Texas Instruments Incorporated

Good day, and welcome to the Texas Instruments 3Q19 Earnings Release Conference 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.

Good afternoon, and thank you for joining our third quarter 2019 Earnings Conference Call. Rafael Luzzardi, 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. 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 third quarter. Second, given the additional weakness we've seen, I'll provide some comments about what we're seeing with added insight by segment and end market. Rafael will then review profitability, capital management results, and then the outlook, after which we'll open the call for Q&A. Starting with a high-level summary of our third quarter financial results. Revenue decreased 11% from a year ago and came in below the midpoint of our guidance, as we saw most end markets continue to weaken further. In our core businesses, analog revenue declined 8% and embedded processing revenue declined 19%, compared with the same quarter a year ago. both businesses' year-on-year growth decelerated. Earnings per share were $1.49, including a $0.09 benefit for items not in our original guidance due to discrete tax benefits. With that backdrop, I'll now provide details on our performance. In the third quarter, our cash flow from operations was $2 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 $6 billion, up 2% from a year ago. Free cash flow margin for the same period was 41% of revenue. 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 be valued only if it's productively invested in the business or if it's returned to owners. For the trailing 12-month period, we returned $7.4 billion of cash to owners through a combination of dividends and stock repurchases, demonstrating our confidence in the 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 third quarter by segment and end market. For the year-ago quarter, analog revenue declined 8% due to declines in power, signal chain, and high volume. Embedded processing revenue declined 19% from the year-ago quarter due to declines in both product lines, processors, and connected microcontrollers. All markets declined across embedded but the declines were most pronounced in the automotive and communications equipment markets. Other declined by 19% from the year-ago quarter due to DLP and custom ASIC. Next, I'll provide some comments on what we're seeing in the market and insight into this quarter's performance by end market versus a year ago. As we've said, when you look at 30 years of history, semiconductor cycles can vary widely but typically experienced four to five quarters of year-on-year declines before returning to positive growth. We've also said that the current trade tensions could impact the depth and duration of the cycle. We've provided these comments as context, not as a prediction about the current cycle. With the end of this current quarter, we've now experienced our fourth consecutive quarter of negative year-on-year growth. There is an increasing number of reports of macroeconomic weakness with trade tensions as the primary contributor. Consistent with this, the weakness we've seen in the third quarter was broad-based across all markets and most sectors. Industrial, automotive, and personal electronics all declined upper single digits from the year ago, as almost all 28 sectors within these markets declined. In communications equipment, Revenue declined about 35% from the year ago and 20% sequentially. We saw weakness across all major customers, regions, and technologies. And lastly, enterprise systems declined from the year-ago quarter. We've learned over the years that staying focused on building the company stronger, especially in the face of a weak market, provides great long-term rewards. We continue to invest in and leverage our competitive advantages. The breadth of our product portfolio and channels to market, including our direct sales and applications team, as well as TI.com, provides us the broadest reach to our customer base, a unique advantage. We've been evolving our distribution network over the years and continue to do so today as we build stronger, direct relationships with our customers. We remain focused on analog and embedded, the best products. We remain focused on industrial and automotive, the best markets. They'll be the fastest growing semiconductor markets as 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 the outlook.

Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2.45 billion, or 65% 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 $778 million, about even from a year ago, and about as expected. On a trailing 12-month basis, operating expenses were 22% of revenue. 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 decline to about $50 million in the fourth quarter and will remain at that level through the third quarter of 2021. Operating profit was $1.59 billion, or 42% of revenue. Operating profit was down 18% from the year-ago quarter. Operating margin for analog was 46%, down from 50% a year ago, and for embedded processing was 32%, down from 35% a year ago. Despite current weakness, our focused investments on the best sustainable growth opportunities with differentiated positions will enable both businesses to contribute nicely to free cash flow growth over time. Other income and expense was a $34 million benefit of $11 million from a year ago. Net income in the third quarter was $1.43 billion, or $1.49 per share. which included a $0.09 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 $1.99 billion in the quarter. Capital expenditures were $149 million in the quarter. Free cash flow on a trailing 12-month basis was $6.03 billion. In September, we announced we would increase our quarterly dividend by 17%, marking our 16th year of dividend increases. In the quarter, we paid $721 million in dividends and repurchased $456 million of our stock for a total return to owners of $1.18 billion. In total, we have returned $7.38 billion in the past 12 months, with our strategy to return all free cash flow. Over the same period, our dividends represented 48% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $5.07 billion of cash and short-term investments at the end of the third quarter. In the quarter, we repaid $750 million of debt and issued $750 million of debt with a coupon of 2.25% due in 10 years. This results in total debt of $5.8 billion with a weighted average coupon of 2.99%. Inventory days were 139, up eight days from a year ago, and down four 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. Work in both of these areas is mostly complete. Given the weaker environment, we have reduced wafer starts to align with demand. Turning to our outlook for the fourth quarter, we expect TI revenue in the range of $3.07 to $3.33 billion, and earnings per share to be in the range of $0.91 to $1.09, which includes an estimated $5 million discrete tax benefit. we continue to expect our annual operating tax rate to be about 16% for 2019. As a reminder, acquisition charges will decline to about $50 million in the fourth quarter and remain at that level through the third quarter of 2021. In closing, as Dave mentioned, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are technology and manufacturing, portfolio breadth, market-rich, 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 we believe will enable us to continue to improve and deliver free cash flow per share growth over the long term. With that, let me turn it back to Dave.