Texas Instruments Incorporated

Good day, and welcome to the Texas Instruments 2Q19 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dave Paul. Please go ahead, sir.

Good afternoon, and thank you for joining our second 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.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. 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 second quarter. And second, some details by segment and end market. Rafael will then review profitability, capital management results, and then the outlook. After that, we'll open the call for Q&A. Starting with high-level summary of our second quarter financial results, the quarter progressed about as we expected, with revenue decreasing 9% from a year ago due to broad-based weakness. In our core businesses, analog revenue declined 6% and embedded processing revenue declined 16% compared with the same quarter a year ago. Both businesses' year-on-year growth decelerated. Earnings per share were $1.36, including a $0.07 benefit for items not in our original guidance. The benefit includes $0.04 due to the previously announced sale of our Greenock Scotland FAB, with the balance primarily due to discrete tax benefits. 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 second quarter, our cash flow from operations was $1.8 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. Free cash flow for the trailing 12-month period was $5.9 billion, up 3% from a year ago. Free cash flow margin for the same period was 38.9% of revenue, up from 36.6% a year ago. We continue to benefit from the quality of our product portfolio that is 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 returned to owners. For the trailing 12-month period, we returned $8 billion of cash to our 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 on the second quarter by segment and end market. For the year-ago quarter, analog revenue declined 6%. due to declines in high volume, power, and signal chain. Embedded processing revenue declined by 16% from a year ago quarter due to declines in both product lines, processors, and connected microcontrollers. Next, I'll provide some insight into this quarter's performance by end market versus a year ago. Industrial and automotive together declined upper single digits due to broad-based weakness. Personal electronics declined low double digits also due to broad-based weakness. In communications equipment, revenue declined sequentially but was about even from a year ago versus a very weak compare. And lastly, enterprise systems declined. 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 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. Rafael will now review profitability, capital management, and our outlook. Rafael?

Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2.36 billion, or 64.3% of revenue. From a year ago, gross profit decreased due to lower revenue. Gross profit margin decreased 90 basis points. Operating expenses in the quarter were $810 million, down about 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 21.1% of revenue, within our expectations. Over the last 12 months, we have invested $1.57 billion in R&D, an important element of our capital allocation. We are pleased with our disciplined processes 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 $80 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. Restructuring charges slash other was a credit of $36 million due to the sale of our Greenock, Scotland facility. Operating profit was $1.51 billion, or 41.1% of revenue. Operating profit was down 12% from a year ago quarter. Operating margin for analog was 43.7%, down from 47% a year ago. and for embedded processing was 33.5%, 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. Other income and expense was $52 million benefit, up $28 million primarily due to investment gains and tax-related items. Net income in the second quarter was $1.31 billion, or $1.36 per share, which included a 7-cent benefit for items that were 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 $1.8 billion in the quarter. Capital expenditures were $284 million in the quarter. Free cash flow on a trailing 12-month basis was $5.93 billion. In the second quarter, we paid $722 million in dividends and repurchased $863 million of our stock for a total return to owners of $1.59 billion. In total, we have returned $8.01 billion in the past 12 months, consistent with our strategy to return all of our free cash flows. Over the same period, our dividends represented 47% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $4.22 billion of cash and short-term investments at the end of the second quarter. Total debt is $5.8 billion with a weighted average coupon of 2.91%. Inventory days were 143, up eight days from a year ago and down one day 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 third quarter. We believe there is strategic value in owning and controlling our inventory and will manage it with our long-term objectives in mind. Turning to our outlook for the third quarter, We expect TI revenue in the range of $3.65 to $3.95 billion, and earnings per share to be in the range of $1.31 to $1.53, which includes an estimated $10 million discrete tax benefit. We continue to expect our annual operating tax rate to be about 16% for 2019. In closing, we have just completed our third quarter of year-on-year declines for TI. As we stated last quarter, If you look at the last 30 years of history in our industry, cycles are always different, but typically you could see four to five quarters of year-on-year declines before year-on-year growth resumes. Again, 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. 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 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.