Texas Instruments Incorporated

Good day, everyone, and welcome to the Texas Instruments 4Q18 and 2018 Year-End Earnings Release Conference. Today's call is being recorded. At this time, I'd like to turn the conference over to Dave Paul. Please go ahead, sir.

Thank you. Good afternoon, and thank you for joining our fourth quarter and 2018 Earnings Conference call. Rafael Lizardi, TI's Chief Financial Officer, is with me today. For any of you who missed the release, you can find it on our website at ti.com slash IR. This call is being broadcast live over the web and can be accessed through our website. A replay will be available through the web. This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the Notice Regarding Forward-Looking Statements contained in the earnings release published today, as well as TI's most recent SEC filings for a more complete description. First, let me provide some information that's important for your calendars. We plan to hold a call to review our capital management strategy on February 5th at 10 a.m. Central Time. Similar to what we've done in the past, Rafael and I will provide insight into our strategy. For today's call, let me start by summarizing what Rafael and I will be reviewing. I'll cover three topics. First, a high-level summary of the financial results for the fourth quarter. Second, I'll provide some details of the fourth quarter by segment and end market, and I'll include some additional color in light of the market weakness we're currently experiencing. And finally, since this is the end of the calendar year, I'll provide a summary of our performance by end market for 2018. Rafael will then review profitability, capital management results, and the outlook. We'll then open the call for Q&A. Starting with a high level summary for the fourth quarter results. The weakness and demand for our products that began in the third quarter continued into the fourth quarter. The weakness was across most markets and came in about as we expected. There were a few exceptions that I'll cover in more detail when I discuss our fourth quarter segment and end market performance. In our core businesses, analog revenue grew 4% and the analog processing declined 12% compared with the same quarter a year ago. Both businesses' growth decelerated. Operating margin decreased in both businesses And similar to the third quarter, embedded remained weaker than analog, primarily because analog benefited from increasing content in 5G, while the weakness in other markets became more pronounced in embedded. It is not unusual for analog and embedded to perform differently in the short term, but they are more consistent in the long term. Earnings per share were $1.27, including a one cent discrete tax benefit, not in our original guidance. In the fourth quarter, our cash flow from operations was $2.1 billion. As we note each quarter, we believe that free cash flow growth, especially on a per share basis, is most important to maximizing shareholder value in the long term. Free cash flow for the trailing 12-month period was $6.1 billion, up 30% from a year ago. Free cash flow margin for the same period was 38.4% of revenue, up from 31.2 a year ago. We continue to benefit from an improved product portfolio that's long lived and diverse and the efficiency of our manufacturing strategy, the latter of which includes our growing 300 millimeter analog output. We believe that free cash flow will only be valued if it's productively invested in the business or if it's returned to owners. In 2018, we returned $7.7 billion in cash to owners through a combination of dividends and stock repurchases. Moving on, I'll now provide some details of the fourth quarter by segment and end market and offer some additional color on the market. From a year-ago quarter, analog revenue grew 4% due to signal chain and power, partially offset by declines in high volume. Embedded processing revenue declined 12% from the year-ago quarter due to declines in both product lines, processors and connected microcontrollers. In our other segment, revenue declined 31 million from the year-ago quarter. For the year in total, analog and embedded grew 9% and 2% respectively, and combined were 91% of TI's revenue. Now, given the current market environment, I want to provide some additional color on the quarter. As I mentioned earlier, The weakness in demand in our products that began in the third quarter continued into the fourth quarter. Demand came in mostly as expected, although personal electronics and specifically smartphones was weaker, including Chinese smartphone manufacturers. Automotive and industrial both declined sequentially, but still grew single digits from the year-ago quarter. In contrast, communications equipment grew about 20% year-on-year, benefiting from 5G deployments. On a regional basis, demand in China was weaker than the other regions. And markets within China, though, behaved directionally consistent with the rest of the world. We are seeing signs from our customers and the channel that this weakness is primarily from increased caution due to trade tensions. We assume that this weakness is a combination of lower local end demand as well as reduced exports, but we do not have visibility to distinguish between the two. In addition, I would note that distributors, particularly in Asia, did get more conservative on their inventory positions late in the quarter. Finally, as we do at the end and close of each calendar year, I'll now describe our revenue by end market for 2018 which is a good indicator of our strategic progress. We break this into six categories, industrial, automotive, personal electronics, which includes products such as mobile phones, PCs, tablets, and TVs, communications equipment, enterprise systems, and other, which is primarily calculators. In summary, industrial, automotive, and enterprise systems each grew double digits while communications equipment was about even, and personal electronics declined low single digits in 2018. Specifically, as a percentage of revenue, industrial was 36% and automotive was 20%. Personal electronics was 23%. Comms equipment and enterprise systems were 11% and 7% respectively. Other was 3% of revenue down low single digits. One of our competitive advantages is diversity and longevity. For 2018, we did not have a customer who was more than 10% of our revenue. We continue our efforts to diversify our growth across products, markets, and customers, strengthening this competitive advantage. We continue to focus our strategy on industrial and automotive markets, where we've been allocating our capital and driving initiatives to strengthen our position. This is based on a belief that industrial and automotive will be the fastest growing semiconductor markets. They have increasing semiconductor content and also provide diversity and longevity. All of this translates to a high terminal value of our portfolio. In 2018, industrial and automotive combined made up 56% of TI's revenue, up from 54% in 2017 and up from 42% just five years ago. We have established momentum in these markets and we see great opportunity ahead. Rafael will now review profitability, capital management, and our outlook.

Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2.41 billion, or 64.8% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and reduced factory loadings. Gross profit margin decreased 30 basis points. Operating expenses in the quarter were $814 million. Operating expenses for the year were up 1% and were 20.5% of revenue, within our range of expectations. For the year, we have invested $1.56 billion in R&D, an important element of our capital allocation. Acquisition charges and non-cash expense were $79 million. Acquisition charges will be about $80 million per quarter through the third quarter, and then decline to about $50 million per quarter for two remaining years. Operating profit was $1.52 billion, or 40.8% of revenue. Operating profit was down 3% from the year-ago quarter. Operating margin for analog was 46.7%, and for embedded processing was 29.6%. Our focused investments on the best sustainable growth opportunities with differentiated positions enable both businesses to continue to contribute nicely to free cash flow growth over time. Net income in the fourth quarter was $1.24 billion, or $1.27 per share, which included a one-cent discrete tax benefit not in our prior outlook, as we have discussed. As a reminder, the year-ago quarter included non-cash charges associated with the tax law changes. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.15 billion in the quarter, up 11% from a year ago. Capital expenditures were $323 million in the quarter. In the fourth quarter, we paid $736 million in dividends and repurchased $2.01 billion of our own stock for a total return to owners of $2.75 billion in the fourth quarter. Our balance sheet remains strong with $4.23 billion of cash and short-term investments at the end of the fourth quarter. Total debt was $5.1 billion with a weighted average coupon rate of 2.77%. Inventory days were 152, up 18 days from a year ago and above our targeted range as mentioned on our last call. We continue to believe there is strategic value in owning and controlling our inventory. We have reduced our operating plans starting in the fourth quarter. but we are also working to replenish inventory of low-volume devices. These actions have served us well in the past. In addition, we have made progress on our next phase of our consignment programs with our distributors. We expect inventory will continue to run above our targeted range for several more quarters. Now let's look at some of these results for the year. In 2018, cash flow from operations was $7.19 billion. Capital expenditures were $1.13 billion, or 7.2% of revenue. Free cash flow for 2018 was $6.06 billion, or 38.4% of revenue. Our cash flow reflects the strength of our business model. As we have said, we believe free cash flow growth, especially on a per share basis, is most important to maximizing shareholder value in the long term and will be valued only if it is productively invested in the business or returned to shareholders. We remain committed to return all our free cash flow to owners. Total cash return to owners in 2018 was $7.66 billion. These combined returns of dividends and share repurchases demonstrate our confidence in our business model and our commitment to return all free cash flow to our owners. In 2018, we paid $2.56 billion in dividends for about 42% of free cash flow, evidence of their sustainability. Outstanding share count was reduced by 3.9% in 2018. and has been reduced by 45% since the end of 2004, when we initiated a program designed to reduce our share count. Turning to our outlook for the first quarter, we expect TI revenue in the range of $3.34 to $3.62 billion, and earnings per share to be in the range of $1.03 to $1.21, which includes an estimated $20 million discrete tax benefits. For 2019, our annual operating tax rate remains unchanged from our prior expectation of 16%. As usual, details of our expectations for taxes can be found on our IR website under financial summary data. In closing, we believe that after 10 quarters of year-on-year growth, the weakness we are seeing is primarily due to the semiconductor cycle. In addition, the macro environment, including uncertainty crossed by trade tensions, could impact the depth and duration of this cycle. Given our experience, we will stay focused on making TI stronger for the long term, while remaining diligent in the short term. We continue to invest in our competitive advantages, which are technology and manufacturing, portfolio breadth, market reach, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best products, analog and embedded processing, and the best markets, industrial and automotive, which I believe will enable us to continue to improve and deliver free cash flow per share growth for a long time to come. With that, let me turn it back to Dave.