Texas Instruments Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 12 speakers on the call.

Operator

Welcome to the Texas Instruments Third Quarter 2023 Earnings Conference Call. I'm Dave Paul, 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.

Operator

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 3rd quarter revenue results with some details of what we're seeing with respect to our end markets.

Operator

Lastly, Rafael will cover the financial results, give an update on capital management as well as share the guidance for our Q4 2023. Starting with a quick overview of the quarter. Revenue in the quarter came in about as expected at $4,500,000,000 flat sequentially and a decrease of 14% year over year. Analog revenue declined 16%, Embedded Processing grew 8% and our Other segment declined 32% from the year ago quarter. Now I'll provide some insight into our 3rd quarter revenue by market.

Operator

During the quarter, automotive growth continued and industrial weakness broadened. Similar to last quarter, I'll focus on a sequential performance as it's more informative at this time. First, the industrial market was down mid single digits with weakness broadening across nearly all sectors. The automotive market continued to grow and was up mid single digits. Personal Electronics was up about 20% off a low base.

Operator

And next, Communications Equipment was down upper teens. And finally, Enterprise Systems grew upper single digits. Given where the market is now, it's a good time to remind everyone of our plan and areas of strategic investments. 1st, Our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive, remains high, and we're well positioned in these markets. 2nd, our long term 300 millimeter manufacturing road map provides our customers with Geopolitically Dependable Capacity.

Operator

To support these build outs and enable future growth, we continue to expect Associated Capital Expenditures to be about $5,000,000,000 per year through 2026. In addition, we made good progress on our inventory management, consistent with our long term objectives to support growth and provide high levels of customer service. Rafael will now review profitability, capital management and our outlook. Rafael?

Speaker 1

Thanks, Dave, and good afternoon, everyone. 3rd quarter revenue was $4,500,000,000 down 14% from a year ago. Gross profit in the quarter was $2,800,000,000 for 62% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and to a lesser extent, higher manufacturing costs associated with planned capacity expansion and reduced factory loadings. As a reminder, Elfab related charges transitioned to cost of revenue in the Q4 of 2022.

Speaker 1

Gross profit margin decreased 6.90 basis points. Operating expenses in the quarter were $923,000,000 up 7% from a year ago and about as expected. On a trailing 12 month basis, operating expenses were $3,700,000,000 or 20 percent of revenue. Operating profit was $1,900,000,000 in the quarter or 42% of revenue and was down 29% from the year ago quarter. Net income in the Q3 was $1,700,000,000 or $1.85 per share.

Speaker 1

Earnings per share included a Ops $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 $1,900,000,000 in the quarter and $6,500,000,000 on a trailing 12 month basis. Capital expenditures were $1,500,000,000 in the quarter and $4,900,000,000 over the last 12 months. Free cash flow on a trailing 12 month basis was $1,600,000,000 In the quarter, we paid $1,100,000,000 in dividends and repurchased about $50,000,000 of our stock.

Speaker 1

In September, we announced we would increase our dividend by 5%, marking our 20th consecutive year of dividend increases. This action reflects our continued commitment to return free cash flow to our owners over time. In total, we have returned 5.6 $1,000,000,000 in the past 12 months. Our balance sheet remains strong with $8,900,000,000 of cash and short term investments at the end of the Q3. Total debt outstanding was $11,300,000,000 with a weighted average coupon of 3.5%.

Speaker 1

Inventory at the end of the quarter was $3,900,000,000 and days were 205, down 2 days sequentially. Inventory was up $179,000,000 in the 3rd quarter, less than half the increase versus the prior quarter as we near our desired inventory levels. Therefore, we began to lower factory starts in the 3rd quarter, which results in additional charges to the income statement. This impact is comprehended in our outlook. For the Q4, we expect TI revenue in the range of $3,930,000,000 to $4,270,000,000 and earnings per share to be in the range of $1.35 to $1.57 as we continue to operate in a weak environment.

Speaker 1

Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%. As you are looking at your models for 2024, based on current tax law, we would expect our effective tax rate to remain above what it is in 2023. 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.

Speaker 1

With that, let me turn it back to Dave.

Operator

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

Operator? Officer. Our first question comes from the

Speaker 2

line of Stacy Rathbod with Bernstein Research. Please proceed with your question.

Speaker 3

Hi guys. Thanks for taking my questions. My first one, I did want to ask about gross margin. So I mean, depending on what I assume for OpEx mix where I'm getting something like 2 50 basis points of compression, maybe more. I I know you talked a little bit about how some of that is the impact of utilization.

Speaker 3

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? Officer. Is there more to go, I guess, is

Speaker 4

what I'm

Speaker 1

asking? Yes. So thanks, Stacy. Let me try to help you with that. Of course, we For the forecast, we gave a range on revenue, a range on EPS, not the pieces.

Speaker 1

But let me go through some of what I said for Q3, which applies for Q4 and beyond. So for Q3, like I said in the prepared remarks, in Q3 gross profit decreased primarily due to revenues, that's the first driver, and to a lesser extent higher manufacturing costs associated with planned capacity expansion, namely depreciation is the main one there and reduce factory loadings, and that's the underutilization component. Then as I also said in the prepared remarks, Inventory, which is the other side of the coin, as we near desired levels of inventory, we began lowering factory starts in the 3rd quarter. So there was an impact In Q3,

Operator

due

Speaker 1

to that, on the income statement, there'll be a bigger impact in Q4 due to that. Beyond that, we're not forecasting, but of course, that will depend on revenue expectations well into next year. Do you have a follow-up?

Speaker 3

I do. Thanks. So you gave us a little color on the end market behavior in Q3. Can you give us some thoughts on leasing qualitatively what to expect by end market into Q4? And particularly for auto, it sounds like auto in Q3 was so strong.

Speaker 3

Do you still see that strength continuing into in the Q4 and the year end?

Operator

Yes, Stacy, I'll take that. When you look at the guidance, It would suggest and we believe that we continue to operate in a weak environment in general. And if there was something Significant that was changing from 1 quarter to the next is our typical practice. We highlight that And we just don't have anything to specifically call out for in the Q4. So thanks and we'll go to the next caller please.

Speaker 2

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

Speaker 5

Thanks a lot. Dave, I also had a question on autos. It sounds like it's holding in there despite this broadening strike. And I guess the question is, Are more of your customers on consignment in that business or is the split in autos about the same as that 2 third, 1 third versus the rest of the company? And I asked because I'm wondering Sort of what you're seeing on the, disty side that you would sell into autos?

Speaker 5

Do you see bookings at least weakening that would be more consistent with what we're seeing in terms of this strike and some of the weak macro numbers that we see.

Operator

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, Officer. That growth had continued.

Operator

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 Then 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 Officer.

Operator

Pretty close to a 1,000 or so different automotive OEMs. So there is quite a bit of broadness in who we serve there. Officer. You have a

Speaker 6

follow on,

Speaker 5

Tim? I do, Dave. Yes. So, what would it take to for you to think about cutting CapEx? And I asked because the plan was put into place when revenue was quite a bit higher than where it is today.

Speaker 5

Is there kind of a line in Officer for revenue where you would reconsider the plan. I know you've actually increased the plan while revenues continue to weaken, but is there some like Officer around is there some if it weakens to this point, you would consider cutting CapEx. Just wondering any comments there. Thanks.

Speaker 1

Yes, let me comment on that. We're very pleased with the progress on our manufacturing expansion. They will provide geopolitically dependable capacity for 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 $5,000,000,000 of CapEx per year in 2023, 2024, 2025 and 2026.

Speaker 1

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 Officer or Grant 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 grant was comprehended in our decision making for these investments.

Operator

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

Speaker 2

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

Operator

Hi guys. Thanks for asking a question. In the Q3, 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?

Operator

Any color on that you could provide? Nothing strange, Ross. I'd say that revenue built as we went through the quarter. And I'd say just in general, it's reflective of a weak environment that we're operating in. So which is obvious from the guidance that we're giving.

Operator

Do you have a follow on? I did. 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

Certainly, certainly. Yes. So industrial market was down mid teens. I mentioned automotive was up about 20%. Personal electronics was down about 30%, comms equipment was down about 50% and enterprise system was down Officer about 40.

Operator

So I think consistent with that weaker environment that we talked about. So thank you, Ross. We'll go to the next caller please. Our next question comes from

Speaker 2

the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Speaker 7

Hi, guys. Thanks for taking the question. I was hoping you guys could elaborate a little bit on the pricing environment. I think many of us have been picking up Evidence of the pricing environment, particularly in Asia, intensifying over the past couple of months or couple of quarters. You don't really give pricing as a reason for gross margins to be down sequentially year over year, but what kind of role is Pricing playing.

Speaker 7

Has your strategy changed at all whether it be on the analog side or MCU side?

Operator

Yes. So Thanks for that question. Always helpful to be able to clarify that. And 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. We're typically agreeing to pricing that's out 6 months or on an annual basis for the following year.

Operator

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, as 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 Officer.

Operator

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?

Speaker 7

Yes, I do. Thanks, Dave. So I guess over the past 12 months, Officer. OpEx is up about 10%, revenue is down about 10%. So as we think about calendar 2024, I was hoping you could give us a hint as to how to think about OpEx.

Speaker 7

And Dave, I think you used to give or you had given multi year guidance on depreciation. How should we to the extent there are any updates, how should we think about 2024 and 2025 depreciation? Thank you.

Speaker 1

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 through 2021, we ran at about $3,200,000,000 of OpEx, And then in 2022, it ticked up to $3,400,000,000 and now we're running at about $3,700,000,000 on a trailing 12 month basis.

Speaker 1

So you can see That's steady hand and just a bit of an increase over the last few years, and that's as we have held 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 and 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've talked about that, addressed it with previous callers. So $5,000,000,000 of CapEx per year for the next 23 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.

Speaker 1

So for Q4, let me start Q4 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 $1,200,000,000 maybe $11.90, dollars 11.80, dollars 11.70, dollars 11.70, dollars 11.70, dollars somewhere in that range Officer for the year. As an update for 2024, we expect depreciation to be between $1,500,000,000 and 1 point $8,000,000,000 and for 2025 to be between $2,000,000,000 $2,500,000,000

Speaker 7

Very helpful. Thank you so much.

Operator

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

Speaker 2

Our Our next question comes from the line of Ambrish Srivastava with BMO Capital Markets. Please proceed with your question.

Speaker 4

Officer. Hi, thank you. I had a question on factory loadings and inventory. So correct me if I'm wrong. Officer.

Speaker 4

I thought the thinking up until now has been we 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 I want to make sure I'm reading it right that you're taking an underutilization charge because you've reached a desired level of inventory. Is that a reflection that your Officer.

Speaker 4

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?

Speaker 1

Let me start and Dave, if you want to chime in. But we have Targets for where we want inventory levels to be and that goes by product and by state of finish of those products. So For example, of the 80,000 different products that we have, more than the vast majority of those are catalogued, Meaning they sell to many, many customers, they last for a long, long time. So we can have so many years of inventory at the chip level or finished goods level, in many cases at both levels, and that's based on our internal process to set those. So those are the and in aggregate, that's added up to $4,000,000,000 to $4,500,000,000 and that's what we've been kind of guiding to and we've been talking about.

Speaker 1

But what really matters is what happens at the very specific level on a part by part number. So as we have neared those levels And you see our inventory levels have increased about $500,000,000 per quarter for 2 quarters and then this last quarter 179,000,000 So clearly, there's a deceleration on that growth and that's on purpose. So as we near those levels, then we have slowed down The factory starts that goes primarily with the fabs, but also with the assembly test operations. And then we That slowdown will continue into Q4. So the reverse the other side of slowing your factory load is the underutilization charges.

Speaker 1

So As we near those levels, we are ready to be on the other side of this cycle for the upturn. And of course, it's not just inventory. Capacity is really the bigger driver, but you know what we've been doing on that now for a number of years and where we're investing. But inventory really bridges that gap as As an upturn happens until you get your factories really cranking at higher levels.

Operator

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 times stable, Officer. 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. Do you have a follow on, Ambrish?

Speaker 4

Yes, quick one, Dave. Just looking at the year over year, we had the 4th quarter double digit year over year decline and I look back many years, There have been other cycles where we have had multiple quarters of negative, but not that many times we have seen a double digit kind of 4, 5 quarter. Just wanted your perspective on what you folks are seeing this cycle versus and I know No cycle is the same, but just kind of give us just help investors think about how to think about that double digit 4 quarters It could be potentially longer year over year decline. Thank you.

Operator

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 this cycle is how the markets have behaved differently.

Operator

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 Officer. As you remember, many automotive manufacturers struggled to restart their factories and people weren't going to showrooms when we were in the midst of the pandemic. So really, as we've seen things begin to roll over, Personal electronics was first.

Operator

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 Our 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.

Operator

We'll go to the next caller please.

Speaker 2

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

Speaker 8

Thanks for taking my questions. 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?

Operator

Officer. Vivek, your question was on Q3 or on Q4?

Speaker 8

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.

Operator

Yes. So, yes, what I said is that there was something that we needed to explain the outlook or unusual or however you want to describe it, we would do that. So, Officer. I'm stopping at that point intentionally and we'll finish up the quarter and report out what happens in 4th quarter. You have a follow-up?

Speaker 8

Yes. On depreciation, what is driving the revision because your CapEx doesn't seem to be changing. And then kind of Part D of that is if I take that year on year delta, Rafael, I think it's about 400,000,000 $500,000,000 or so incremental in 24. So at the current revenue run rate, that's a 2 to 3 point headwind to gross margin. I just wanted to make sure that I got those two points right.

Speaker 1

Yes. So the for 2024, I said $1,500,000,000 to 1 point $8,000,000,000 and that is down from what you probably had before, dollars 2,000,000,000 And for 2025, I said $2,000,000,000 to $2,500,000,000 So that is down from 2.5 which we had said before. And the reason, as you point out, CapEx has not changed, so that's not the reason. It's just as time has passed, we have more clarity on what to expect. So for example, depreciation on tools, that doesn't start until the tool is not only received, But installed and then qualified, and that's when depreciation starts.

Speaker 1

So that doesn't happen immediately. So as we have to learn more as to how that process works with all the number of tools that we're receiving for the various factories, and who are providing an update on depreciation. Thank you. And the gross

Speaker 8

margin headwind, is that did I have the Right. It's a 2 to 3 point headwind on gross margins.

Speaker 1

Well, so we've given you the tools to calculate gross margin. So let me Remind everybody what that is. First is revenue. So you pick the revenue that you believe is going to happen for the next Several years and this works on a quarterly basis, but of course in any quarter there are a lot of puts and takes, but better to do it over longer horizons. So So you start with revenue, then you fold that through at 70% to 75%, which by the way that is reflective of The great not only geopolitically dependable capacity that we're putting in place, but it is all that new fab capacity is 300 millimeters.

Speaker 1

So it as a structural cost advantage, not to mention that we're getting ITC and grant benefits that is installed in the United States. So but so then you fall that through at 70% to 75%, Then you need to account for the added depreciation. So this year is probably going to be close to $1,200,000,000 and then I just gave you $1,500,000,000 to $1,800,000,000 So if you want to take a point between that, then you get your added depreciation for 2024. And then at a high level, that's it. But of course, in any given quarter, even in any given year, but especially in any given quarter, you have Officer.

Speaker 1

And one of them that we're seeing right now is the underutilization. But that right now is a headwind, but that can also be a tailwind We're on the other side and we're increasing loadings and what does that what that does is that it then it comes back the other way, right? So But that's more of a tactical comment that happens in some quarters. Hopefully that answers your question.

Speaker 6

Thank you. Thank you,

Operator

Vivek. We'll go to the next caller please.

Speaker 2

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

Speaker 6

Yes, thank you. I wonder if you

Operator

could walk us

Speaker 6

through the calculation on the underutilization charge. I mean, I think it seems like with over 200 days of inventory, you would see the cost impact of that In 6 months, but you're pulling it forward. Can you just talk about how you determine how much to pull forward?

Speaker 1

Yes. Well, it's an accounting process and it's essentially when you're below what's considered normal utilization, Officer. That percent that you're below that norm, that is generally determined by wafer in the fab is wafer starts and outs In the assembly test operation is 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 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 and L instead of going into inventory. So some of those costs, I will call them fixed of the some of their depreciation, but it's not only depreciation.

Speaker 1

You have electricity, for example, is largely fixed. You use about the same amount of electricity whether a tool is running production or not as long as it's plugged in. So you take that into account and then you're 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 and L. And in this case, it's going directly into the P and L as an in quarter charge because that portion of the capacity is not producing. Now one more comment.

Speaker 1

That gives us tremendous operating leverage on the other side of that, right? Because think about fixed costs, on the way down, they heard a bit, but On the way up, they're fixed, right. So from a cash standpoint, on the way up, you don't spend anymore and then you get just Tremendous cash fall throughs on the revenue, particularly when it's 300 millimeter capacity at very low cost.

Operator

Follow on, Joe?

Speaker 6

Great. Yes, thank you. Yes, separately on the Comm Infrastructure business, it seemed quite soft both quarter on quarter, 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

Yes. And last year was about 7% of our revenue, Joe. Officer. We can find great opportunities in comms equipment. We continue to invest.

Operator

We just don't think it has secular growth that other markets like industrial automotive have. So, we continue to make investments there. And as we've talked about that market over the years, it's one that just tends to be choppy. We believe that they're continuing to adjust their inventory levels as we work our way through this quarter. And as I mentioned earlier, it's down 50%.

Operator

So that's a pretty Officer. Significant drop. So, yes, so again, long term, we think it's a great market and we're positioned well there, But it will have these types of moves overall. Okay. Thank you, Joe.

Operator

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

Speaker 2

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

Speaker 9

Yes. Thank you, Dave. Thank you, Rafael. So you talked about operating in a weak environment. Could you also give us some color on bookings trends, Officer, maybe even the current run rate versus where you think consumption is.

Speaker 9

Just trying to understand and this goes back to Ambrish's question about 4 consecutive quarter to double digit declines. So, yes, any color on bookings trends would be really helpful.

Operator

Yes. So, as I mentioned, I think as part of another question on revenue order linearity. There was nothing unusual inside of that. Secondly, 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?

Operator

The strongest signal that we get is orders from customers. Now, as we talked about earlier, Tom, a market like personal electronics was the 1st 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.

Operator

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 Tom's 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 build for the next upturn because it will certainly come. Do you have a follow on?

Speaker 9

Yes. Thank you, Dave. Very helpful. Follow on for Rafael. Rafael, thank you for the depreciation numbers for the next few years.

Speaker 9

Do you also have an update us on the timing of the offsets to the depreciation, Especially in relation to ITC and the CHIPS Act, anything new there?

Speaker 1

So nothing new, The ITC, the expectation is similar, which is about So 25% credit on everything that is spent over CapEx in the U. S. For fabs. So what we said back in February is that that's going to be roughly $4,000,000,000 of the $20,000,000,000 or so that For CapEx, the $5,000,000,000 times $4,000,000,000 So roughly about $4,000,000,000 of that we're going to get back on ITC, about 1 year offset. Of that, we have already accrued $1,200,000,000 on the balance sheet.

Speaker 1

So you'll see that under on our balance sheet on their long term assets. A portion of that we will get sometime next year, probably by Q4 next year is when we expect to get that cash. So that's when the cash will start out 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.

Speaker 1

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're planning on receiving them. The funding from the Chips Ag 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 And we believe there will be meaningful to our manufacturing operations in Texas and Utah to support semiconductor growth and the objectives of Officer.

Operator

The Chief's Program Office. Great. Thank you, Tore.

Speaker 9

Great. Thank you.

Operator

Go to the next caller please.

Speaker 2

Our next question comes from the line of Harlan Sur with JPMorgan. Please proceed with your question. Yes.

Speaker 10

Thank you. Good afternoon. China headquarter shipments were about 20% of sales to the first half of this year. This geography has The most significant decline, I think it was down like 33%, 35% year over year in the first half of this year. Much of your China business is focused on industrial.

Speaker 10

Is this geography continuing to contribute to the weakness here in Q4? And What other geographies are you seeing that is contributing to this broadening out of sort of the weak industrial trends? Yes.

Operator

So let me I'll speak to what we saw in the Q3 and just in general, including industrial in China, continued to remain weak. So I think if we're having this call a year ago or Officer. So as China came out of COVID, I think most of us would have expected there to be more significant rebound, which just hasn't materialized. So, yes, and I think when you look at on a regional basis Officer. Compared with the year ago, the only region that was up was Japan.

Operator

So the other regions were down. And so again, just describe that weakness as being very broad in nature. You have a follow on, Harlan?

Speaker 10

Yes, thank you. So your embedded business continues to hold up relatively well, right? Surely in 12 months, it's up 8% year over year. You've talked about the positive strategy changes in Embedded. Last quarter, you also cited some constraints.

Speaker 10

I assume that Those constraints have fully normalized. So do you anticipate embedded continuing to hold up or do you anticipate the segment starting to weaken from here with some of the capacity constraints potentially easing.

Operator

Yes. As we talked about before, Officer. 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.

Operator

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 was different because we had capacity in place to service analog, our own capacity there overall. So, Yes.

Operator

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.

Speaker 2

Our next question comes from the line of William Stein with Securities. Please proceed with your question.

Speaker 11

Great. Thanks for squeezing me in. Dave, can you remind us Officer. What's in the other segment besides calculators? And perhaps why that end market was down so much more than the others.

Speaker 11

I know it's very seasonal from calculators, but there was a big drop year over year.

Operator

Yes. So besides calculators, Officer. We have our DLP or digital light processor products that are in there. So those products continuing to make their way through inventory correction overall and Calcuators had a weaker back to school this season. Do you have a follow on?

Speaker 11

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 Officer. 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 4 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.

Operator

Sure. Yes. So, and I may have mentioned this earlier, but, almost all of our catalog products are available on ti.com for immediate shipment. And so as we approach our and I'm joined by our Chief Financial Officer. We've got product that is positioned both in finished goods as well as in wafer form to to be able to restock that.

Operator

Of course, lead times therefore are what I described normal levels and continue to be Consistent. And there's probably no time that we don't with so many different products and so many different customers, We'll have hotspots, but they're very few and far between and our ability to close those is Officer. We've got flexible manufacturing as most of our production is fungible. So with that, I'll ask Rafael to wrap up the call for us.

Speaker 1

All right. 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 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 with one as our neighbor.

Speaker 1

When we're successful, our employees, customers, communities and owners all benefit. Thank you and have a good evening.

Speaker 2

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

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Earnings Conference Call
Texas Instruments Q3 2023
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