Texas Instruments Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 12 speakers on the call.

Operator

Welcome to the Texas Instruments First Quarter 2024 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 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. 1st, I'll start with a quick overview of the quarter. Next, I'll provide insight into Q1 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 Q2 of 2024.

Operator

Starting with a quick overview of the quarter. Revenue in the quarter came in about as expected at $3,700,000,000 a decrease of 10% sequentially and 16% year over year. Analog revenue declined 14% year over year and embedded processing declined 22%. Our Other segment declined 33% from the year ago quarter. Now I'll provide some insight into our Q1 revenue by end market.

Operator

Revenue declined sequentially across all of our end markets. Our results reflect the current environment as customers continue 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 upper single digits. The automotive market was down mid single digits.

Operator

Personal electronics was down mid teens. Next, communications equipment was down about 25% And lastly, Enterprise Systems was down mid teens. Rafael will now review profitability, capital management and our outlook. Rafael?

Speaker 1

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, 1st quarter revenue was $3,700,000,000 Gross profit in the quarter was $2,100,000,000 or 57 percent of revenue. From a year ago, gross profit decreased primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with reduced factory loadings and our planned capacity expansions. Gross profit margin decreased 8 20 basis points. Operating expenses in the quarter were $933,000,000 flat from a year ago and about as expected.

Speaker 1

On a trailing 12 month basis, operating expenses were $3,700,000,000 or 22 percent of revenue. Operating profit was $1,300,000,000 in the quarter or 35 percent of revenue and was down 34% from the year ago quarter. Net income in the Q1 was $1,100,000,000 or $1.20 per share. Earnings per share included a $0.10 benefit that was not in our original guidance, primarily due to the sale of a property. Let me now comment on our capital management results, starting with our cash generation.

Speaker 1

Cash flow from operations was $1,000,000,000 in the quarter and $6,300,000,000 on a trailing 12 month basis. Capital expenditures were $1,200,000,000 in the quarter $5,300,000,000 over the last 12 months. Free cash flow on a trailing 12 month basis was $940,000,000 In the quarter, we paid $1,200,000,000 in dividends. And in the past 12 months, we returned $4,800,000,000 to our owners. Our balance sheet remains strong with $10,400,000,000 of cash and short term investments at the end of the Q1.

Speaker 1

In Q1, we issued $3,000,000,000 in debt. Total debt outstanding is now $14,300,000,000 with a weighted average coupon of 3.8%. Inventory at the end of the quarter was $4,100,000,000 up $84,000,000 from the prior quarter and days were 235, up 16 days sequentially. For the Q2, we expect TI revenue in the range of $3,650,000,000 to $3,950,000,000 and earnings per share to be in the range of $1.05 to $1.25 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.

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. We'll now be conducting a question and answer Our first question is from Timothy Arcuri with UBS. Please proceed with your question.

Speaker 3

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's still like $9,000,000,000 outstanding for mature nodes. So can you kind of talk about that for us?

Speaker 1

Yes. No, happy to do it. First, let me address the grants, which I think is what you're referring to. On that, frankly, we don't have an update to give. We're still going through that process, submit our application late last year and are working through the details with the CHIP's program office.

Speaker 1

As we said before, we believe our investments in manufacturing in both Texas and Utah are well positioned with the objectives of the CHIPS Program Office. Now let me give you an update on the ICC, the investment tax credit. To date, we have accrued about $1,500,000,000 on that credit. And based on the recently released regulations, we will be receiving the ICC cash benefit throughout the year in 2024 and beyond. And starting next quarter, so in Q2, we're expected to receive about $300,000,000 and a total of $1,000,000,000 for all of 2024.

Speaker 1

Okay. Do you have a follow-up?

Speaker 3

I do. Yes. Yes. 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.

Speaker 3

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 to tick maybe in June. Thanks.

Speaker 1

Yes, sure. Of course, we gave guidance. We gave a range on revenue. We gave a range on EPS and then 90 days from now, we'll discuss that at more or less. But for now, I'll tell you that in Q1, we adjusted factory loadings as we neared our desired inventory levels.

Speaker 1

And as we said in every prepared remarks, we grew inventory about $80 some 1,000,000 And then for Q2, we're going to adjust those load ins depending on future demand.

Operator

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

Speaker 2

Our next question is from Stacy Rasgon with Bernstein Research. Please proceed with your question.

Speaker 4

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?

Speaker 1

Yes. So, Steve, it's a good question, but it's a complex question. And at the end of the day, it's going to depend. It's going to depend on a number of factors, what kind of revenue profile you were faced with, and not just in 1 or 2 quarters, but really over a longer horizon. Maybe the best thing I can tell you is, don't expect a significant or even any drain on inventory because just given our business model and how we want to run the company, keeping lead times short and also the upside potential that we have with having this inventory and the capacity in place is so much higher than the downside risk.

Speaker 1

So hopefully that gives you some good insight into how we're thinking. Do you have a follow-up?

Speaker 4

I do. Thanks. I was wondering if you could talk a little bit about pricing. I think last quarter you 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're seeing in terms of the pricing environment?

Speaker 4

Is that still the environment that we're in or things better or things worse? Like where do you see that going as we go forward?

Operator

Yes, Stacy, I'll comment on that. As I said last quarter, really we began seeing things change mid last year, in the back half of last year as we began discussions with customers for their demand in the following year and out in time, whatever those pricing windows would open up. And those are really just going back to what we've seen last 10, 20 years kind of pre pandemic. So describe it roughly in the low to very low single digit declines over time. And I'd say just generally that's what we're continuing to see.

Operator

Let me

Speaker 1

add one more thing, Steve. I want to give you a bonus answer. You always ask about OpEx.

Speaker 4

I appreciate it. Thank you.

Speaker 1

So you're not asking, but I'm going to give you OpEx. Remember that second quarter has a full 3 months of raises, whereas Q1 only had 2 months of raises. There's something for your modeling. Thank you.

Operator

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

Speaker 2

Our next question is from Vivek Arya with Bank of America Securities. Please proceed with your question.

Speaker 5

Thank you for taking my question. I think in the prepared remarks, you said customers continue to reduce inventory levels, but you're 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're seeing real time? Are we past the industry inventory correction?

Speaker 5

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 perspective would be very useful to understand where we are in the inventory and the broader demand cycle.

Operator

Yes. Vivek, let me start with what we saw happen in last quarter because I think it's helpful. First, we saw personal electronics was the 1st market that went into the correction. It really was the first to come out in the last few quarters. I'd describe it as behaving more seasonal.

Operator

If you go to the other end of the spectrum, we've had industrial, which has been declining sequentially from some time. And over the last few quarters, we've been talking about how there's some asynchronous behavior inside of the 12, 13 secondtors that we have there. That continued inside of the quarter. So we've got some of the later cycle sectors that are continuing to decline and declining at double digit rates. But there are some that are beginning to begin to slow in the declines and even a couple that grew sequentially.

Operator

So that I would just describe as being more mixed this quarter, which is certainly different than last quarter. So and if you look historically, a second quarter is a seasonally strong quarter for us. So it's not unusual for us to see sequential growth sequentially. Do you have a follow on?

Speaker 5

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?

Speaker 5

Or are we something different?

Operator

Well, again, we're not in the practice of giving guidance by end market. And but even inside of last quarter as we looked at it inside of industrial, there obviously are some customers that are nearing the end of that inventory depletion cycle. So as you know, we try to be very cautious and not try to predict tops or bottoms or those types of things and just report what we see and just stick to the facts. So thank you, Vivek. We'll go to the next caller please.

Speaker 2

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

Speaker 6

Hey, good afternoon. Thanks for taking my question. Mine is in regards to China. 2023 data came out recently and it looks like some of the larger North American players didn't really lose share despite some concerns on the trailing edge that you would have some increased China competition. Can you talk has there been any change in the way that customer behavior has kind of trended over the last couple of months?

Speaker 6

And can you talk about just that competitive environment? Are you seeing more players there? Are you seeing players that you didn't see before? Any color on China would be super useful. Thank you.

Speaker 2

Sure.

Operator

Yes. Thanks Tom for that question. And I would 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 5 or 10 years ago, is it harder to compete there?

Operator

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. It continues to be a growing market and we can and we'll compete there to support our customers.

Operator

So our competitive advantages, whether that's our manufacturing and technology, the breadth of the portfolio, the reach of the markets all service very, very well in China. You have a follow on?

Speaker 6

Yes. Just on auto particularly, I know that you're not guiding the out quarter, but just conversations that you've had since you last updated us with those customers. I think you just mentioned that inventories are coming down, but through the pandemic, there was a kind of change of stated ordering patterns of just in time to just in case. Do you see that kind of persisting? Or do you think that we're moving back to a situation in which customers really want to have much lower inventory on their balance sheet.

Speaker 6

Obviously, you have a unique supply chain, but just any thoughts on just the auto environment, particularly through the last several months? Thank you.

Operator

Sure. Yes. Thanks again, Tom. Yes, 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 were very thoughtful and 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.

Operator

And what they described that to us is geopolitically dependable capacity is what they're seeking. And again, we've talked about that before in our capital management updates. We believe that that's going to be highly sought after it is that we are seeing that today. And so I think we're in a position to be able to support customers and that growth that will come from that. So thank you, Tom.

Operator

We'll go to the next caller please.

Speaker 2

Our next question is from Ross Seymore with Deutsche Bank. Please proceed with your question.

Speaker 7

Hi guys. Thanks 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 Q1, please?

Operator

I can do that. Yes. So, the industrial market was down about 25% from a year ago. Automotive was down lower single digits. Personal electronics was actually up single digits.

Operator

Comms equipment was down about 50% and Enterprise system was down mid teens. You have a follow on Ross?

Speaker 7

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're 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 $1,000,000,000 as opposed to, I think you said $500,000,000 before? [SPEAKER JOSE RAFAEL

Speaker 1

FERNANDEZ:] Right. No direct impact on the income statement. That's already played in as the lower depreciation and are already flowing through the P and L and in our expectations on depreciation. Of course, having more cash does have an impact in terms of you have more cash, you're going to have more interest income. But put that aside, that's kind of below the profit line, right, the operating profit line.

Speaker 1

So speaking of depreciation, let me give you an update on that. We've been talking about depreciation for this year, dollars 1,500,000,000 to 1,800,000,000 dollars That is we continue to expect that, but we're more likely to come in at the bottom half of that range. And for 2025, we continue to expect $2,000,000,000 to $2,500,000,000 in depreciation.

Operator

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

Speaker 2

Our next question is from Chris Danely with Citibank. Please proceed with your question.

Speaker 8

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 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.

Speaker 8

Any sort of changes in the long term thinking there on cash usage of cash, etcetera?

Speaker 1

Yes. When it comes to capital management, it all depends and depends on circumstances. And at the moment, our objective when it comes to you've known us for a while, we return all cash all cash flow to the owners of the company and we do that over time. But there are times to increase liquidity and to build up cash. So you have seen us over the last couple of years do that and steadily increase the cash on the balance sheet.

Speaker 1

We finished at $10,400,000,000 last quarter. And we've done that very consciously, right, to protect the investments that we're making, particularly the $5,000,000,000 per year CapEx investments in manufacturing because that is the most important allocation of capital has been for the last few years, will continue to be for the next 3 years. So with that in mind, we've had that in mind as we have made overall capital allocation decisions, including the decisions on repurchases.

Operator

A follow on, Chris?

Speaker 8

Yes. Thanks, Dave. Just another question on China, but more on the, I guess, the in sourcing side. So some of your competitors have talked about this impacting them. Do you guys see an impact of this on TI?

Speaker 8

Would or will this alter your long term, I guess, growth expectations or thoughts on your China business? Just any color there would be very helpful. Thanks.

Speaker 1

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.

Speaker 1

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 in sourcing. And today, that share my guess my sense is that 10% to 15% of the local content is sourced by local semiconductor suppliers. I think the fact number is 12%, the one I saw. So that means there's another 88% that is shared now between U.

Speaker 1

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 U. S. And European semiconductor suppliers.

Operator

Yes. And maybe I'll just add, in China, in any market, we've just got to have the best parts. And when we have that, that means we've got to be ahead of competitors, whether that's on performance, on support, availability and costs. So, and we have customers in every region that are beginning to think about where they're sourcing products from. So customers that aren't in China are looking at our, as they describe it, geopolitically dependable capacity and that's about 80% of our revenue.

Operator

The 20% that's in China, we have customers in China that have and support global markets and they're coming and describing our geopolitical dependable capacity and wanting to have access to it because it is very unique. We're the only ones that are building at scale outside of China and Taiwan capacity. So customers understand that. They understand both in China as well as outside. So thank you for that, Chris.

Operator

We'll go to the next caller please.

Speaker 2

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

Speaker 9

Great. Thank you. I've asked this question before, but it keeps coming up. Can you talk about how you think about pricing kind of more strategically as you contemplate having a decent amount of capacity, more 300 millimeter capacity, more subsidization? Does that change the pricing paradigm at all?

Speaker 9

Are there markets where you might be more price aggressive than you wouldn't be if any of that were different?

Operator

Yes. So, 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.

Operator

So hopefully that's amazingly consistent. You have a follow on?

Speaker 9

Yes, thank you for that. Yes, in terms of the embedded business, I know you've had a number of kind of vertical markets that you deemphasized and things like that with kind of a focus on more of a core kind of catalog strategy in that business. Where are you in that? Do you expect that you would that your embedded business would sort of track the broader microcontroller business or just how do you think about the transitions that are happening there?

Operator

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 the long time. We think it's a great business and continue to invest. So, we're very happy with that strategic progress.

Operator

So, I think in the near term, of course, we're not going to be immune to cycle related corrections. It's a little bit later because of the constraints that we have due to embedded relying on foundry supply. And as you know, we're 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'll go to the next caller please.

Speaker 2

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

Speaker 10

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're targeting?

Operator

Yes. So let me speak to bookings at the top level. We saw bookings increase each month of the quarter. That is very typical that we would see in a Q1. I don't have bookings by end market.

Operator

If there's something very unusual going on, of course that would jump out at us. So that's just not that's something I have here in front of me, but I would describe it as behaving as we would expect it to. And of course, those bookings and other demand signals that we get from our customers are obviously immune into our guidance. You have a follow on, Tore?

Speaker 10

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

Yes. Again, as we talked about over the last several quarters now that there was markets that were behaving sectors that were behaving asynchronously. So there are shorter cycle investment sectors that began to roll earlier, longer term investment cycles that were rolling later, really just the last couple of quarters into it. So it's really if you had to kind of divide them out, that's what they would look like. So thank you for that, Dory.

Operator

Okay. Thanks. We'll go to the next caller please. And this will be our last caller.

Speaker 2

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

Speaker 11

Yes, thanks. Good evening. First question is related to the buybacks and I think you addressed this in a prior question. But I guess the question is, what would be the trigger for being able to resume some degree of buybacks? We realize that the intention is to return 100% of excess free cash flow.

Speaker 11

But at what point does the cash on the balance sheet and kind of industry conditions allow you to kind of come back to what you've been doing previously?

Speaker 1

Yes. Well, a couple of things. For example, the data point that I'll give you is our free cash flow for the trailing 12 months was $940,000,000 and we returned and also in trailing 12 months $4,800,000,000 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're allocating capital.

Operator

Do you have a follow on, Chris?

Speaker 11

I do. Thanks. And I guess the question is about where TI is allocating the R and 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.

Speaker 11

As we look out over the next 2 years or so, do you think that, that percentage of revenue since it's on the segments kind of stays about where it is right now? Or based on the R and D investments you're making, do you think that changes substantially?

Operator

Yes. And it's a great question, Chris. Let me just use as a backdrop for those that hadn't looked at our capital management slide deck. And slide 21 shows our percentage of our revenue by end market. And the middle column there, it talks about what we're doing directionally from an R and D spend.

Operator

So, and we've talked about for some time that our belief that there's going to be secular trends and increasing semiconductors and industrial and automotive. And as a result of that, we have been taking investments up there. And the other markets though, if you look at personal electronics and communications equipment, our investments there have been and continue to be very steady because we can find great opportunities inside of those markets And so we'll continue those investments. And then enterprise systems, we've taken up the investments there slightly. And there's just opportunities and enterprise systems likely will be a good grower as well.

Operator

It doesn't have quite the same dynamics as industrial and automotive for us. But certainly, things that sit inside of enterprise, we believe will make that above average grower for over the next decade plus. So with that, I'll turn it over to Rafael to wrap up.

Speaker 1

Okay. Thanks, Dave. Let me wrap up by emphasizing 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 the long term growth of free cash flow per share.

Speaker 1

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

Speaker 2

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Texas Instruments Q1 2024
00:00 / 00:00
Remove Ads