Texas Instruments Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 12 speakers on the call.

Operator

Welcome to the Texas Instruments 4th Quarter 2023 Earnings Release 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 For 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 am 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.

Operator

First, I'll start with a quick overview of the quarter. Next, I'll provide insight into 4th 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 Q1 of 2024. Starting with a quick overview of the quarter.

Operator

Revenue was $4,100,000,000 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 ago quarter. Now I'll provide some insight into our 4th 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.

Operator

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.

Operator

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.

Operator

Our industrial and automotive customers are increasingly turning to analog and embedded technologies to make their end products more reliable, more affordable and lower Empower. 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.

Speaker 1

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, 4th quarter revenue was $4,100,000,000 Gross profit in the quarter was $2,400,000,000 or 60 percent of revenue. From a year ago, gross profit decreased primarily due to lower revenue, higher manufacturing costs associated with planned capacity expansions and reduced factory loadings. Gross profit margin decreased 6.50 basis points. Operating expenses in the quarter were $898,000,000 up 4% from a year ago and about as expected.

Speaker 1

On a trailing 12 month basis, operating expenses were $3,700,000,000 or 21 percent of revenue. Operating profit was $1,500,000,000 in the quarter or 38 percent of revenue. Operating profit was down 30% from the year ago quarter. Net income in the 4th quarter was $1,400,000,000 or $1.49 per share. Earnings per share included a 0 point items that were not in our original guidance.

Speaker 1

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. Capital expenditures were $1,100,000,000 in the quarter. In the quarter, we paid $1,200,000,000 in dividends and repurchased $65,000,000 of our stock. We also increased our dividend per share by 5% in the 4th quarter, marking our 20th consecutive year of dividend increases.

Speaker 1

In total, we have returned $4,900,000,000 in the past 12 months to owners. Our balance sheet remains strong with $8,600,000,000 of cash and short term investments at the end of the Q4. Total debt outstanding was $11,300,000,000 with a weighted average coupon of 3.5%. Inventory at the end of the quarter was $4,000,000,000 up $91,000,000 from the prior quarter and days were 219, up 14 days sequentially. Now let's look at some of these results for the year.

Speaker 1

In 2023, cash flow from operations was $6,400,000,000 Capital expenditures were $5,100,000,000 Free cash flow for 2023 was $1,300,000,000 or 8 percent of revenue. Our free cash flow reflects the strength of our business model as well as our decisions to invest in 300 millimeter manufacturing assets and inventory to support our overall objective to maximize long term free cash flow per share, which we believe is the primary driver of long term value. Turning to our outlook for the Q1. We expect TI revenue in the range of $3,450,000,000 to $3,750,000,000 and earnings per share to be in the range of $0.96 to 1 $0.16 We now expect our 2024 effective tax rate to be about 13%. In closing, we will stay focused in the areas that add value in the long term.

Speaker 1

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

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?

Speaker 2

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

Speaker 3

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 clearly well below what we consider to be seasonality. Any end markets or regions or device types that you can call out that's driving that view?

Speaker 3

Or is it broad based weakness across all applications?

Operator

Yes, I'll take that, Foshia. Thanks for the question. In Q4, we did see weakness In industrial, increasing weakness there. We saw the sequential decline in automotive. And as the guide would suggest, we believe that we'll just continue to operate in a weak environment and one where customers are continuing to rebalance their inventories overall.

Operator

So, but nothing specific to comment on. You have a follow-up?

Speaker 3

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.

Speaker 3

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.

Operator

Yes. And I'll remind everyone else, I know you know the industry well, but pricing just doesn't move quickly in our markets overall and nor is it the primary reason why a customer chooses our products. So, and as we've mentioned before, our pricing strategy hasn't changed. And Of course, we're always regularly monitoring the market and pricing our products appropriately. And as we've talked about now for I think a couple of quarters as we expected supply and demand to come more in balance that we would expect pricing to revert back to how it behaved over the last 10 or 20 years and over the last 6 months or so that's what we've seen.

Operator

So, somewhat of a low single digit decline is what we're expecting out in time and wouldn't describe that as unusual. Thanks for the question.

Speaker 1

Thank you.

Speaker 2

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

Speaker 4

Thanks a lot. I wanted to ask about factory loadings. Dave, gross margin was down maybe 2 50 basis points. It's kind imply to be down 2 50 basis points. Even if I strip out depreciation, it's down about 100 basis points for March.

Speaker 4

So it seems like utilization is coming down a bit. And CapEx also came in a little bit lower too for December. So the first question on that is, can you talk about loadings? Is March going to be the bottom in loadings and we should see begin to come down also in March? And then I had a follow-up on that too.

Speaker 1

Yes. So thanks for the question. So Step back, in Q3 at the end of Q3, we talked about this. As we have near our inventory levels, Then we have adjusted our factory loadings accordingly. So in 3rd quarter, we did some of that and that had an impact On gross margins on underutilization, 4th quarter adjustment was bigger than 3rd quarter.

Speaker 1

And now going into first we're taking that adjustment further. So the Q1 adjustment on the utilization 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. Do you have a follow-up?

Speaker 4

I did, yes. So then on CapEx, can you talk about that? It was a little lower. It's running actually quite a bit below the $5,000,000,000 run rate now. So are you actually cutting CapEx now with Since you're bringing down factory loadings?

Speaker 4

Thanks.

Speaker 1

No, we're not. In fact, CapEx came in as expected, $5,100,000,000 and we've been talking about $5,000,000,000 per year. So it was right on target. And you should expect and we expect to continue running at about $5,000,000,000 per year through 2026 as we complete the investment plans that we've been talking about.

Operator

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

Speaker 2

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

Speaker 5

Hey, thanks guys. Just a follow-up on the utilization rates. So is the target, I guess, inventory level, Has that not changed for you guys? And so do you expect utilization rates to bottom in Q1? Or do you think you might have some more inventory adjustments going into Q2 for TI.

Speaker 1

Yes. No, thanks, Chris. So our broadly speaking, our inventory targets have not changed over the last 6, 9 months through this cycle. So we still have some ways to go, clearly less than we did 6 months ago. But we still have some ways to go on that front.

Speaker 1

At one point, I talked about $4,000,000,000 to $4,500,000,000 worth of inventory. So that's in the ballpark, and We just finished just shy of $4,000,000,000 But as far as when the underutilization bottoms, that's going to depend on revenue expectations. And At this point, we're only as always, we only give 1 quarter at a time. So we'll see where we are 90 days from now and we'll tell

Operator

you about that. Maybe I'll just add that our target inventory is set really by device. It's we look at things like how many customers are Buying the product, what the buying patterns look like, how long it takes us to manufacture the product. So it's really a bottoms up plan built on that very, very specifically. So That's what drives that target overall and we want to have inventory positioned to support growth over the long term.

Operator

This is a side comment. So a follow on Chris?

Speaker 5

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.

Speaker 5

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 marketinventory would as well?

Operator

Yes. So, I'll start and Rafael if you want to add anything. I would say that the demand signals that we get from customers Our orders that they place whether that's either directly or through consignment fees. So that's the data that we can see. We actually can't see their inventory levels.

Operator

We can anecdotally as we see a market like personal electronics is down 30%, 40%. We know Handsets and PCs that market hasn't gone down as much as that. So we know anecdotally that We're shipping below demand. So, we believe that that's what's going on in industrial. We have customers who have told us that they have built inventory and plan to correct that.

Operator

So having a real clear picture of what Their demand looks like and their channel inventories look like isn't something that we can see directly overall. So And the comment on automotive, we know that customers there did want to build inventory And we believe that they're in a good position now. So it wasn't surprising that we saw a sequential decline there. So thanks, Chris. We'll go to the next caller, please.

Speaker 2

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

Speaker 6

Hey, and thanks for taking my question guys. I just wanted to understand the linearity of the industrial and automotive declines. When you set out in the quarter baked into your expectations, were you kind of looking at these two businesses, both a little bit better than they came in? Or was one a bit worse than the other versus your expectations? And then just in terms of the timing of the quarter, it looks like your finished goods inventory went up a bit more than your other buckets.

Speaker 6

And I just want to understand, Is that just because later in the quarter customers were signaling some weaker trends or is there any reason behind the dynamic there?

Speaker 1

Thank you. Let me start with the second part of the question. And Dave, you want to take the first one? Sure. No, second part, that's just a reflection of our ability to build those inventory buffers that we're talking about.

Speaker 1

And what you're seeing there is on the finished goods side, That's one as 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 certain finished good level for each one of those parts. But we're also building at the chip level.

Speaker 1

Think of a can go into 2, 3, 10 different finished goods. So it works out well to have some chip level inventory operationally, but you also 1.5 finished goods. So that's what you saw there.

Operator

Yes. And by end markets, Tom, our guidance as you saw where our revenues came in, we were I think less than 1% from the midpoint of the guidance range. So the business came in about as we expected And nothing unusual in our versus our expectation in industrial or automotive overall. Thank you. Thank you.

Operator

Thank you. Follow-up for that. That was a 2 part question.

Speaker 1

That was that counts as well. Okay. All right.

Speaker 6

I appreciate it guys. Thank you. We appreciate

Speaker 2

it. Thanks.

Operator

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. 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? Yes, Ross, I think your instincts are spot on that the first lens to look at things is through the end markets and Embedded has is heavied up in industrial and automotive.

Operator

So revenues there were stronger for a longer period of time. The second consideration is that embedded relies on foundry wafer supply more heavily. Most of our analog business is done internally. So there the constraints lasted longer and have now been resolved and are behind us. So that created some of the lag between there as well.

Operator

So and as you know, our CapEx plans and spend We'll have more of our wafers overall built internally, which is inclusive of embedded. Do you have a follow on?

Speaker 5

Yes, I do. And it's kind

Operator

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 6th quarter of negative year over year comps. Do you see anything that's TI specific that's different this cycle? Pricing just got so good before, now it's a bigger headwind.

Operator

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? Yes, Ross. I think I'll make a comment and Rafael if you want to add anything. All cycles are the same and they're all different, right, as we've all studied them over time. What's clearly different this time is how the markets have behaved and the bifurcation.

Operator

We saw personal electronics begin to weaken second quarter a year ago and automotive just we saw a sequential decline this last quarter. So in the other markets somewhere in between. So and then in addition, I think that we've had Lots of other noise that's inside of the system, whether that's been pricing as you mentioned. We've had non cancelable, non rescheduled orders and other longer term contracts that have required customers to take product that they don't need. Whether companies are using distributors more heavily than others, so all of that adds noise into it.

Operator

So I think we just need to let that noise ring itself out over the cycle. And what we're focused on, of course, is investing in our competitive advantages, getting stronger. We believe that we're in a great position to continue to gain share over the long term.

Speaker 1

Yes. I just want to clarify for those who may be new on the call, when Dave talked about non cancelable, non Return of orders, 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.

Speaker 1

Our distributor footprint It's much smaller than with many of our competitors. We're down to 25% or so of our revenue through distribution, so 75% direct, Whereas many of our competitors are the opposite. So great clarification.

Operator

Thank you, Ross. 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 7

Great. Thank you. I wonder if you could talk about the CHIPS Act, How that's kind of flowing through both the investment tax credit and then any thoughts you may have on timing of kind of grant issuances or things like that?

Speaker 1

Yes. And I'm happy to talk about that. So first, let me address the ITC first and then I'll go to the grants. So the ITC Investment Tax Credit, 25% credit on CapEx for manufacturing in the United States, we have accrued to date over the last 1.5 years or so, dollars 1,400,000,000 We expect to get about $500,000,000 of that later this year, probably in Q4 as far the current law and regulations stipulate. And we'll get the rest further down the road, mostly the following year and then after that.

Speaker 1

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 and L, you're already We're already seeing the benefit as lower depreciation. That tends to be 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 ICC.

Speaker 1

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

Operator

there. Yes,

Speaker 7

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?

Speaker 1

Yes. First, I would point you to our operating cash. Our business model It's very strong and our operating cash flow is very strong and it supports our investments for growth through this cycle. So clearly, with the levels of CapEx that we have right now that hits the free cash flow, but big picture, understand and look at the operating cash even in a depressed environment with the revenue depressed, the operating cash flow is very strong. We also have Very strong balance sheet, and we just finished the year at $8,600,000,000 When it comes to repurchases, I would take you to our objectives on capital management for cash return, and our objective is to return all free cash flow via dividends and repurchases.

Speaker 1

Each one of those has different objectives on dividends and repurchases, but we have a really good track record over many years of doing both of those. Great. Thank you.

Speaker 8

Thank you, Joe.

Speaker 1

Thank you, Joe.

Operator

We'll 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.

Speaker 9

Yes, good afternoon. Thanks for taking my question. Up through Q3 of last, I know the team had seen numerous consecutive quarters of increasing cancellations and push outs, right, typical customer behavior in a weak demand environment. I assume given your commentary that the that the team continues to see cancellations, push outs activity expanding into the December quarter. You're almost a month into March.

Speaker 9

You still seeing cancellations and push outs expanding or starting to maybe see some signs of stabilization?

Operator

Yes, Harlan. As you would expect, we have seen cancellations in the quarter and 4th quarter had remained elevated. I wouldn't describe them as increasing, but just at higher levels. And we're still early inside of the quarter. I would say all of what's going on with cancellations and the back that we see is all comprehended in our guidance and our outlook.

Speaker 1

Yes, power?

Speaker 9

Perfect. And then, yes, from a geographical perspective, China headquartered shipments did about 20% of your sales through the October quarter of last year. This geography has experienced the most significant decline during this downturn, where it's down about 33% year to date up through Q3 of last year, your total business was down 13%, right. Is this geography continuing to contribute

Speaker 8

to the weakness stepping into this

Speaker 9

year or is the weakness more U. S. And European based?

Operator

Yes. I would say when you look regionally this quarter 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.

Speaker 9

Okay. Thank you, Dave.

Operator

Go to the next caller, please.

Speaker 2

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

Speaker 8

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

Speaker 8

Thank you.

Speaker 1

Yes. Big picture, we have a disciplined process of allocating capital to R and D and SG and A to the best opportunities, and we've held a steady hand Throughout a number of years, pre pandemic, during the pandemic, post pandemic, where we managed OpEx very well during that time and didn't get ahead of our skis. So we will continue with that disciplined process. Remember, Of course, these investments, particularly industrial automotive, which is where we're biased in our investments, they're very long term in nature. You're not going What you say now is going to would hurt your long term revenue growth.

Speaker 1

So we're not going to do that. So we're going to maintain those investments for the long term. Yes, thank

Speaker 8

you. I guess I wanted to Ask about your fixed cost leverage. I mean, in the past, you've talked about, I think, 75% gross margin fall through on incremental revenue. Is that still the right metric we should be using, Given revenues a good amount lower and depreciation is larger, I'd just be curious to hear if anything in the mechanics of that math has changed. And basically, when can 300 millimeter the incremental 300 millimeter capacity start flowing through the gross margins and be margin accretive?

Speaker 8

Thank you.

Speaker 1

Yes. So the math is still the same. The fault that you should use 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.

Speaker 1

And then there are always puts and takes on any given like right now is under utilization, 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 depreciation just to make sure everybody has the right number. It's the same as what I said 90 days ago, for 2024 expect $1,500,000,000 to $1,800,000,000 and for 2025 expect $2,000,000,000 to 2,500,000,000

Operator

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

Speaker 2

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

Speaker 10

Good afternoon. Thank you for taking the question. I guess first question, your revenue outlook for March basically gets us back to kind of pre COVID first half 2020 levels, yet at the same time your inventory is roughly double. And so curious, how are you thinking about kind of normalized inventory over time? And also how are you thinking about coming out of the trough, what kind of a gross margin recovery will look like given where your inventory levels are today?

Speaker 1

So that's a multipart question with 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 $4,000,000,000 As I said earlier on the call, we have continued upward bias for at least 1 more quarter, probably a couple of quarters at least, an upward bias on that. But that is good inventory for catalog part 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 start of the cycle and depending on demand and different things, but I would expect to continue holding relatively high levels of inventory.

Speaker 1

We're just in a different position than we were even 3 or 4 years ago in terms of how much of our 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 75% 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.

Speaker 9

If I

Operator

want, C. J?

Speaker 10

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?

Speaker 10

And perhaps how It's kind of impacting your thoughts on the capacity you're bringing online?

Speaker 1

Yes. No, unfortunately, No, there's nothing we can share. It's really up to the Department of Commerce. We sent our application, and we'll see where that goes. What I would say, Just like I said I've said before is when we decided about a year ago to take our CapEx up From $3,500,000,000 per year to $5,000,000,000 per year and this tremendous plan To build more fabs in the United States, we comprehended Chip's grant in in that decision.

Speaker 1

So that was part of our thinking there. But at this point, yes, that's all we can share on that front.

Speaker 2

All right. Thank you, C.

Operator

J. And I think we've got time for one more call, please.

Speaker 2

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

Speaker 11

Yes, thank you. Guys, I 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. 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 that's also some of your competitors lagged your lead time normalization perhaps that was a factor here?

Operator

Yes. Chris, as you know, You can't pin it on one thing, especially we've got well over 100,000 customers and 80,000 products that we're managing. As Rafael is talking about building inventory, We've got essentially all of our catalog products or almost all of our catalog products now immediately available on ti.com. And our objective with inventory and the capacity we're putting on place is to have our customer service metrics remain high, which means keeping lead times stable. So I think in some markets, we've seen customers that have told us that they were planning and have built their capacity and their inventories to grow at 25% in the coming year and they showed up and their plans changed and they're only going to grow 10%, right.

Operator

So they told us they won't be ordering product for some time as they equalize those numbers. They're still going to have healthy growth, but it's hard to put that across all of those 100,000 customers into one short concise statement. A follow

Speaker 11

on? 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 of 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?

Speaker 11

Or do we just kind of go back to sort of those mid-70s incremental margins in the way back up?

Speaker 1

Yes. So what I would tell you first, we don't quantify underutilization, but you can Fairly reasonably back into it, just looking at our numbers, our midpoint or range or midpoint and then consider the depreciation expected depreciation increase And it'd be relatively straightforward for you to back into something reasonable for Q1 on the underutilization impact there. Now after that, it's all going to depend on revenue and revenue expectations because, of course, depending What those are in the second half of the year, let's say, 90 days from now, then that will be a big factor in determining how the factories will run. But the bigger picture is all this deployment of CapEx that we're doing is all on 300 millimeter, which has a 40% cost advantage versus 200 millimeter. As Several questions people asked earlier.

Speaker 1

It has ITC benefits on that. So they it's coming in at 25% discount on the ITC, and we'll see How much we get on grant. So the fall through on those investments for many, many years will be very positive, I would say. So with that, Dave? Yes.

Operator

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

Speaker 2

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

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