Texas Instruments Incorporated

And welcome to the Texas Instruments Q1 2019 Earnings Release Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Paul. Please go ahead, sir.

Thank you. Good afternoon, and thank you for joining our first quarter 2019 Earnings Conference Call. Rafael Lazzardi, 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 as well. 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. For today's call, let me start by summarizing what Rafael and I will be reviewing. I'll be covering the following topics. First, a high-level summary of the financial results for the first quarter. Second, I'll provide some details of the first quarter by segment and end market. And third, I'll include some additional color in light of the market weakness we're currently experiencing. Rafael will then review profitability, capital management results, a brief comment on the status of our next 300-millimeter FAB, and then the outlook. Then we'll open the call for Q&A. Now, starting with the high-level summary of our first quarter financial results. The weakness and demand that began in the second half of 2018 continued into the first quarter. The weakness was across all markets with the exception of communications equipment. In our core businesses, analog revenue declined 2% and embedded processing revenue declined 14% compared with the same quarter a year ago. Both businesses' year-in-year growth decelerated as we expected at this point in the cycle. Similar to the fourth quarter, embedded remained weaker than analog, primarily because it didn't benefit from increasing content in 5G. Operating margin decreased in both businesses. Reduced factory loadings affected both businesses, but the impact was greater and analog since more of its supply comes from internal manufacturing. Overall revenue in the first quarter decreased 5% from a year ago, and earnings per share were $1.26, including a $0.04 discrete tax benefit not in our original guidance. With that backdrop, I'll now provide details on our performance, which we believe continues to be representative of the ongoing strength of our business model. In the first quarter, our cash flow from operations was $1.1 billion. As we know 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. We remain committed to returning all of our free cash flow to owners. Pre-cash flow for the trailing 12-month period was $6 billion, up 22% from a year ago. Pre-cash flow margin for the same period was 38.4% of revenue, up 32.1% from a year ago. We continue to benefit from the quality of our 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 be valued only if it's productively invested in the business or returned to owners. For the trailing 12-month period, we returned $8 billion of cash to owners through a combination of dividends and stock repurchases, demonstrating our confidence in our business model and our commitment to return all of our free cash flow to owners. Moving on, I'll now provide some details of the first quarter by segment and end market. and then offer some additional color on the market. From a year ago quarter, analog revenue declined 2% due to high volume and power, partially offset by growth in signal chains. I'll note that the strength in communications equipment minimized analog's decline. Embedded processing revenue declined by 14% from a year ago quarter due to declines in both product lines, processors, and connected microcontrollers. In our other segment, revenue declined 6% from a year ago. Now, given the current weaker market environment, I wanted to provide some additional color on the corner. As I mentioned earlier, the weakness in demand for our products that began in the second half of 2018 continued into the first quarter. Demand came in mostly as expected, although communications equipment was stronger than expected due to shipments of products that support 5G. Next I'll provide some insight into this quarter's performance by end market versus a year ago. Industrial and automotive declined mid-single digits due to broad-based weakness. We continue to focus our investments across 13 sectors in industrial and five sectors in automotive. Despite this near-term weakness, we continue to believe these investments will deliver broad-based and diverse revenue growth over the long term. Personal electronics declined low double digits due to broad-based weakness, including mobile phones and PCs. In contrast, communications equipment grew about 30% year-on-year, and as we mentioned earlier, benefiting both from 5G shipments as well as an easy compare due to weakness in the year-ago period. History would suggest that we should expect this market to be choppy in the future. And then lastly, enterprise systems declined. Looking at these end markets on a regional basis, generally all the regions performed consistently, excluding the positive effects of communications equipment. So in summary, we continue to focus our strategy on the industrial and automotive markets where we've been allocating our capital and driving initiatives to strengthen our position. This is based on the belief that industrial and automotive will be the fastest growing semiconductor markets. They have increasing semiconductor content, and they also provide diversity and longevity. All of this translates to a high terminal value of our portfolio. Rafael will now review profitability, capital management, and our outlook.

Thanks Dave, and good afternoon everyone. Gross profit in the quarter was $2.26 billion, or 62.9% of revenue. From a year ago, Gross profit decreased due to lower revenue and reduced factory loadings. Gross profit margin decreased 170 basis points. Operating expenses in the quarter were $803 million, down about 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 20.7% of revenue, within a range of expectations. Over the last 12 months, we have invested $1.56 billion in R&D, an important element of our capital allocation. We are pleased with our disciplined process of allocating capital to R&D, which we believe will allow us to continue to grow our top line over the long term. Acquisition charges and non-cash expense were $79 million. Acquisition charges will be about $80 million per quarter through the third quarter of this year, then declined to about $50 million per quarter for two remaining years. Operating profit was $1.38 billion, or 38.4% of revenue. Operating profit was down 11% from the year-ago quarter. Operating margin for analog was 43.2%, down from 45.4% a year ago. And for embedded processing was 31.3%, down from 35.4% a year ago. Our focused investments on the best sustainable growth opportunities with differentiated positions will enable both businesses to continue to contribute nicely to free cash flow growth over time. Net income in the first quarter was $1.22 billion, or $1.26 per share, which included a 4 cent discrete tax benefit not in our prior outlook, as we have discussed. Let me now comment on our capital management results. starting with our cash generation. Cash flow from operations was $1.11 billion in the quarter. Capital expenditures were $251 million in the quarter. Free cash flow on a trailing 12-month basis was $5.99 billion. In the first quarter, we paid $724 million in dividends and repurchased $1.15 billion of our stock for a total return to owners of $1.88 billion. In total, we have returned $8.05 billion in the past 12 months, consistent with our strategy to return all of our free cash flow. Over the same period, our dividends represented 45% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $4.09 billion of cash and short-term investments at the end of the first quarter. Total debt is $5.8 billion with a weighted average coupon of 2.91%. Inventory days were 144, up eight days from a year ago, and down eight days sequentially. We are pleased with the progress we have made replenishing inventory of low-volume devices and implementing the next phase of our consignment programs with our distributors. Work in both of these areas will continue in the second quarter. We believe there is strategic value in owning and controlling our inventory and will manage it with our long-term objectives in mind. Next, as we mentioned earlier, we want to update you on our next 300 millimeter wafer fab. As you may have seen, we have chosen Richardson, Texas as the site for our next wafer fab. The new building will be on our existing site in Richardson. We have not announced a specific construction timetable yet but as we indicated during the February capital management call, we would expect to get started in the next few years. Turning to our outlook for the second quarter, we expect TI revenue in the range of $3.46 to $3.74 billion, and earnings per share to be in the range of $1.12 to $1.32, which includes an estimated $10 million discrete tax benefit. We continue to expect our annual operating tax rate to be about 16% in 2019. In closing, as we said last quarter, we believe that after 10 quarters of year-on-year growth, the weakness we are seeing is primarily due to the semiconductor cycle. We have just completed our second quarter of year-on-year declines for TI. If you look at history, cycles are always different, but typically the industry would have four to five quarters of year-on-year declines before year-on-year growth resumes. We're not trying to forecast a cycle, but simply offer some historical perspective. 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 products. We will continue to strengthen disadvantages 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.