another thing you'll address on the August call, but you narrowed the range for depreciation next year down a little bit. Last quarter, you talked about CapEx kind of being around this $5 billion level per year. It was down sequentially in the second quarter. Is $5 billion still a reasonable way of looking CapEx this year?

Rafael Lizardi:

No, absolutely no. This year, $5 billion, what you saw in second quarter is just little puts and takes on a quarterly basis, but for 2024, $5 billion of CapEx and the depreciation numbers I gave are reflective of that.

Haviv Ilan:

So let me wrap up with what we've said previously. At our core, we are engineers. Our technology is the foundation of our company, but ultimately, our objective and the best metric to measure progress and generate value for owners is the long-term growth of free cash flow per share. While we strive to achieve our objective, we'll continue to pursue our three ambitions. First, we will act like owners. We will own the company for decades. We will adapt and succeed in a world that's ever-changing and we will be a company that we are personally proud to be part of and we would want as our neighbor. When we are successful, our employees, customers, communities, and owners all benefit. Thank you, and have a good evening.

Dave Pahl:

Welcome to the Texas Instruments First Quarter 2024 Earnings Conference Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by 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

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines 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.

Timothy Arcuri:

Thanks a lot. Rafael, I'm wondering if you can give us an update on any CHIPS Act money that you may have gotten. I know, basically all the money for the advanced nodes has been allocated and has been announced, but there is still like $9 billion outstanding for mature nodes. So can you kind of talk about that for us?

Timothy Arcuri:

I do, yeah. I wanted to ask about factory loadings and sort of where you think inventory goes for June. If I look at your guidance, the gross margins implied pretty flat ex-depreciation. So it seems like loadings have sort of leveled-off in June. Is that right? And kind of what do you expect for inventory in June? It seems like it should start to come down a tick maybe in June. Thanks.

Dave Pahl:

Thank you Tim. We’ll go to next caller please.

Stacy Rasgon:

Hi guys. Thanks for taking my question. I wanted to follow up on that. If and when revenues begin to recover, how do we think about what that would imply for your factory utilization given your current inventory position, as well as additional capacity coming online, which I guess sort of just naturally gives a downward bias to utilization anyways? Like I guess, how long would you need to take utilizations up? Or how much revenue growth would you need to start taking utilizations up given your positioning on inventories and capacity additions?

Stacy Rasgon:

I do. Thanks. I was wondering if you could talk a little bit about pricing. So I think last quarter, you'd suggested that pricing was sort of resuming historical trends, which -- I think, it suggests it was down -- I think, it was low to mid-single digits. Is there any update on what you are seeing in terms of the pricing environment? Is that still the environment that we are in? Are things better -- are things worse? Like where do you see that going as we go forward?

Rafael Lizardi:

Let me add one more thing, Stacy. I want to give you a bonus answer. You always ask about OpEx. So you are not asking, but I'm going to give you OpEx. Remember that second quarter has a full three months of raises whereas first quarter only had two months of raises. So it's something for your modeling.

Dave Pahl:

Thank you Stacy. We will go to the next caller please.

Vivek Arya:

Thank you for taking my question. I think in the prepared remarks, you said customers continue to reduce inventory levels, but you are also guiding Q2 sales to be up 4% sequentially. So my question is, should we think of Q2 as kind of a normal seasonal quarter? Just any more color on what you are seeing real time. Are we past the industry inventory correction? Are we kind of getting back to some semblance of -- on normalcy from a demand perspective? Any other color you could give from an end-market or geo perspective. Just -- you are the largest, right most influential vendor in the market. So I think, your perspectives would be very useful to understand where we are in the inventory and the broader demand cycle.

Vivek Arya:

Yeah, thank you Dave. Maybe if I press a little bit on that. For Q2, specifically industrial and automotive, do you think -- is your assumption that customers will continue to work down inventory? Or do you think that they have worked down most of the inventory and we are getting back to some semblance of what normal demand looks like for TI in Q2? Like what does your guidance actually imply that are we below seasonal? Are we seasonal? Or -- are we something different?

Operator:

Our next question is from Thomas O'Malley with Barclays. Please proceed with your question.

Dave Pahl:

Sure. Yes. Thanks, Tom for that question. And I’d say, no change over the last couple of months. But I think, certainly over the last few years, there's many things that are changing in China. We've got very competent local competitors there as well as there’s subsidized capacity going in place. And when you compare that to five years or 10 years ago, is it harder to compete there? It certainly is. But again, I would not describe that as a competitive landscape that's changing overnight. And we've talked about that for some years. So China is an important market for us that -- it continues to be a growing market. And we can and will compete there to support our customers. So our competitive advantages, whether that's our manufacturing and technology, the breadth of the portfolio, the reach of the markets all [serve] (ph) us very, very well in China. Do you have a follow-on?

Dave Pahl:

Sure. Yes. Thanks again, Tom. I would say that many customers and especially those in automotive, as they went through and dealt with the disruptions that they had in supply chains actually we are very thoughtful in looking at where their supply is coming from, what things that they can do differently well beyond just carrying extra days of inventory. And when they went through that analysis, I think many found that they have a pretty significant dependence on wafers coming out of both China and Taiwan. And what they described that to us is geopolitically dependable capacity is what they're seeking. And again, we have talked about that before in our capital management updates. We believe that -- that's going to be highly sought after it is -- we are seeing that today. And so I think, we are in a position to be able to support customers, and that growth that will come from that. So thank you Tom, we will go to the next caller please.

Ross Seymore:

Hi guys thanks. I'm going to ask a couple of questions. I guess for the first one, Dave, I know you don't want to guide by the segments but you gave the quarter-over-quarters. Could you give us what the year-over-years were by end-market in the first quarter, please?

Ross Seymore:

I do. Rafael, you talked a little bit about the trajectory of the grant side of the CHIPS Act -- or excuse me, the ITC side and where you are getting the money in over time. Does any of that inflows of cash have a differing impact on the income statement? Or is it just the same, it's just a matter of timing and when you're getting that $1 billion as opposed to, I think you said $500 million before?

Dave Pahl :

Thank you Ross. We will go to the next caller please.

Chris Danely:

Hey, thanks guys. Rafael, just another question on the balance sheet and cash. So you guys have seen the share count kind of flatten out here for the last 4 quarters or 5 quarters and then you're building cash and increasing your debt. I guess what's changed? Traditionally, you've sort of taken the share count down slowly but steadily. Any sort of changes in the long-term thinking there on cash, usage of cash, et cetera?

Dave Pahl:

Do you have a follow-on, Chris?

Rafael Lizardi:

Yes. So I'll start and, Dave, if you want to chime in. But as Dave alluded to earlier on the call, China is a very important market. We need to compete there, we do compete there and we compete to win there. China, there -- it's pretty clear that there's an incentive to design local semiconductor suppliers. I think, that's what you're referring to as insourcing. And today, that share, my guess -- my sense is 10% to 15% of the local content is sourced by local semiconductor suppliers. I think, the exact number is 12%, the one I saw. So that means there's another 88% that -- that is shared now between U.S. and European suppliers. And our goal is to continue that fight and maintain and gain that share, competing with local suppliers but also competing with US and European semiconductor suppliers.

Operator:

Our next question is from Joe Moore with Morgan Stanley. Please proceed with your question.

Dave Pahl:

Yes. Joe, the answer will be amazingly consistent with how you've asked it before. But we haven't changed our strategy on pricing. You know that pricing doesn't move quickly in our industry, and it -- isn't the primary reason why customers choose our products overall. So we regularly monitor pricing for all of our products. That includes all end markets and all product categories and all regions. And we price to be competitive, and we can do that because we've got a great product portfolio and we've got great access to the markets through our channels. And we've got competitive products because we build it on 300 millimeter. So hopefully, that's amazingly consistent. Do you have a follow-on?

Dave Pahl:

Yes. I think that we continue to make progress overall in our embedded business. The goal there is to have that business growing and contributing to our free cash flow over a long time. We think it's a great business and continue to invest. So we are very happy with that strategic progress. So I think, in the near-term, of course, we're not going to be immune to cycle-related corrections. It is a little bit later because of the constraints that we have due to embedded relying on foundry supply. And as you know, we are investing to put capacity in place. And we'll have control of that in the future and really are in a good position to gain share there. So thank you for that Joe, we will go to the next caller please.

Tore Svanberg:

Yes, thank you. Dave, I had a question about the Q4 -- I mean the Q2 outlook. So I know, obviously, you can't guide by market and things like that. But from a bookings perspective, are we starting to see sort of a broad-based recovery in bookings? Or would you still say it's quite selective in all the different applications that you are targeting?

Tore Svanberg:

Yes. That's very helpful. As my follow-up, you mentioned there's a few segments within the industrial category that are starting to grow or perhaps have found the bottom from an inventory correction perspective. Can you talk about which segments those are?

Operator:

Our last question is from Chris Caso with Wolfe Research. Please proceed with your question.

Rafael Lizardi:

Yes. Well a couple of things. For example, the data point I will give you is our free cash flow for the trailing 12 months was $940 million. And we returned in -- also in trailing 12 months, $4.8 billion. So one catalyst for a change there would be once we're past this investment phase that is consuming a good chunk of that free cash flow. Another catalyst is obviously revenue and how that behaves over a number of years. But -- so these are just some of the puts and takes that we think about when we are allocating capital.

Chris Caso:

I do. Thanks. And I guess the question is about where TI is allocating the R&D investment going forward and how that may be changing. Over last year, it looks like auto industrial is about 70% of your revenue, and I know that's by design. But you've got some segments such as comm equipment that have been down a lot more. As we look out over the next two years or so, do you think that percentage of revenue on the segments kind of stays about where it is right now? Or based on the R&D investments you are making, do you think that changes substantially?

Rafael Lizardi:

Okay. Thanks, Dave. Let me wrap up by emphasizing what we have said previously. At our core, we are engineers and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate value for owners is the long-term growth of free cash flow per share. While we strive to achieve our objective, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that's ever changing. And we will be a company that we're personally proud to be a part of and would [want] (ph) as our neighbor. When we're successful, our employees, customers, communities and owners all benefit. Thank you and have a good evening.

Dave Pahl:

Welcome to the Texas Instruments Fourth Quarter 2023 Earnings Conference Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by 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. I'd like to provide some information that's important for your calendars. Next week, on Thursday, February 1, at 10 a.m. Central Time, we'll have our Capital Management Call. Similar to what we've done in the past, Rafael and I will summarize our progress and provide some insight into our business and our approach to capital allocation as we prepare for the opportunity ahead. Moving on, today we'll provide the following updates. First, I'll start with a quick overview of the quarter. Next I'll provide insight into fourth quarter revenue results with some details of what we're seeing with respect to our end markets. I'll then provide an annual summary of revenue breakout by end market. And lastly, Rafael will cover the financial results and our guidance for the first quarter of 2024. Starting with a quick overview of the quarter. Revenue is $4.1 billion, a decrease of 10% sequentially and 13% from the same quarter a year ago. Analog revenue declined 12% year-over-year and embedded processing declined 10%. Our other segment declined 25% from the year-go-quarter. Now I'll provide some insight into our fourth quarter revenue by end market. Our results reflect increasing weakness in industrial and a sequential decline in automotive as customers work to reduce their inventory levels. Similar to last quarter, I'll focus on sequential performance as it's more informative at this time. First, the industrial market was down mid-teens as we saw that increasing weakness. The automotive market was down mid-single-digits after 3.5 years of very strong growth. Personal electronics was about flat. And next, communications equipment was down low-single-digits. And lastly, enterprise systems grew low single digits. In addition, as we do at the end of each calendar year, I'll describe our revenue by end market. As a percentage of revenue for 2023, industrial was 40%; automotive was 34%; personal electronics 15%; communications equipment 5%; enterprise systems 4%; and other was 2%. In 2023, industrial and automotive combined made up 74% of TI's revenue, up about 9 percentage points from 2022, and up from 42% in 2013. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive. Our industrial and automotive customers are increasingly turning to analog and embedded technologies to make their end products more reliable, more affordable, and lower in power. These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth, compared to our other markets. Rafael will now review profitability, capital management, and our outlook.

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines 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?

Toshiya Hari:

Hi, good afternoon. Thank you so much for taking the question. My first question is on your Q1 outlook, I think at the midpoint you're guiding revenue down 12% or so which is you know clearly well below what we consider to be typical seasonality. Any end markets or regions or device types that you can call out that's driving that view? Or is it broad-based weakness across all applications?

Toshiya Hari:

I do, thanks Dave. Just on gross margins, I think you guys did a good job in explaining what's driving it. Still, I'm a little bit surprised with the year-over-year, kind of, drop through, if you will? Gross margin dollars essentially dropping as much as your revenue. I understand the underutilization, the increase in depreciation. But what are you seeing from a pricing perspective? Is it more pricing than volume that's driving the revenue decline and the decline in gross margins? Or if you can kind of speak to your strategy from a pricing perspective, what you're seeing in the marketplace? That would be helpful. Thank you.

Toshiya Hari:

Great. Thank you.

Operator:

Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Rafael Lizardi:

Yes, so, no, thanks for the question. So step back in third quarter, at the end of third quarter, we talked about this. As we have near our inventory levels, then we have adjusted our factory loadings accordingly. So in third quarter, we did some of that and that had an impact on gross margins on underutilization. Fourth quarter adjustment was bigger than third quarter. And now going into first quarter, we're taking that adjustment further. So the first quarter adjustment on underutilization will be bigger. But we continue to have an upward bias on inventory as we continue to build the right buffers for the right parts to be ready on the other side of the cycle. So, follow-up?

Rafael Lizardi:

No, we're not. In fact, CapEx came in as expected $5.1 billion, and we've been talking about $5 billion per year. So it was right on target. And you should expect, and we expect, to continue running at about $5 billion per year through 2026 as we complete the investment plans that we've been talking about.

Operator:

Our next question comes from the line of Chris Danely with Citibank. Please proceed with your question.

Rafael Lizardi:

Yes, no, thanks, Chris. So broadly speaking, our inventory targets have not changed over the last six, nine months through this cycle. So we still have some ways to go, clearly less than we did six months ago. But we still have some ways to go on that front. At one point, I talked about $4 billion to $4.5 billion worth of inventory. So that's in the ballpark, and we just finished just shy of $4 billion. But as far as when, underutilization bottoms, that's going to depend on revenue expectations. And at this point, we're only, as always, we only give one quarter at a time. So we'll see where we are 90-days from now and we'll tell you about that.

Chris Danely:

Yes, thanks guys. I guess just a little bit of color on the end market commentary, thanks for that. On the industrial side, it sounds like most of the downside is due to excess inventory, not demand. I was hoping you could confirm that? And then with automotive weakening, is there any reason why automotive wouldn't fall under the same issues that the industrial end market/inventory would as well?

Operator:

Our next question comes from the line of Tom O'Malley with Barclays. Please proceed with your question.

Rafael Lizardi:

Let me start with the second part of the question. And Dave, you want to take the first one? No, the second part, that's just a reflection of our ability to build those inventory buffers that we were talking about. And what you're seeing there is on the finished goods side. That's one, Dave alluded to earlier, that's one set of targets that we have. That's at the finished goods level. Remember, we have 100,000 different parts, and the vast majority of those are what we call catalog, which means they sell to many, many customers. So we want to build a certain finished good level for each one of those parts. But we're also building at the chip level. Think of you know a chip can go into two, three, 10 different finished goods so it works out well to have some chip level inventory operationally, but you also have want to have finished goods. So that's what you saw there.

Rafael Lizardi:

No it’s two part question. Yes, that counts as good.

Rafael Lizardi:

Okay.

Dave Pahl:

Next caller, please.

Ross Seymore:

Hi, guys. Just wanted to ask about the product side, the analog versus embedded. Embedded had a significantly better year, dropping 3% versus the analog down 15%. I know there's very different end market exposures for those, but were there other competitive dynamics, pricing dynamics, strategic focus dynamics, anything else to explain the difference between the performance of those two segments?

Ross Seymore:

Yes, I do and it's kind of a cyclical question. You guys are astute students of cyclicality of this whole industry. I think this is going to be including your guide the sixth quarter of negative year-over-year comps. Do you see anything that's TI specific, that's different this cycle, you know, pricing just got so good before, now it's a bigger headwind, you kind of addressed the pricing dynamic a little bit before, but what's making this duration so much longer and is any of it TI specific?

Rafael Lizardi:

Yes, I just want to clarify for those who maybe new on the call, when Dave talked about non-cancellable, non-returnable, or that's not, we don't do that. Many of our competitors have done that. So that, in our view, distorts the market. That wasn't the case with us. And the second point, distributors, same thing. Our distributor footprint is much smaller than with many of our competitors. We're down to 25% or so for our revenue through distribution, so 75% direct, whereas many of our competitors are the opposite, so…

Operator:

Our next question comes from the line of Joe Moore with Morgan Stanley. Pleased to see you with your question.

Rafael Lizardi:

Yes, I'm happy to talk about that. So first, let me address the ITC first and then I'll go to the grant. So the ITC investment tax credit 25% credit on CapEx or manufacturing in the United States. We have accrued to-date over the last year and a half or so $1.4 billion. We expect to get about $500 million of that later this year, probably in fourth quarter as far as the current law and regulations stipulate. And we'll get the rest further down the road, mostly the following year and then after that. And we'll continue to accrue that benefit, just again, 25% on anything we spend in the United States for manufacturing. That's the cash side and the balance sheet. On the P&L, we're already seeing the benefit as lower depreciation. That benefit tends to be small, has been small so far because for example, some of that is for buildings that haven't even started to depreciate, but it will build up over time on that front. So that's the ITC. The grants, we submitted our application for those in December. And at this point, we will wait to hear from the Department of Commerce and see what happens there.

Joe Moore:

Yes, I did. So I think, obviously that stuff will help the cash flow down the road, but your free cash flow is below the level of the dividend. Right now, I assume it's pretty important to keep paying the dividend. Where does that leave you in terms of share repurchases and other uses of cash?

Joe Moore:

Great, thank you.

Operator:

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

Dave Pahl:

Yes Harlan, you know, as you would expect we have seen cancellations in the quarter and fourth quarter had remained elevated. I wouldn't describe them as increasing, but just at higher levels. You know, and we're still early inside of the quarter. I would say all of, you know, what's going on with cancellations and the backlog that we see is all comprehended in our guidance and in our outlook.

Dave Pahl:

Yes, I would say when you look regionally this quarter from a -- just from a dollar standpoint you've got sequentially all the regions were down with the exception of the rest of Asia. So nothing unusual with China going on specifically there overall. So again, when we look at our business, I think most of that is explained by the end markets and certainly, we hadn't seen a recovery inside of China that I think most of us were expecting.

Dave Pahl:

Go to the next caller, please.

Joshua Buchalter:

Hey, guys. Thanks for taking my question. I want to ask you about how you're thinking about OpEx given the extended softness. Any thoughts on getting more defensive with OpEx? Does the weakness last longer than expected? Or you grew OpEx 8% in 2023. Is that sort of the right level that you think you need to be investing in the business for the long-term growth? Thank you.

Dave Pahl:

A follow-on Josh.

Rafael Lizardi:

Yes, so the math is still the same. The fault-through issue used is 70% to 75% that is still a reasonable starting point. You then have to adjust for depreciation, as you alluded to, and our depreciation, I gave you an update on that 90-days ago, but I'll reinforce that in a second, but you have to adjust for that. And then there are always put some takes on any given quarter, like right now it's underutilization, but at some point that goes the other way. Throughout this time, as you pointed out, we will continue to benefit increasingly from 300 millimeter, more 300 millimeter wafers, which have a cost advantage. So, let me go back to the appreciation just to make sure everybody has the right number. It's the same as what I said 90 days ago. For 2024, expect $1.5 billion to $1.8 billion and for 2025, expect $2 billion to $2.5 billion.

Operator:

Our next question comes from the line of CJ Muse with Cantor Fitzgerald. Please proceed with your question.

Rafael Lizardi:

So that's a multi-part question in many angles to that. What I would tell you, high level, we're very comfortable with our inventory level. Right now we're just shy of $4 billion as I said earlier on the call. We have continued upward bias for at least one more quarter, probably a couple quarters at least, an upward bias on that. But that is good inventory for catalog parts that sell to many customers that last a long time. So I feel really good about that. But we'll see how things play out on the other side of the cycle and depending on demand and different things. But I would expect to continue holding relatively high levels of inventory. We just in a different position than we were even three or four years ago in terms of how much of our revenue and our parts are in industrial automotive, in catalog type of parts that last a long time. So our strategy is such that it makes sense to have that inventory. Our order fulfillment processes have also improved. We have ti.com and different tools that we can leverage to go direct to market. We have a much higher percent of our revenue now 35% is direct. So all those factors play into having more inventory as a real leverage point that we can use to serve our customers even better.

CJ Muse:

Thanks, Dave. A quick follow-up to a prior question. I know you can't share too much, but your application clearly in for the Chips Act. I guess we should hear results between now and the summer. I guess is there anything you can share on that front and perhaps how it's kind of impacting your thoughts on the capacity you're bringing online?

Dave Pahl:

All right. Thank you, CJ. And I think we've got time for one more caller, please.

Chris Caso:

Yes, thank you. Guys, I just did, just trying to understand a little bit about why the customers may have reacted as they did. Because we know your lead times have normalized well in advance of the rest of the industry. Do you think this is just simply a function of end markets took another leg down here? Do you think perhaps some of your customers were delaying their inventory adjustments until they saw lead times for the rest of the industry come down? Because we know that's also some of your competitors lagged your lead time normalization. Perhaps that was a factor here?

Chris Caso:

Yes, fair enough. And if you could help us with the impact of the underutilization right now, how much of a headwind is that providing right now on a cost to sales basis? And then on the other side of this, when we finally get to a recovery, what will be the right way to model this? Will there be a bigger snapback as some of the underutilization comes off or do we just kind of go back to sort of those mid-70s incremental margins and the way back up?

Dave Pahl:

Yes, thank you, Rafael. Thank you all for joining us. We look forward to sharing our capital management update next Thursday, February 1 at 10 a.m. Central Time, as I mentioned earlier. And a replay of this call will be available shortly on our website. Good evening.

Dave Pahl:

Welcome to the Texas Instruments Third Quarter 2023 Earnings Conference Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by 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

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines 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?

Stacy Rasgon:

Hi guys, thanks for taking my questions. My first one, I did want to ask about gross margins. So I mean depending on what I assume for OpEx next quarter, I'm getting something like 250 basis points of compression maybe more. I know you talked a little bit about how some of that is the impact of utilization. Can you give us some feeling for, I guess, like the magnitude of the different drivers' utilization, lower revenue depreciation, pricing, and how we ought to be thinking about that trajectory as we get into the next year? Is there more to go, I guess, is what I'm asking.

Stacy Rasgon:

I do. Thanks. So you gave us a little color on the end market behavior in Q3. Can you give us some thoughts on, at least even qualitatively, what to expect by end market into Q4? And particularly for auto, it sounds like auto in Q3 was so strong. Do you still see that strength continuing in the Q4 in the year end?

Operator:

Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Dave Pahl:

Sure. Yes. And as we mentioned in the prepared remarks, it was up, auto was up mid-single digits sequentially and it was up 20% when you look year-on-year. So obviously that growth had continued. In general, I would say that a market like automotive and personal electronics will have larger customers. Those larger customers tend to be biased to more consignment. So we would have that probably more in automotive than if I contrast it to a market perhaps like industrial. But overall, as you know, we've moved to having closer direct relationships with customers, which would include the customers that we have in automotive. And I think we service pretty close to 1,000 or so different automotive OEMs, so there is quite a bit of broadness in who we serve there. You have a follow on, Tim?

Dave Pahl:

Yes, let me comment on that. We're very pleased with the progress on our manufacturing expansion. They will provide geopolitically dependable capacity to support customer growth for the coming decade. And as you know, semiconductor content continues to increase. And to provide us the ability to grow at that 10% growth rate that we talked about at the last capital management call, if the market requires that, we'll continue to make those investments. So we continue to expect $5 billion of CapEx per year in 2023, 2024, 2025, and 2026. So you should count on that. Let me also give everyone, as a reminder, these CapEx numbers are gross, meaning they do not include benefits from the ITC or grants from the CHIPs Act. So we're actively working through the grant application process with the CHIPS program office, which we believe will be meaningful to our manufacturing operations in Texas and Utah and will help support semiconductor growth for decades to come. And funding from the CHIPS Act grants was comprehended in our decision making for these investments.

Dave Pahl:

Thank you, Tim. We'll go to the next caller, please.

Ross Seymore:

Hi, guys. Thanks for asking a question. In the third quarter I think it was the first time in a few years that you guys just came in at the midpoint of your guidance. Usually you beat it by 2%, 3%, 4%, something like that. So I guess my question is, anything strange in the linearity in the quarter, either by end market, just aggregate bookings, any color on that you could provide?

Ross Seymore:

I do. On the end market side of things, you said automotive was up about 20% year-over-year. I know oftentimes you go between giving sequentials or year-over-years, but could you give us year-over-years by the end markets, please?

Operator:

Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Dave Pahl:

Yes, so thanks for that question. Always helpful to be able to clarify that. First, I'll just start with pricing doesn't move quickly in our markets, nor is it a primary reason that customers choose our products. So we're typically agreeing to pricing that's out six months or on an annual basis for the following year. And so, we're continuing to move through that. Our pricing strategy, as we mentioned before, hasn't changed. So we're regularly monitoring what's going on with pricing. We always have a goal to remain competitive. And certainly a supply and demand has come into balance, or more closer to balance. We've said for some time that we would expect that pricing to behave like it has over the last couple of decades, meaning, low single digit decline. So as we move out in time, that's what we're beginning to see. So really no changes other than going back to what we've seen over the last couple of decades. You have a follow on?

Rafael Lizardi:

Yes. No, thanks for the question. I'll address both OpEx and depreciation. So on OpEx, we've held a steady hand on OpEx for many years and we'll continue to do so. So as an example, to illustrate the point, from 2017 to 2021 we ran at about $3.2 billion of OpEx. And then in 2022, it ticked off to $3.4 billion. And now we're running at about $3.7 billion on a trailing 12-month basis. So you can see the steady hand and just a bit of an increase over the last few years. And that's, as we have has a steady hand with our hires, new college hires, and as we make investments to continue to strengthen the company in the case of R&D, the broad portfolio in the case with sales and TI.com on the reach of our channels. Then on depreciation, so our CapEx expansions are unchanged. We talked about that, addressed it with previous callers. So $5 billion of CapEx per year for the next 2023 and three years beyond that, as we have been talking about. Now when it comes to depreciation, as time has passed, we have more clarity on what to expect on depreciation. So for fourth quarter, let me start fourth quarter of 2023, we expect depreciation to increase on a quarterly basis at about the same rate as what we have been seeing throughout 2023. So essentially, we're going to end the year just shy of $1.2 billion, maybe [11.90, 11.80, 11.70] (ph), somewhat in that range for the year. As an update for 2024, we expect depreciation to be between $1.5 and $1.8 billion, and for 2025 to be between $2 billion and $2.5 billion.

Dave Pahl:

Thank you, Toshiya. Now we'll go to the next caller, please.

Ambrish Srivastava:

Hi. Thank you. I had a question on factory loadings and inventory. So correct me if I'm wrong. I thought that thinking up until now has been we've got to be ready for the upturn and so, we're building inventory for that. And you have highlighted that over several quarters. Look, we're not -- we don't have a target, but you did raise the target in terms of how much inventory you want to carry. So this change, which I want to make sure I'm reading it right, that you're taking underutilization charge because you've reached a desired level of inventory. Is that a reflection that your expectation for the recovery is changing, i.e. you're expecting a slower ramp in revenues than what you perhaps were thinking a couple of quarters ago?

Dave Pahl:

Yes, and I'll just add and bring back to our capital management that we've been saying for, I think, over a decade now, our objective with inventory is to maintain high levels of customer service, keep our lead time stable, keep product availability really high. So as we talked about earlier, ti.com, really, essentially all of our catalog products are available for immediate shipment. Lead times are stable. And so, we are prepared for that next upturn when it does come. You have a follow on, Ambrish?

Dave Pahl:

Sure. Yes. And I think we all know as being students of studying the cycles over the years. They're all the same and they're all different at the same time and they're unique. The one thing that is unique, of course, with the cycle is how the markets have behaved differently. We've seen bifurcation and really lined up very well with when markets recovered. So PE was the first to recover and was very strong early on. The other markets followed very shortly after that and Automotive was last. As you remember, many automotive manufacturers struggle to restart their factories and people weren't going to showrooms when we are in the midst of the pandemic. So really, as we've seen things begin to roll over, Personal Electronics was first. It was then followed by the other markets, and yet we still have automotive that's hanging in there. So I think that's the one thing that's unique. And I think as we've learned and studied the cycles, our product portfolio has changed as well over time. But the best time to be preparing for the upturn is before it shows up. So that's what we've been busy doing and we think we're in a great position to support the next upturn and to continue to gain share. So, thank you, Ambrish. We'll go to the next caller, please.

Vivek Arya:

Thanks for taking my question. I wanted to go back to automotive just to make sure that I understood what you said. Do your comments imply that you're seeing a largely seasonal environment in Q4 with no changes in terms of orders to traditional or EV customers? And if that is the case, if I understood it correctly, isn't that surprising given the macro headwinds that sector is facing?

Vivek Arya:

So what is being -- I think when you were asked before, you said that if there was anything abnormal, you would have mentioned it. So I assume that because you didn't mention it, that it is normal.

Vivek Arya:

Yes. On depreciation, what is driving the revision? Because your CapEx doesn't seem to be changing. And then kind of part B of that is, if I take that year-on-year delta, Rafael, I think it's about $400 million, $500 million or so incremental in 2024. So at the current revenue run rate, that's a 2 point to 3 point headwind to gross margin. I just wanted to make sure that I got those two points right.

Vivek Arya:

And the gross margin headwind, is that -- did I have the calculation right? It's a 2 point to 3 point headwind on gross margins.

Vivek Arya:

Yeah. Thank you.

Operator:

Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Rafael Lizardi:

Yes. Well, so it's an accounting process and it's essentially when you're below what's considered normal utilization, that percent that you're below that -- and that is generally determined by wafer and the fab is wafer starts and out in the assembly test operation as your -- the number of units that you're producing and you divide that by the capacity that you can get, the maximum capacity. You establish a normal, which is where you normally expect to be. That could be 85%, 90%, 95%, depending on the situation. And whenever you're below that, then you take that percent that you're below and then you take those fixed costs and go straight to the P&L instead of going into inventory. So some of those costs that will come in fixed costs, some of them are depreciation, but it's not only depreciation. You have electricity, for example, is largely fixed. You use [indiscernible] whether that tool is running production or not as long as it's plugged in. So you take that into account. And then at the end of the day, you're not creating money when you do that, you just essentially put it on the balance sheet or the P&L. And in this case, it's going directly into the P&L as a linked quarter charge because that portion of the capacity is not producing. Now one more comment, that gives us tremendous operating leverage on the other side of that, right? Because think about fixed costs on the way down, they heard of it. But on the way up, they're fixed, right? So from a cash standpoint, on the way up, you don't spend any more and then you get just tremendous cash fall-throughs on the revenue, particularly when it's 300-millimeter capacity at very low cost.

Joe Moore :

Great. Thank you. Separately, on the comm infrastructure business seemed quite soft, both quarter-on-quarter and year-on-year. I know that business isn't a focus for you guys, but can you talk about what's driving that weakness?

Operator:

Our next question comes from Tore Svanberg with Stifel. Please proceed with your question.

Dave Pahl:

Yes. So as I mentioned, I think as part of another question on revenue order linearity, there was nothing unusual inside of that. Secondly, we obviously, we're describing the environment as being weak. And we don't have a system that tells us, are we shipping above or below demand. The strongest signal that we get is orders from customers. Now as we talked about earlier comms, or a market like Personal Electronics was the first market to go into the downturn. We've had a couple of quarters of growth inside of that market. Now it's up off of a very weak base. But we are seeing that as a trend. If you compare that to the industrial market, we had seen that, let's say, let's call it, about half of the sectors begin to weaken a couple of quarters ago, it was really this quarter that we saw that, that weakness is broadening. So customers, we believe, inside of markets like that inside of markets like Comms equipment that we said they're adjusting their inventories as such. So again, that provides us the opportunity both strategically with building the capacity and more tactically, building, putting in place the inventory to be able to support the next upturn because it will certainly come. Do you have a follow-on?

Rafael Lizardi:

So nothing new, frankly. The ITC is the expectation is similar, which is about a 20% to 25% credit on everything that is spent on CapEx in the U.S. for fabs. So what we said back in February is that that's going to be roughly $4 billion of the $20 billion or so that for CapEx, the $5 billion more. So roughly about $4 billion of that we're going to get back on ITC about one year offset. Of that, we have already accrued $1.2 billion on the balance sheet. So you'll see that on our balance sheet on the long-term assets. A portion of that, we will get some time next year, probably by fourth quarter next year is when we expect to get that cash, so that's when the cash will start flowing in. As I mentioned in an earlier call, on an earlier question, we are actively applying for the grant. So that's going to be in addition to the ITC. We're not counting on that. We don't have any numbers on that because you have to apply, you have to wait until the Department of Commerce makes that decision. But we are -- we're planning on receiving the funding from the CHIPS Act grant was comprehended in our decision, and we firmly believe we are very well positioned to receive those funds, and we're a great candidate for that, and we believe there will be meaningful to manufacturing operations in Texas and Utah to support semiconductor growth and the objectives of the CHIPS program office.

Operator:

Our next question comes from the line of Harlan Sur with JPMorgan.

Dave Pahl:

Yes. So let me -- I'll speak to what we saw in the third quarter. And just in general, including industrial in China continue to remain weak. So, I think if we're having this call a year ago or so, as China came out of COVID, I think most of us would have expected there to be a more significant rebound, which just hasn't materialized. So yes, I think when you look at on a regional basis compared with the year ago, the only region that was up was Japan. So the other regions were down. And so, again, just described that weakness as being very broad in nature. Do you have a follow-on, Harlan?

Dave Pahl:

Yes. As we talked about before, we had focused on changing the product strategy that we had inside of embedded. I'd say we're very pleased with the results that we have so far. Our first objective was to stabilize that business. And we continue to invest in it because we believe it has long-term growth potential and contribution to free cash flow. So we're very pleased with where we're going. I think more tactically, as we talked about last quarter, we saw that business does rely more heavily on foundry suppliers. We began to see those -- that capacity begin to free up for us. And I think that it was different because we had capacity in place to service analog, our own capacity there overall. So, yes. So again, we think that business long term is going to be a great driver for us in the future. So thank you. And I think we've got time for one more caller.

William Stein:

Great. Thanks for squeezing me in. Dave, can you remind us what's in the other segment besides calculators and perhaps why that end market was down so much more than the others? I know it's very seasonal from calculators, but there was a big drop year-over-year.

William Stein:

Yes, perhaps something that hasn't come up in a while, but lead times. We were dealing with this golden screw issue for a while where there were quite a number of parts or quite a big part of the, let's say, all the available SKUs that had very extended lead times with revenue down as much as it is. I'm guessing that, that's mostly resolved and lead times are like sort of stock to four weeks for most things at this point. But if you could level set me on that, the degree to which there are still extended lead times, that would be really helpful. Thank you.

Rafael Lizardi:

All right. Let me wrap up by reiterating what we have said previously. At our core were engineers and technologies, the foundation of our company but ultimately, our objective and the best metric to measure progress and generate value for owners is a long-term growth of free cash flow per share. While we strive to achieve our objective, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that's ever changing and we will be a company that we are personally proud to be part of and would want as our neighbor. When we are successful, our employees, customers, communities and owners all benefit. Thank you, and have a good evening.

Dave Pahl:

Welcome to the Texas Instruments' Second Quarter 2023 Earnings Conference Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by 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, I'll start with a quick overview of the quarter. Next, I'll provide insight into second quarter revenue results with some details of what we're seeing with respect to our end markets. And lastly, Rafael will cover the financial results and our guidance for the third quarter of 2023. Starting with a quick overview of the quarter. Revenue in the quarter came in about as expected at $4.5 billion, an increase of 3% sequentially and a decrease of 13% year-over-year. Analog revenue declined 18%, Embedded Processing grew 9%, and our other segment declined 10% from the year ago quarter. Now, I'll provide some insight into our second quarter revenue by market. During the quarter, we experienced continued weakness across all markets except Automotive. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the Industrial market was about flat. Next, the automotive market was up low-single digits. Personal Electronics was up low-single digits after several quarters of sequential declines. And next, communications equipment was down mid-teens, and finally, Enterprise Systems was down mid-single digits. Rafael will now review profitability, capital management, and our outlook. Rafael?

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines for questions. In order to provide as many of you as possible the 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?

Vivek Arya:

Thanks for taking my question. I had a high level question which is when I compare TI's sales growth right down almost 13%, 14% in the near-term down double-digit versus peers, it's significantly below, and when I look at your trailing 12-month free cash flow of sub-17%, if my model is right that is the lowest since 2010. But what point will TI say that something needs to change in the strategy to help close the gap on the growth side and to help free cash flow margins get back to the trend line? So I understand that obviously you're not optimizing the model for just one year, but now we have seen just consistent decline in free cash flow per share, which is your preferred metric. So at what point should we start to see free cash flow get back to historical trends?

Dave Pahl:

Yeah, and maybe I'll just add that Vivek, as you know, and had followed us for some time. One of our competitive advantages is manufacturing and technology. So these CapEx investments really are strengthening that advantage over time. It's fairly obvious that those investments will allow us to produce products at significantly lower cost when -- to service demand and controlling those assets in today's world is increasingly important. So customers can see the investments that we're making. Not only with that, the other systems that we've got to make it easier to do business with us. Combined with the inventory we're putting in place to support their growth. And customer reactions is extremely positive to that. So, we believe these will be great investments for all of us long-term. You've a follow on?

Dave Pahl:

Yeah. I'll start, Rafael, if you want to add. Again, we've talked about is share doesn't move quickly inside of our markets. I think that depending on the peer you're comparing to, oftentimes the market exposure can explain a good portion of it. There's other factors like how much distribution is someone using. As you know, we've transitioned from mostly using distribution to mostly having revenue come direct. So there is inventory that needed to be burned out of the channel as we made that transition. So there's multiple factors. I think going forward, our confidence in being able to continue to gain share is extremely high. Customer reaction to the capacity that they know they need to have wanting to know that they've got capacity runway not from someone's manufacturing supplier, but directly from someone that makes their products is really resonates with customers. Okay, thank you. We'll go to the next caller, please.

Operator:

Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Dave Pahl:

Yeah, I'll just point out that this last quarter we saw weakness across the board in our markets with the exception of automotive like you've called out. And just to point out that continued asynchronous behavior. We had PE weakened back in second quarter a year ago and the other markets followed, but obviously, the exception of that with automotive continued to be strong and it's up over 20% year-on-year. So definitely very strong growth there. And as we look into the third quarter, we're not expecting to see any significant change in our end-markets compared to this last quarter. You have a follow on?

Dave Pahl:

Yeah. No, thanks for the question, Toshiya. Yes, we are comfortable where we are. As a reminder, our objective for inventories to maintain high levels of customer service and minimize obsolescence. I would point you to slide 13 at our capital management call. That shows the semiconductor cycle over many years of about 30 some years and what that informs us on what could happen in the future and we're planning for the long-term growth through those cycles, not in any one quarter or even any one year. And of course inventory levels always depend on demand expectations and for the time being in the near term, they will likely have an upward bias.

Rafael Lizardi:

Utilization this last quarter was lower than the previous quarter. That was largely a function of adding capacity.

Dave Pahl:

Thank you, Toshiya. The next caller, please.

Stacy Rasgon:

Hi, guys. Thanks for taking my question. So my first one is just to follow up on that. You said the inventories have an upward bias. So that means inventory like dollars and days, do you expect to increase again in Q3?

Stacy Rasgon:

How many quarters are they going to keep going up for though?

Dave Pahl:

Okay. Thank you, Stacy. We'll go to the next caller, please.

Dave Pahl:

What was your second, yes, thank you.

Christopher Danely:

Hey, thanks, guys. And by the way, thanks for having a nice, concise conference call. It's unique and semis, much appreciated. My first question is just on lead times and shortages. Given all the capacity you're adding in the inventory, can we pretty much say that TI lead times are the lowest, at least among peers and the shortages are all gone? Are we pretty much, I guess , back to normal. And I mean, are there any metrics that you could share with us sort of now versus three or six months ago on the improvement there?

Christopher Danely:

Yes, earlier in the call, and in a bunch of the calls, you keep talking about your advantages in manufacturing and given you have more internal manufacturing and more 300-millimeter than the competitors, are you, I guess, are you guys getting a little more aggressive on price? Are you able to price below the competition? Is this something that has happened recently? Some of your competitors have, I guess, complained about TI getting more aggressive in price recently. I just wanted your response to that.

Christopher Danely:

Thank you.

Harlan Sur:

Yes. Thank you. Good afternoon. Up into the March quarter, the team had seen three consecutive quarters of increasing cancellations and push-outs, right sort of the typical sort of customer behavior in a weak demand environment. Did the team continue to see cancellations and pushout activity expanding in the June quarter? Or have you guys -- or have you or are you seeing signs of stabilization?

Harlan Sur:

Yes. Thanks for that. So your embedded business continues to hold up very well, right? I think trailing 12 months, it's up 9% year-over-year versus your analog business, which is down 7%. I know part of it is due to the strategy, the refocusing of the MCU businesses over the past few years. More general purpose, catalog-focused, right? But it also seems to be reflecting this broader trend in the industry, if I look at the SIA data. If I look at you and your other MCU competitors, where -- industry MCU trends year-over-year are holding up much, much better versus the analog. I just wanted to get the team's perspective on why the large delta in performance analog versus embedded?

Operator:

Our next question comes from the line of Blayne Curtis with Barclays. Please proceed with your question.

Rafael Lizardi:

In the big scheme of things, our goal here is to support revenue growth. It's not, frankly, to optimize short-term fluctuations in gross margins. Those are not irrelevant, of course, but it's just the focus is on supporting revenue growth in the short-term, midterm and long-term. And inventory supports short-term to midterm fluctuations, right, that we can mitigate -- we're having plenty of inventory. And the incremental cost of inventory is really low. As we talked about, on the obsolescence side, also on the variable cost nature of what goes into inventory. So it's just sort of just things that we keep in mind when -- in trying to make those decisions.

Rafael Lizardi:

So I assume you're talking about third quarter? So yes, our guidance, and as you pointed out, we only give top line and EPS. But our guidance is the best estimate that we have in our gross margins -- or I'm sorry, that guidance embeds -- the revenue is flat in that particular case, and it embeds the result in depreciation and other related costs from added capacity over time. On a year-on-year basis, I know you asked sequentially, but just a reminder, on a year-on-year basis -- keep in mind that last year, we had the Lehi acquisition fab cost in restructuring, and now it is in COR, in cost of revenue as of December of last year when you move.

Operator:

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

Rafael Lizardi:

Yes. Just -- what I would tell you is depreciation, the way we depreciate equipment is over five years. Buildings is much longer, usually they average about 30 years or so. But consider that that equipment lasts a lot longer than five years, right? We have factories today that are running on 50 years-plus. And some of that has upgraded equipment. But -- but broadly speaking, that equipment lasts for decades, not the five years where we depreciate it. So it's probably an unfair comparison to try to put the 300 benefit next to the depreciation and expect an offset in the short-term. I would suggest you think of it from a cash standpoint. We're investing that CapEx. It's cash, forget about the depreciation, is -- CapEx is what we're investing. That's going to enable growth by adding that internal capacity, which, as Dave alluded to earlier, that is geopolitically dependable capacity. We're putting as many as four Fabs in Sherman, two in Richardson, two in Lehi in Utah. And then assembly test facilities in Asia, primarily Malaysia and Philippines, for example. So -- so that's going to put us in a really great position to grow the top line for a long time. And then what happens there is that yields a lot of operating cash for a company that then we can either redeploy or return to the owners of the company after those investments.

Joshua Buchalter:

Yes, sure. Thank you. I recognize the language is similar last quarter regarding the end market commentary. But did anything change get any better or worse intra-quarter? And in particular, personal electronics grew, you've talked in the past about it sort of being a four-quarter cycle. Is it safe to say that that's sort of bottom now? Thank you.

Operator:

Our last caller comes from the line of Chris Caso with Wolfe Research.

Dave Pahl:

Sure. Yes, Chris, I think if you look across the end markets broadly, you could say that all of them showed weakness and reflective of customers reducing inventories, with the exception of automotive. And even inside of that, of course, if you look at industrial, it's not -- all the sectors aren't identical, meaning you've had strength in aerospace, grid infrastructure, in other sectors like that. So -- and PE is the same way, not all of the sectors were as weak or as strong as others. So -- but broadly, you could say it was across each of those markets. Do you have a follow-on?

Dave Pahl:

Yes. So it wouldn't surprise us if it corrected. I don't think anyone can declare certainty on those types of things in the future. But I think that customers will build inventory. I've got 37 years of experience in the industry now, and that's the way the markets have behaved in the past. So that's generally a good guide in the future, but I think you can't pound the table and make absolutes, but certainly wouldn't be surprised if that were the case. So with that, we'll hand it over to Rafael to wrap this up.

Operator:

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Dave Pahl:

Welcome to the Texas Instruments' First Quarter 2023 Earnings Conference Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by 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, I'll start with a quick overview of the quarter. Next, I'll provide some insight into first quarter's revenue results with some details of what we're seeing with respect to our end markets. Lastly, Rafael will cover the financial results and our guidance for the second quarter of 2023. Starting with a quick overview of the first quarter. Revenue in the quarter came in about as expected at $4.4 billion, a decrease of 6% sequentially and 11% year-over-year. Analog revenue declined, 14%, embedded processing grew 6% and our other segment declined 16% from the year ago quarter. As expected, our results reflect weaker demand in all end markets with the exception of automotive. As mentioned last quarter, a component of the weaker demand was inventory reductions by our customers, which we expect to continue in the second quarter. Now, I'll provide some insight into our first quarter revenue by market. Similar to last quarter, I'll focus on sequential performance as it's more informative at this time. First, the industrial market was about flat. The automotive market was up mid-single digits. Personal electronics declined about 30% as we continued to see broad based weakness. Next, communications equipment was down mid-teens and finally enterprise systems was down about 30%. Rafael will now review profitability, capital management and our outlook. Rafael?

Dave Pahl:

Thanks, Rafael. Operator, you can now open up the lines for questions. In order to provide as many of you as possible the 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?

Stacy Rasgon:

Hi, guys. Thanks for taking my questions. For my first one, I just wanted to dig into CapEx and depreciation. So you did CapEx of $982 million in the quarter. I just, first, can you just clarify that's the gross number without any of the tax credits? And I guess assuming that's true, both the CapEx and the depreciation number in the quarter are running well below the run rate there or the annualized number that you would give at the capital management CapEx should have been about $5 billion for the year. Depreciation maybe $1.5 million. So am I right in assuming that implies a fairly substantial ramp into the back half and end of the year for both those metrics, CapEx and depreciation?

Stacy Rasgon:

I do. Thanks. I'm going to let somebody else ask about the CHIPS Act accrual. I want to ask about inventories. So you're at almost 200 days of inventory. And I think the top end of your target was 190 and you said you'd be comfortable above that. And so we're kind of there. Are you done building inventory now, I guess, and if that's the case, what happens to fab loadings, I guess, as we go into the end of the year? I'm assuming you're running pretty full right now. Do those fab loadings need to come down, especially given the revenue trajectory and given inventories are sitting pretty close to 200 days?

Dave Pahl:

Thank you, Stacy. And we'll go to the next caller please.

Vivek Arya:

Thank you for the question. The first one is specific to industrial and automotive. If I heard you, Dave, I think you said industrial was flattish in Q1. I think it was down 10% in the last quarter. So seems like it's starting to flatten out. But I just wanted to check if that's the right conclusion. I think autos was up mid-single in both Q4 and I said and I thought you said in Q1 as well. So that also seems to be in the right direction. So the specific question is, as we look into Q2, how should we think about industrial and auto? Can they stay at least kind of flattish or do you think that they are also exposed to the macro weakness?

Vivek Arya:

Yeah. Dave, I actually wanted to stay on the same question because there is a perception that industrial and auto demand is kind of this last shoe to drop in semiconductors. And when I look at what your competitors, right, peers are seeing in analog and microcontroller markets. They are noticing a level of stability and strength. And that's what I want to confirm with TI that are you seeing the same thing as you go into Q2? Because, yes, consumer is weak, right? Enterprise is weak. That is well known. But specifically auto and industrial. Do you think they are now trending in the right direction in Q2 or do you think that you are in front of some weakness and inventory adjustment in those markets also?

Operator:

Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Dave Pahl:

Yeah, I think, Tim, as you know, this is the first time that our markets, not only for us, but the industry have behaved differently as we've gone into this cycle. So if you look at personal electronics, we began seeing weakness in personal electronics back second quarter a year ago, right? So we're now into our fourth quarter of weaker demand. The other markets with the exception of automotive began weakening the quarter before last. So we're a couple of quarters in on that. So and of course automotive has remained strong through last quarter. So you put all that together. I think it depends on which market you're looking at. If you're in PE, you're obviously closer to the bottom than you are to the top. So I think our practice, we don't try to predict where the bottom or the top is, really draws -- draw your attention back to slide 13 that we talked about. That longer term trend is what we're planning on and what we believe we can look at to inform our decisions. Do you have follow-on?

Dave Pahl:

Yeah. And as we've talked about that's something we think you have to look at over time. If you go back to the prior year as with the pandemic started, you remember we made some decisions to continue to run our factories and build long-lived inventory. And those decisions served us very well. So as we went through each quarter, as customers really expedited across the board. We could respond to that and ship them product. And in the short term, that probably helped us with the numbers when you compare it against what the industry was doing. So as we go into the following year, of course, those are our tougher compares. But we have a lot of practices that I think are different than many of our peers. As an example, through that period, we've moved to more closer direct relationships with customers. We believe that's giving us much better insight. We can see their demand more clearly. We can see what they need both short term and long term much better. Also I'd say that as we were moving through a period where most of our customers are reducing their inventory to align with their needs, we have an employee things like long-term sales agreements or non-cancelable, non-reschedule contracts. So customers aren't taking product that they don't need. So that isn't share gains, it's just -- I think for us, we want to be as easy to do business with as we can. And those -- I think all those practices are setting us up well to continue to gain share. So thank you, Tim. We'll go to the next caller, please.

Ambrish Srivastava:

Hi. Thank you very much. Rafael, I just want to make sure I got the depreciation answer right. Obviously, it has implications for gross margin. And the run rate -- should we assume the first quarter run rate because that is a very positive implication. And you said it would be lower than the linear, but how much lower, I think we were all modeling $1.5 billion is kind of the number that we had. What's the right way to think about that, please?

Ambrish Srivastava:

Got it. Got it. Just a clarification and not a follow-up. So if you look at gross margin last year versus this year, the three factors at least. I just want to make sure I'm doing it right is the flow-through and the fall-through that you talk about. And then the offsets would be LFAB is now going from restructuring into COGS and then apples-to-apples add a higher depreciation. Is that the right way? Am I thinking about the right three parts?

Ambrish Srivastava:

Got it. Thank you.

Operator:

Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Rafael Lizardi:

Yes. No. I would tell you, it was similar to Ambrish's question, high level, think of the model we've given you is 70% to 75% fall-through. But that in any one quarter, even if it's on a year-on-year basis, but especially sequentially on relatively small changes in revenue, that's not going to work very precisely, right? So but over a long enough time, that works well. As we just talked about, you had the depreciation. And then in this particular quarter, you have to adjust for the cost that were in restructuring that were for Lehi that now go to primarily to cost of revenue. Now there are other factors that are going to play, for example, and I mentioned it to Ambrish a second ago, but mix is a factor. So you get a quarter with a lot more industrial automotive and less personal electronics, that plays into it. And the final one, depreciation doesn't necessarily immediately flow through the P&L because it needs to be matched to inventory. So that generally flows through inventory first and then so that sometimes delays the impact of -- the true impact of depreciation to the gross margin. But clearly, depreciation, as I mentioned earlier, it is increasing, so it's coming. So over a long enough time, multiple quarters, certain years, you need to factor it as we have talked about, right, the fall-through and the increase in depreciation.

Ross Seymore:

Yeah, I do. I'll just pivot to round up that CHIPS Act question from earlier. Rafael, could you give us an update on what the cumulative accruals are for that? And probably equally importantly, when does that likely flow through the income statement?

Dave Pahl:

Thank you, Ross. We'll go to the next caller, please.

Christopher Danely:

Hey, thanks, guys. Just some color on the inventory correction you're seeing out there. So do you think that we're through the worst of it? Maybe talk about where it's, I guess, lower or where it's higher? Do you think that it's getting better at this point or getting worse? Or can we not tell?

Christopher Danely:

Yes. Can you just talk about the linearity of bookings during the quarter and how your backlog looks now versus, I guess, three months ago? And what does that imply for the second half of the year?

Operator:

Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Rafael Lizardi:

Yes, Joe, I would say that we continue to believe the best way to look at our revenue and the changes in revenue is more easily understood by looking at end markets, but there wasn't any significant change that we saw inside of China this last quarter. Do you have a follow-on?

Rafael Lizardi:

Yes. I think that as we've talked about before, sure, doesn't move quickly. We're in a position as we're building inventory to support higher demand if it was to materialize. So again we think that's mostly reflective of what's going on in the market. I think that's consistent with what you see from customers and other data that you can see that's out there. Thank you, Joe. And I believe we've got time for one more caller, please.

C.J. Muse:

Yeah, good afternoon. Thank you for taking the question. I just wanted to clarify and confirm some of the statements from earlier. So your gross margins came a little better than what we thought for March. And so just curious, are you still on track for that $1.5 billion depreciation for the year? And were there any changes in kind of the timing of installation of equipment? Are you still seeing kind of a tight supply there?

C.J. Muse:

Yes, please, a longer-term question. One of the overriding themes for the last couple of quarters on the semi-equipment side is the vast spending by lagging edge domestic China with an obvious focus kind of on the 90-nanometer plus. But actually I shouldn't discount the 28-nanometer plus part of the world. So as you think about regionalization and as you think about perhaps a rising kind of competitor in the China landscape looking out over the next five-plus years, how are you thinking about the pros and cons and how you'll compete kind of in that environment? Thank you.

Rafael Lizardi:

Yes. Thanks, Dave. Let me wrap up by reiterating what we have said previously. At our core, we're engineers and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate long-term value for owners is the growth of free cash flow per share. While we strive to achieve our objective, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that's ever changing. And we will be a company that we are personally proud to be a part of and would one as our neighbour. When we're successful, our employees, customers, communities and owners all benefit. Thank you and have a good evening.

Dave Pahl:

Welcome to the Texas Instruments' Fourth Quarter 2022 Earnings Release Conference Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by 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. First, you likely saw last week we announced that Haviv Ilan will become President and CEO on April 1st and that Rich Templeton will continue as our Chairman. I'm sure you'll want to join me in congratulating both of them. Secondly, let me provide some information that's important to your calendars. Next week on Thursday, February 2nd, at 10:00 a.m. Central time, we will have our capital management call. Similar to what we've done in the past, Rafael and I will summarize our progress and provide some insights into our business and our approach to capital allocation. This will include an update of our 300 millimeter capacity expansion plans to support the increasing confidence that we have in our long-term growth. Moving on, today, we'll provide the following updates. First, I'll start with a quick overview of the quarter. Next, I'll provide insight into fourth quarter revenue results, with some details of what we are seeing with respect to our customers and markets. I will then provide an annual summary of our revenue breakout by end market. And lastly, Rafael will cover the financial results and our guidance for first quarter of 2023. Starting with a quick overview. Revenue was $4.7 billion, a decrease of 11% sequentially and 3% from the same quarter a year ago. As expected, our results reflect weaker demand in all end markets with the exception of automotive. A component of the weaker demand was customers working to reduce their inventories. In first quarter, we expect a weaker than seasonal decline, with the exception of automotive, as we believe customers will continue to reduce inventory levels. Turning to our segments, fourth quarter Analog revenue declined 5% year-over-year and Embedded Processing grew 10%. Our Other segment declined 11% from the year-ago quarter. Now, I'll provide some insight into our fourth quarter revenue by end market. I'll focus on sequential performance again this quarter, as it is more informative at this time. First, the industrial market was down about 10%. The automotive market was up mid-single digits with strength in most sectors. Personal electronics was down mid-teens with broad-based weakness. Next, communications equipment was down about 20%, and finally, enterprise systems was also down about 20%. Lastly, as we do at the end of each calendar year, I'll describe our revenue by end market for 2022. We break our end markets into six categories that are grouped by their life cycles and market characteristics. The six end markets are industrial; automotive; personal electronics, which includes products such as mobile phones, PCs, tablets and TVs; communications equipment; enterprise systems; and other, which is primarily calculators. As a percentage of revenue for 2022, industrial was 40%, automotive about 25%, personal electronics 20%, communications equipment 7%, enterprise systems 6%, and other was 2%. In 2022, industrial and automotive combined made up 65% of TI's revenue, up about three percentage points from 2021 and up from 42% in 2013. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive. Our industrial and automotive customers are increasingly turning to analog and embedded technologies to make their end products smarter, safer, more connected and more efficient. These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth compared to our other markets. Rafael will now review profitability, capital management and our outlook. Rafael?

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines 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 will provide you an opportunity for an additional follow-up. Operator?

Chris Caso:

Yes, thank you. Good evening. I guess, the first question is, if you could just maybe characterize what you're seeing going to Q1, you're talking about that being worse than seasonal. Is that also broadly based in terms of the decline as you've seen in Q4? And I know you don't guide by segment, but any kind of color you could provide by segment as to what you're seeing and the extent to which customers are burning inventory as you know into the first quarter?

Chris Caso:

I do. Thank you. I wonder if you could speak about the pace of depreciation expenses as you go through next year. You spoke about RFAB and I know it started production and it's hitting depreciation now. Is there additional incremental depreciation coming from RFAB as you go through the year. What happens to LFAB as you, I guess, maybe the timing of that when that starts production and start hitting depreciation? And then how should we think about some of the benefits that come from CHIPS Act that tend to decrease depreciation over time. I'm sure you're going to speak about that on the Capital Day coming up as well.

Chris Caso:

Yeah.

Operator:

Next, we’ll hear from Chris Danely of Citi.

Dave Pahl:

Yes. I – and I – again, that’s – thanks for the question, Chris. It – the longer-term growth rates are really we’re speaking to how things are going to grow over the next three and five and 10 years. And that higher confidence comes from the higher semiconductor content growth that we’re seeing particularly in industrial and automotive. And the fact that that those two markets now make up two-thirds of our revenue. So just as that structurally grows faster than the rest of the market, we’re convinced more than ever that that will continue to drive our top line and also the products that we have inside of those markets. And I’d say also the strong customer response we’re getting to our geopolitically dependable capacity. So since we’ve shared publicly our plans last February in capital management call, I just say that, that the response has been very, very strong. So those are really the three things that are adding to our confidence. You have a follow-up?

Dave Pahl:

Yes. So let me take that. And first, big picture let me point you to our scorecard. The one that we used for capital management when we talked about the objectives in – when it comes to inventory is to maintain high levels of customer service, keeping stable lead times while minimizing inventory obsolescence, our strategy and our portfolios such that it’s long-lived a very diverse, our customer base. So the risk of obsolescence is very low. So that’s a part of the equation. And the other part is the upside that we get by having that inventory both short-term and long-term to support customers. So that’s why we’re comfortable holding higher levels of inventory. I’ve been talking about from current levels we could add a $1 billion to $2 billion of additional inventory. And the timing, that all depends on revenue trends. So if they’re higher, then it’ll take longer. If those serving trends are a little weaker, then it’ll be a little faster to get there. On the mix is a number of angles on that, chip stock versus finished goods, we have a mix of both of those. In some cases, it makes sense to have more of one than the other, but they’re both very low risk. So that’s how we think about it.

Dave Pahl:

Yes. We’ll go to the next caller, please.

Toshiya Hari:

Hey, how’s it going? Thank you so much for taking the question. Dave, hoping you guys could talk a little bit about trends in China, what you saw in Q4, if there was any choppiness toward the end of the quarter, and more importantly, how you’re thinking about Q1 and beyond. I guess, there’s hope out there that China as an economy bounces back in 2023. Are you guys seeing any early signs of a recovery in terms of end consumption of your products?

Toshiya Hari:

Yes, I do. Your analog business in the quarter was down 5% year-to-year and obviously you guys are the first to report. So it’s hard for us to compare and contrast. How you guys did relative to your competition or your peer group. But it feels like you may have underperformed in the quarter, and I realize it’s only one quarter. What’s the competitive landscape like today? What kind of pricing trends are you seeing as demand patterns start to soften? Thank you.

Operator:

Harlan Sur of JP Morgan.

Dave Pahl:

Yes. Harlan, so the first question is, in a weakening environment, not too surprising. The cancellations were up in the quarter. So we did see an increase there. And from a consignment versus classic backlog, customers really not much difference there. Their visibility – even though we’ll get visibility out six months, their visibility to their demand can change, as we know very rapidly within the 90 days or certainly even within 30 days as those windows move a long time. So I would say that there’s not much changed in that. And oftentimes if customers aren’t canceling orders, what they’re doing is rescheduling them back out in time. So certainly seeing that happen as well. Do you have a follow on?

Dave Pahl:

Yes, yes. Thanks. Great, great question. Thank you for it. Yes, first I would just say that our efforts having impact, they are. And I would just say that we’re pleased with the progress that we’re making there with embedded. And we believe that progress in those results just need to be measured again over time. So, we continue to work on that business and we’ll continue to do that. When we think about the market opportunity for embedded and analog, we think that both of those markets have about the same growth opportunities. So in time the growth rates will converge, though they could be – you could see differences in any given quarter. But longer term, we believe that they can grow at the same rates. So thank you. And Harlan will go to the next caller, please.

Timothy Arcuri:

Thanks a lot. Dave, I had a question about just the analog business generally, both with respect to share and margins. The margins are quite a bit lower than in early 2021 on quite a bit more revenue. I guess, is that all just still supply chain related costs? And do we get that back at some point? And then on share, just in that same point, the share, we don’t know what the – all of the calendar fourth quarter looks like, but it’s pretty clear that the share is going to be down about 150 basis points this year, and you’re kind of back to 2012 levels. So I just wonder kind of what’s going on there? Is there some pricing issue that might explain why that share would be down so much? Thanks, Dave. And then I have a follow up.

Dave Pahl:

Yes, and I’ll just add that I think our approach to building closer relationships with customers has served us well. As you know, we’ve moved and taken more of our revenue direct as well as providing services through ti.com. So it’s provided a lot of advantages including, as being better able to see and respond to changes in demand. And you know as customers are reducing their inventories now, we haven’t employed any long-term sales agreements or non-cancelable, non-reschedulable contracts, really just focused on customers, and trying to meet their needs and service them well for the long-term. I think all those things has us in a position where we do believe that we’re able to grow the top-line faster over the next few years. And as we talked about, we’ll give you some insight into that next week, and how that’s going to change some of our plan. So was that Tim’s follow up, or, you have a follow up, Tim?

Dave Pahl:

Yes. So year-on-year, automotive was up about 30%. And just put that in context from fourth quarter 2019. I just picked that because it’s pre-pandemic levels are – revenues in auto are up in the mid-70%s [ph]. So we continue to see strong growth there. So that’s the year-on-year. The comment that we made before that it was up mid single-digits it was the sequential comment, Tim.

Operator:

Next we’ll hear from Ambrish Srivastava of BMO Capital Markets.

Dave Pahl:

Yes. Ambrish, thanks. I’d say that as we – you almost have to go back to the beginning of the pandemic and how revenues behaved as we went through first quarter and into second and third. And if you remember, as the pandemic spread in third quarter, we saw wide and very deep cancellations across all of the markets including automotive. But as we all went home to set up our home offices, we either bought a new monitor or a printer or PC. So very quickly our personal electronics customers came back and came back very strong if you remember. The other markets began to follow, but automotive was the last to respond. And people early in the pandemic weren’t shopping for cars, they weren’t going out of the house. So they had that issue. And as manufacturers tried to reopen, they had more issues with COVID protocols and working to bring their plans back online. So it’s not too surprising that there as an asynchronously came out. It’s asynchronously going down. So – but all these markets we believe over the long term will behave the same. And at some point we believe that we will see a correction in automotive. It may not, but we don’t – we just don’t know. And we’ll continue to ship product to customer demand. It’s obviously very strong. There’s lots of reasons why besides us gaining share, there’s more content, there’s mix and other factors inside of that. But clearly there’s inventory built across all markets. It’s inclusive of automotive. So do you have a follow-up?

Rafael Lizardi:

Yes. So the CHIPS Act has both an ITC, investment tax credit and grants. So you’re asking about the grants. We’re still working through those details. We do not have an update to share right now though the applications open in February. So we are actively – we’re going to actively seek funding on those in whatever – for whatever we could qualify. So we’re going to submit our application in February. But right now, we don’t have any information to share on that. The – all the accruals that we have taken so far, the 400 million that we have taken are all for the ITC, for the investment tax credit, 25% investment credit for U.S.-based manufacturing.

Rafael Lizardi:

Yes. In fact, let me take a second and kind of walk through how it flows through the financial. So you can actually look at our balance sheet on the Page 4 of our release. The other long-term assets that is up to 1.1 billion. You can see the increase year-on-year, that’s the 400 – that’s what a 400 million receivable is for that ITC. If we had not taken the ITC, that $400 million would have gone to property, plant and equipment. So you can see property, plant and equipment $6.9 billion that would have been $7.3 billion. So instead on a long-term asset, a receivable therefore it's not going to depreciate that $400 million doesn't appreciate because it's not part of PP&E, and eventually, we'll get the cash. Now to your question right now, based on our interpretation of the law, we're not going to get that cash until late 2024. And then every year, it will be like one-year in areas, right? You get a kind of one-year late, but that could change. Clearly, that's something that companies are advocating forward to get that cash early. But right now, we're not planning to get that until 2024. So again, that's how you see it on the balance sheet, lower PP&E. You see a receivable instead. Then because of lower PP&E, you have lower depreciation over the life of the asset [ph] and then the receivable because the receivable venture, you get the cash, so it goes from a receivable to the cash line, right? And then eventually, we return it to the owners of the company or use it for other – for the corporate core business. Hopefully, that answers your question.

Dave Pahl:

Yes. Maybe just quickly there 2024 timing is tied to when we file our taxes for 2023, right?

Ambrish Srivastava:

It's an more-than [ph] accounting. Thank you, guys.

Operator:

Thank you. And our final question for today will come from Joshua Buchalter of Cowen.

Dave Pahl:

Yes. Joshua, maybe just quickly, obviously, when customers begin reducing inventory, its number one quarter phenomenon. It usually takes several quarters for that to happen. We won't have a sight and it obviously will also depend on what happens to their end demand, which we can't predict. And – but yes, we do believe that we get better visibility because we do have more direct relationships with customers overall, so you have a follow on?

Rafael Lizardi:

Sure. No, I’m happy to address that. So first, these are long-term investments in nature. The R&D, clearly that’s where we get the, continue to build on the broad portfolio. That’s where we have process technology and that we get results over many, many years into the future. And we’re going to protect those investments. But it’s not just R&D, even in SG&A we have areas that are tied to capabilities. TI.com is the best example. That’s another place where we’re investing, and that’s tied to a long-term top line growth of the company to be strengthening the reach of channels advantage, you could add CapEx to that picture. That’s also obviously a long-term investment to strengthen our manufacturing and technology advantage. If you look at the, over the last four or five years, our OpEx, so R&D and SG&A, they’ve been at a very steady $3.2 billion for like four or five years. This year for the first time, we picked that up to $3.4 billion. So we went up a little bit as we increased investments. And actually that was an impact on due to inflation, which we’re not immune to that, you can expect that to continue increasing a little bit over the, in 2023 and over the next several years as we continue to increase investments. There’s also the inflation component and but big picture, those are great long-term investments that will feel the growth for the company over the next 10 to 15 years.

Operator:

That does conclude today’s conference. Thank you all for your participation. You may now disconnect.

Dave Pahl:

Welcome to the Texas Instruments Third Quarter 2022 Earnings Release Conference Call. I am Dave Pahl, Head of Investor Relations and I am joined by 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 you will be able to get it 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 will provide the following updates. First, I will start with a quick overview of the quarter. Next, I will provide insight into third quarter’s revenue results with some details of what we are seeing with respect to our customers and markets. And lastly, Rafael will come to results and our guidance for the fourth quarter of 2022. Starting with a quick overview of the third quarter, revenue in the quarter came in about as expected at $5.2 billion, an increase of 1% sequentially and 13% year-over-year. Analog revenue grew 13%, Embedded Processing grew 11%, and our Other segment grew 20% from the year ago quarter. Now I’ll provide some insight into third quarter revenue by market. This quarter, I will focus on our sequential performance as it’s more informative at this time. First, personal electronics declined mid-teens as we continue to see the weakness we described in the second quarter. Industrial was about even sequentially as we saw weakness begin to broaden in the industrial market. The automotive market remains strong and was about 10%. Next, communications equipment was up high single-digits. And finally, enterprise systems, was up mid single-digits. Turning to our expectations for the fourth, we expect that most of our end markets will decline sequentially with the exception of the automotive market. Lastly, we and our customers remain pleased with the progress of our expansion of our manufacturing capacity, which was outlined in our February capital management call and will support the long-term secular trend of increased semiconductor content per system. Customers especially value the geopolitically dependable footprint of our manufacturing additions. We are now in production in RFAB2 and expect production in LFAB later this year. In addition, construction of SM-1 and SM-2 in Sherman, Texas continues as planned. Rafael will now review profitability, capital management and our outlook.

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines for questions. [Operator Instructions] Operator?

Timothy Arcuri:

Hi, thanks. Dave, I wonder if you can sort of go into any detail within distribution versus consignment? Maybe what I am trying to get at is sort of any differences in demand pull as measured by bookings inside distribution or demand pull from the consignment segment, is one better than the other? And also is there any cancellations inside of – into distribution?

Operator:

So we will take the next question from Vivek Arya, Bank of America Securities. Your line is open. Please go ahead.

Dave Pahl:

Yes, Vivek, thanks for that question and the opportunity to clarify. So, personal electronics last year was 24% of our revenue. If you look at the market overall, personal electronics, a little more than 50% of the semiconductor market without memory. So we have less than half of the exposure there. If you look at industrial and automotive, that makes up 62% of our revenues. And inside of the market, that’s 26% of the market. So we are really highly exposed to both industrial and automotive and that’s not by accident, is probably more than a decade ago, we began allocating more of our resources to automotive and industrial and the emphasis there. So we are very pleased with our exposure. And we believe that, that will be where there just will be more content added into those systems. Now that said, there is great opportunities inside of personal electronics, communications equipment and enterprise systems in the decades ahead, but we will just have those secular tailwinds more than average inside of industrial and automotive. Do you have a follow-on Vivek?

Dave Pahl:

Yes. I’d say first, I think when you look at the secular trends inside of automotive, I think all of us know that it will be a great grower for us and we are investing very broadly. So we are just thrilled with the position. If you look at the second quarter of 2020, our growth there has, off the bottom, been very, very strong. Will that market eventually roll over? It will. I mean, that’s just what happens. And we are not trying to predict when that will happen, we will continue to ship product to customers as they request it. And we are really focused on making sure we have got capacity in place for them over the long-term. So we are not really trying to worry about when that will happen. So thank you, Vivek, and we will go to the next caller, please.

Joshua Buchalter:

Hey, guys. Thanks for taking my question. I wanted to double-click on the industrial market. Did anything change materially through the quarter? Anything you can give us on linearity or by geography? As we think about what’s baked into the guide, is it more, I guess, conservatism on the macro or was there really a material change in your customers’ order patterns? Thank you.

Joshua Buchalter:

Yes. Thank you, that’s very helpful. I also wanted to clarify the comments on the CHIPS Act. You mentioned $50 million was accrued on the balance sheet. Was that from the investment tax credit only? Because I know there is a second bucket for manufacturing incentives. And if not, when should – when would you expect to, I guess, get more clarity on how much you’ll be able to accrue for the manufacturing incentive portion of the CHIPS Act? Thank you.

Dave Pahl:

Thank you. We will go to the next caller please.

Timothy Arcuri:

Thanks a lot Dave for let me come back in. So my follow-up was on China. And I’m wondering if you can talk about your business there. Are you seeing any signs of pull-ins or push-outs as a result of some of these bands. Are you seeing any changes sort of in the linearity around the bands getting announced? And I think also, you had talked about China being like high teens of consumption of your product. Is that still where you see it? Thanks.

Rafael Lizardi:

Yes, correct. 99% of our parts fall on the very lowest category of restrictions, just given the nature of the types of parts that we sell. So we don’t have restrictions on those. Of course, there are restrictions specific to entities. There is the entity lease that you hear about, the FDP, that’s another list. And we, of course, follow all the regulations when it comes to that. So when an entity goes listed in there, we take that into account and restrict shipments as according to the law. But given how that works, we don’t expect any meaningful or significant impact to our revenue with those export loss.

Operator:

Next one from Stacy Rasgon, Bernstein Research. Your line is open. Please go ahead.

Rafael Lizardi:

Yes. So let me answer the first one – the last one first. So you see on our P&L, about $77 million of restructuring charges in third quarter, that is all because of – those are the Lehi costs that we chosen to put in there before it qualifies once it qualifies that cost will move to cost of revenue. So it will move to gross margin.

Rafael Lizardi:

Well, it will happen during Q4. Of course, not changing. It doesn’t affect EPS. So it’s just going to move – and we don’t guide the specific lines, right? But if it qualifies in December 1, third of that will go into COR and then all of it will be there for first quarter, right? If you qualify December 31, then all of it will be in restructuring in fourth quarter, and then all of it will move in first quarter.

Rafael Lizardi:

Into gross profit. It’s being in profit from operations the entire time all of this year. The first part of your question, big picture, we will give you an update in about 4 months at the capital management with all the puts and takes. But what I would tell you is that – well, short-term, we expect our change – our CapEx expectation for 2022 have not changed. That is $2.6 billion to $2.8 billion for this year; depreciation, about $1 billion for this year. I’m talking 2022. Bigger picture, as I said earlier, the CHIPS Act, great legislation. We’re very excited about that. That is going to decrease on a net basis. our investment because we’re going to get a 25% reduction from the investments that qualified and manufacturing investments in the United States. But on the other hand, as I alluded to earlier, our confidence around our long-term growth prospects have only grown over the last 6 to 12 months based on the secular trends based on input from our customers. So we feel really excited about that. The net effect of those two and whatever that does to our CapEx plans, we will tell you about that in February.

Stacy Rasgon:

I do. Thank you. I wanted to ask about OpEx. So it’s been running in the $800 million range, plus or minus, for quite a while. And frankly, people are wondering how you’ve been keeping it there. in such an inflationary environment. It is now ticking up, but it’s picking up as revenues are falling. I guess why is it increasing now where is it did increase before and what happens going forward? Because if I would just hold it flat on the revenue guide going forward to do something like 19% of revenue, so it is still below your kind of what you’ve talked about in terms of long-term targets for OpEx. So how do we think about that? Why is it growing now versus before? And how do we think about where the range might go going forward?

Dave Pahl:

Okay, thanks, Stacy. We will go to the next caller. Thank you.

Blayne Curtis:

Hey, guys. Thanks for taking my question. I had two. Maybe just a clarification, though, on Stacy’s question because you said, but I didn’t hear anything negative to net off of two positives. So I’m just kind of curious, and I guess we will see what March brings, and I’m happy if you want to comment on that. But it seems like at least personal electronics is back to where you were in ‘19, ‘20. It seems like industrial is going to kind of get back there. And at that point, you’re building inventories. You had more capacity than demand. So if we do go back to those levels and you’re adding more capacity, I’m just trying to understand is still the view that you’ll build inventory like you do in ‘19 and ‘20 and still roll out the capacity for the long-term.

Dave Pahl:

You have a follow-on, Blayne?

Dave Pahl:

Yes. I think – as well documented, I think as we went through the pandemic, it had the deepest correction from a starting point standpoint. The mix of auto manufacturers to the high end. You’ve got EVs that are inside of those mix that are all adding to that to those secular trends. So I think that we’re well positioned as we make investments across our businesses. We’re investing in powertrain, which would include electric vehicles and hybrid. We’re investing in ADAS systems. We’re investing in infotainment systems. We’re investing in body and lighting. That doesn’t get talked about a lot on conference calls where we get excited about turn signals, as we do about BMS systems. And then we also invest in safety systems. So we are growing very broadly. We’ve got close to 1,000 different automotive OEMs that we service. And we really believe that we’ve got probably decades of growth ahead of us that we’re preparing for. So, thank you, Blayne. Now we will go to the next call please.

Ross Seymore:

Hi, guys. Thanks for let me ask q question. A high-level one on your Analog business. Year-to-date, I think it’s 15% year-over-year with the midpoint-ish of your guidance. It seems like this year might be up about 10%. That’s roughly half of what the broader market is running at. Can you guys explain a little bit about why you would be undergoing the market as defined by SIA? And if you are, is that something that you expect to mean revert? Because you don’t – you lose this amount of share in a year unless there is something unique going on. So any help in explaining that would be great.

Ross Seymore:

I do. I just want to revisit the gross margin side. Not going into whether the Lehi charges are moving into COGS or not. But are there any other moving parts? Because it appears at the midpoint of your revenue guide and your earnings guide if OpEx is roughly the same sequentially that the gross margin would have to go down, better part of 2 points or 3 points. I just wanted to know if there is any other unique aspects implied in that guidance.

Ross Seymore:

Thank you.

Operator:

Next One is Joe Moore from Morgan Stanley. Your line is open. Please go ahead.

Dave Pahl:

Yes. So, we still do have hotspots, in any market environment we have got hotspots. But we still do have them probably still most pronounced inside of automotive. Lead times didn’t change much second quarter to third quarter. And at the same time, as we have talked about before, customers can get immediate availability of products on ti.com. So, you have kind of all those dynamics going on. Do you have a follow-up, Joe.

Dave Pahl:

Yes. We have seen and heard and been in those discussions before. We know that some customers that are really taking a hard look at their supply chains, where their product is coming from, what technologies they are being built on, ensuring that they have got supply of those technologies. That’s part of the reason why, when they look at product being built and the capacity we are putting in place at the 45 nanometer to 130 nanometer. They know they need that capacity for decades to come. So, they get excited about when they see that capacity overall. But to change supply, the supply chains is really hard work. It will take a long time to be able to do it. And it’s not oftentimes just as simple as carrying more inventory on the balance sheet. So, there probably will be some of those customers that do that hard work and restructure the supply chains. And there probably will be some that once we get supply and demand imbalance, so it just kind of fall back into normal practices. So, I think time will tell as that plays out. And Rafael, do you have…

Dave Pahl:

Great. Thank you, Joe and we will go to the next caller please.

William Stein:

Hi. Great. Thank you very much for taking my question. I wanted to ask about ti.com. In past quarters, I think maybe even a quarter ago, you talked about how percent of revenue from that channel had gone from less than 1% of sales to over 10%. I think that occurred in about a 1-year timeframe. You just mentioned a moment ago, Dave, that this is the channel where customers can go for the immediate availability. So, I would assume that they get that availability at a price and that when things start softening as you are alluding to on this call that perhaps that channel sees a more precipitous decline. Did we see that during the quarter? And do you anticipate that to happen in the coming quarter or two quarters?

Rafael Lizardi:

Now, longer term, it’s a fantastic channel to engage customers on a number of levels and customers are very pleased. So, there will be fluctuations quarter-to-quarter, maybe even year-to-year. But over the long-term, we are very pleased with that channel and what it’s doing to get us even more directly engaged with customers.

William Stein:

Yes. Sort of along the same lines, there has been some speculation in the press, for example, that this has been a channel for companies that you might call brokers or some people call it the gray market of distribution to get their hands on TI product, and that perhaps there is still inventory that was acquired by such parties that is still sort of floating around and waiting to be sold on to end customers. I wonder whether you have found a better reason to maybe track that and measure it, and any observations you have made with regard to that? Thank you.

Operator:

We will take C.J. Muse from Evercore. Your line is open. Please go ahead.

Dave Pahl:

And C.J., just to clarify, you are talking about the fourth quarter guidance?

Dave Pahl:

Yes. So, again, we are not trying to provide guidance by quarter or by each market inside of that. We are obviously, with the guide overall, it is a weaker fourth quarter than a typical fourth quarter. So, with the exception of auto, as we have talked about, that we will continue to see weakness inside of personal electronics, but we will see the other markets weaken as well. So, we are not trying to get specific on that. So, we will finish up the quarter and report that out. But we do expect the weakness to broaden across those markets. Do you have a follow-on?

Rafael Lizardi:

Yes, I will start. Dave, you want to chime in. But I would tell you, at the end of the day, it all comes down to our competitor advantages, right. And it starts with the broad portfolio that we have in the analog and embedded space, you need a huge portfolio to compete effectively, particularly in industrial and automotive. And we have 80,000 or so parts that we sell to 100,000 different customers. So, you need that type of diversity. Then second is manufacturing and technology. These investments that are positioned 300-millimeter, first, but then all the investments that we are making are just building on that, right. So, we have RFAB2 coming, that just came online. Our new factory in Lehi and the mega site that we just broke ground in Sherman that’s going to have four factories, each one the size of RFAB2. So, that really puts us in a very strong position to compete against anyone, whether it’s in the United States or in China, okay.

Operator:

That concludes today’s event. Thank you for your participation. You may now disconnect.

Dave Pahl:

Welcome to Texas Instruments Second Quarter 2022 Earnings Release Conference Call. Today’s call is being recorded. I’m Dave Pahl, Head of Investor Relations, and I’m joined by 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. A replay will be available through the web. 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, I’ll start with a quick overview of the quarter. Next, I’ll provide insight into second quarter revenue results, with some details of what we are seeing with respect to our customers and markets. Lastly, Rafael will cover the financial results and our guidance for third quarter 2022. Starting with a quick overview of the quarter. Revenue in the quarter was $5.2 billion, an increase of 6% sequentially and 14% year-over-year, driven by growth across markets. Analog revenue grew 15%, Embedded Processing grew 5%, and our Other segment grew 19% from the year-ago quarter. Now let me comment on the environment in second quarter to provide some context of what we saw with our customers and markets. As we spoke about in our last earnings call, April started out weak from COVID-19 restrictions in China. As those restrictions began to ease towards the latter part of May and into June, customers began to pull product generally consistent with their prior demand forecasts at the start of the quarter. Moving on, I’ll provide some insight into our second quarter revenue by market from the year-ago quarter. First, the industrial market was up high-single digits and the automotive market was up more than 20%. We saw weakness throughout the quarter in personal electronics, which grew low-single digits. Next, communications equipment was up about 25%. Finally, enterprise systems was up mid-teens. Rafael will now review profitability, capital management and our outlook.

Dave Pahl:

Thanks, Rafael. Operator, you can now open the lines 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?

Stacy Rasgon:

Hi, guys. Thanks for taking my questions. My first one, I guess, I wanted to ask about gross margins. So, they declined -- they were very strong objectively, but they declined sequentially from Q1 to Q2 even as revenue grow and then I know you don’t guide gross margins for next quarter, but if I sort of like squint at the math, they seem to be being guided down probably a little more than revenues. I’m just wondering if something is going on, whether on the cost line or on the pricing line in this environment that may be influencing gross margins at all?

Stacy Rasgon:

I do. Thank you. It sounds like you had a surge in demand at the end of Q2, as everything opened up. So I guess that’s leading into Q3. I’m just wondering if the shape of the revenue the linearity through Q3 kind of looks the reverse of what we saw in Q2, we had a weak start and a strong finish in Q2, do you think we have like a strong start and then maybe a weaker finish into Q3, just given that, I guess, the demand surge that we’ve got going into it?

Operator:

We’ll take our next question from Vivek Arya with Bank of America. Please go ahead.

Dave Pahl:

Yeah. Vivek, I would say that as you know, we don’t forecast the out quarter by market, with the exception when there’s something significant that’s an outlier and hence that’s why we’re highlighting personal electronics. So I would just leave it at that. That’s where we’re seeing really most of the weakness. Do you have follow-on?

Rafael Lizardi:

I’ll take that question to a few angles, first, tactically second quarter, as we pointed out was, the revenue came in late in the quarter or a disproportionate amount of the revenue came in late. So that means that a lot of the cash was stuck in accounts receivable, as I talked about in the prepared remarks. So that’s going to distort some of your trends from cash -- from a cash flow standpoint a little bit. Beyond that big picture, we are very excited about these investments in manufacturing and technology. They’re going to continue to position us well for the long-term, given us the manufacturing platform that is needed to support revenue growth and that will have CapEx increase, as we have talked about in February. In fact, at that time, we talked about for the next four years, from 2020 to 2025 and average CapEx, that’s an average of $3.5 billion per year. For this year, it looks like we’re going to be coming in at about $2.5 billion, about as expected it could come in a little higher than that. And then, obviously, since the average is $3.5 billion, you would expect the subsequent years to then come in higher than that number.

Operator:

We’ll take our next question from Ross Seymore with Deutsche Bank. Please go ahead.

Rafael Lizardi:

Correct. Correct. So, first, as I talked about earlier, we’re very excited about these investments, RFAB2 and LFAB. We’re going to have RFAB2 sometime in the second half of this year supporting production and LFAB early 2023. And then we -- on Sherman, we just broke ground on that a couple of months ago and we expect Sherman facility, the first factory there support revenue in 2025. So that’s you want to think about it. From a depreciation standpoint, I just gave you the $1 billion for this year. Beyond that and I had already given you in February, to expect about $2.5 billion of depreciation by 2025 and then from $1 billion to $2.5 billion, you can roughly approximate that linearly between the end of 2022 to 2025 together tomorrow how the appreciation will likely come in.

Ross Seymore:

Yeah. Thanks for that color. I guess the final topical side, the Chips Act in the equivalent thereof in Europe. All the numbers you just gave, I assume are exclusive of those government policies? How should we think about TI taking advantage of those policies or not and maybe lowering some of those impacts financially on your company?

Dave Pahl:

Great. Thank you, Ross. We will go to next caller.

Joe Moore:

Great. Thank you. I guess going back to the guidance that you had given in April when you talked about kind of maybe demand to support $5 billion in Q2 and then but you were taking it down to $4 billion or $5 billion, because of China lockdown. Can you just give us some sense of how much of that $500 million? Did you end up capturing how much of this upside reflects upside in other regions? Just put this in the context of that original adjustment?

Joe Moore:

Yeah. That does. And then if you could just characterize your customers kind of mentalities around inventories at this point. Obviously, we’ve been dealing with hotspots and tight conditions for a while, do you feel like your customers in industrial, automotive markets are looking to build buffer stock inventory, so that this is tempered? Again, just kind of how are people thinking about that?

Operator:

We’ll take our next question from Chris Danley with Citi. Please go ahead.

Rafael Lizardi:

We -- of course, we do that constantly. At the highest level? Yes. We, the capacity is relatively fungible. There’s always some nooks and crannies that are a little different for each technology or each particular part. So but at the highest level, yes. We are -- we have been adjusting our capacity over the last two months the things I’ve been tied to deploy that to the best uses and support our long-term strategic roadmap.

Chris Danley:

And for -- yes, for my follow up, sort of going along with that line of questioning. You guys have talked about shortages and extended lead times all year. Are we seeing any improvement or do you anticipate any improvement there before the end of the year?

Rafael Lizardi:

Yeah. And I agree, it’s all about increasing our supply. That’s what we can control, right? So we’ll be increasing that with RFAB2 coming online soon. LFAB shortly after that and then in 2025, the first of the four factories in Sherman, so that will increase our ability to supply the market. And by the way, as you can see, just -- we just put out $5.2 billion of revenue and grew inventory again, for I believe, the fourth consecutive quarter. So that gives you also a sense of the increased ability that we’re developing to supply the market.

Rafael Lizardi:

That’s a good point.

Chris Danley:

Thanks, guys.

Toshiya Hari:

Hi. Thanks so much. I had to as well. First, on your pricing strategy going forward, just curious with RFAB2 ramping and LFAB ramping over the next 12 months to 18 months and your peers much more supply constrained than you are and they’re all sort of facing inflationary pressures from their foundry partners. Is there an opportunity for you to be a little bit more aggressive than then historical trends and for you to pursue market share or would you look to follow suit and raise pricing along with your peers going forward?

Toshiya Hari:

I do. Thanks, Dave. So on OpEx, I think, over the past four months, your OpEx budget is barely up, I think, it’s up 1% -- 1% plus in what’s been a very inflationary environment. Just curious what the offsets have been over the past four months and how should we think about sustainability in your model, OpEx being up kind of low singles, while revenue growing strong double digits? Thank you.

Dave Pahl:

Thank you.

Dave Pahl:

We will go to next caller, please.

Harlan Sur:

Good afternoon, guys. Thank you for taking my question. On unfinished goods inventory, which is where your direct customer consignment inventory is resides. They are still 30% below pre-pandemic levels. They’re down 3% versus last year. They are down slightly sequentially. Is it fair to assume that this is a reflection that your direct customers continue to pull at a very strong rate just given their demand profiles and can you guys get to your target inventory days exiting this year especially with RFAB2 ramping?

Dave Pahl:

Yeah. And let me just add that, Harlan, part of your question was, is that a reflection of direct customers and just remind that we have 70% reductions last year, around 70% of our revenues direct, that includes…

Dave Pahl:

… revenue going through TI.com, which we still believe is going to be a significant strategic asset for us as we move forward. And what goes through distribution to my prior combat, we long believed that owning and controlling that inventory is important. We’re probably running two weeks or less than that inside of that. So, when we ship revenue, because we’re owning and controlling that inventory, it really is reflective of what customers want inside of that quarter. So you have a follow on?

Dave Pahl:

Yeah. So inside of the quarter compared with a year ago, all the regions were up. That’s the year-on-year and sequentially they were all up as well. So we did see those trends in both year-on-year and sequentially. So, thank you, Harlan, we’ll go to the next caller, please.

Dave Pahl:

Yeah. Thank you.

C.J. Muse:

Yeah. Thank you for taking the question. I guess first question, revisiting an earlier question around the $560 million revenue beat versus the midpoint of your guide for June and the $500 million haircut that you took when you initially guided? So I’m curious, given that you started to see recovery in May? Is it safe to say that maybe you went above and beyond kind of the run rate, and therefore, you recaptured all of that $500 million or was it just a portion of that? And then as part of that, where do you see upside relative to where you guided before, was that isolated to industrial or auto or any particular end market?

C.J. Muse:

So if I look at the midpoint of your guidance versus what you actually did, it was about $560 million better and in your initial guidance…

C.J. Muse:

… you told us a $500 million China uncertainty haircut. So really trying to understand, how that $560 million came in better? Was it all China or were there other drivers within that?

C.J. Muse:

Yeah. Please. On the depreciation guide for the year, roughly up 35% half-on-half and considering for RFAB2, you’re going to start to depreciate the equipment when you actually qualify the wafers and begin revenuing, is that kind of a ballpark kind of estimate? And maybe it comes in more like $925 million, $950 million or just trying to understand the moving parts there given that it’s qualification of wafers -- revenue of wafers, which sounds like it’s really going to be later Q4 that really starts?

C.J. Muse:

Thank you, Rafael.

Operator:

We’ll take our last question from Ambrish Srivastava with BMO Securities. Please go ahead.

Dave Pahl:

Yeah. We did see a benefit in second quarter, Ambrish. And again, our pricing practices haven’t changed. So, we’ll continue to price aggressively. And to ensure that we’re gaining share and so no changes from that standpoint. So we’ll just see what happens in the marketplace.

Dave Pahl:

Yeah. Yeah. So we’re just cautious to give a specific number as we look at it. We’ve got -- if you just took units and divided by revenue that would give you an average price, which is what SIA is doing. We’ve got our customers that are buying through TI.com. They’re enjoying the convenience of having product that’s immediately available and in some regions we’re doing shipments more than once a day to the docks of those customers. So there’s a convenience that they’re enjoying. They pay a higher price for that. But so you’ve got that mixing in. So there’s other factors besides that, there’s mixing the types of products that we ship. We have products that we sell for a couple of pennies and products that we ship sell for thousands of dollars each and depending on either end of that spectrum, it can move your ASP or your average selling price around. So, but that said, in an environment like we’ve seen over the last several quarters, just in price increases that customers for like-on-like product that we have seen that that benefit as well. I am sorry I can’t give any specific. Do you have a follow up or that makes it fine.

Dave Pahl:

Okay. Thanks, Ambrish.

Dave Pahl:

So let me wrap up by reiterating what we have said previously. At our core, we’re engineers and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate long-term value for owners is the growth of free cash flow per share. While we strive to achieve our objective, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that’s ever changing. And we will be a company that we’re personally proud to be a part of and would want us our neighbors. When we’re successful, our employees, customers, communities and owners all benefit. Thank you and have a good evening.

Operator:

Good day, and welcome to the Texas Instruments First Quarter 2022 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dave Pahl. Please, go ahead, sir.

Rafael Lizardi:

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, first quarter revenue was $4.9 billion, up 14% from a year ago. Gross profit in the quarter was $3.4 billion or 70% of revenue. From a year ago, gross profit margin increased 500 basis points. As a reminder, we had about $50 million of additional utility expenses in cost of revenue related to the winter storm in the year ago quarter. Operating expenses in the quarter were $830 million, about flat from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.2 billion or 17% of revenue. Restructuring charges were $66 million in the first quarter and are associated with the LFAB purchase we closed in October of last year. Operating profit was $2.6 billion in the quarter or 52% of revenue. Operating profit was up 32% from the year ago quarter. Net income in the first quarter was $2.2 billion or $2.35 per share, which included a $0.02 benefit that was not in our prior outlook. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations were $2.1 billion in the quarter. Capital expenditures were $443 million in the quarter and $2.6 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $6.5 billion. In the quarter, we paid $1.1 billion in dividends and repurchased $589 million of our stock. In total, we have returned $5 billion in the past 12 months. Over the same period, our dividend represented 62% of free cash flow. Our balance sheet remains strong with $9.8 billion of cash and short-term investments at the end of the first quarter. Total debt outstanding was $7.8 billion with a weighted average coupon of 2.6%. Inventory dollars were up $150 million from the prior quarter to $2.1 billion and days were 127, up 11 days sequentially but still below the higher levels. For the second quarter, we expect TI revenue in the range of $4.2 billion to $4.8 billion and earnings per share to be in the range of $1.84 to $2.26. This outlook comprehends an impact due to reduced demand from COVID-19 restrictions in China, which are affecting our customers' manufacturing operations. We continue to expect our annual operating tax rate for 2022 to be about 14% and our effective tax rate to be about a point lower. In closing, 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 Dave.

Operator:

Thank you. [Operator Instructions] We're going to take our first question from Stacy Rasgon with Bernstein Research. Please go ahead.

Dave Pahl:

Yes, Stacy, I'll comment on that. Our assessment in early April indicated that revenue would continue to incrementally grow again in the second quarter. However, it just became clear that we were experiencing lower demand, particularly due to COVID-19 restrictions in China. And just to be clear, customers' behavior wasn't changing as it related to backlog or cancellations. In fact, we continue to see expedites for deliveries. However, we did see that our customers' manufacturing operations were being impacted. So as a result, the approach that we took, we just took a tops-down assessment and just reduced the midpoint of second quarter by 10%, and so from roughly $5 billion at the midpoint to the $4.5 billion that you see. And the second thing we did was we slightly widened the range just to comprehend the higher uncertainty that we're seeing overall. Do you have a follow-up, Stacy?