Texas Instruments Incorporated

Good day and welcome to the Texas Instruments fourth quarter 2019 and 2019 year-end 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 fourth quarter and 2019 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. 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 4th 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 be covering the following topics. First, a high-level summary of the financial results for the fourth quarter. Second, I'll provide some comments about what we're seeing with added insight by segment and end market and explain why we would characterize the market as showing signs of stabilizing. And finally, Since this is the end of the calendar year, I'll provide a summary of our performance by end market for 2019. Rafael will then review profitability, capital management results, and then the outlook, after which we'll open the call for Q&A. Starting with the high-level summary of the fourth quarter financial results. Revenue was $3.35 billion, a decrease of 10% from a year ago, and EPS was $1.12 per share, including a one-cent benefit not in our original guidance. Revenue came in above the midpoint of our guidance with the relative strength across all markets. At the company level, our year-on-year decline abated slightly from 11% in the third quarter to 10% in the fourth quarter. While this is only a marginal improvement, all end markets reduced their rate of decline substantially with the exception of communications equipment. where the year-over-year decline increased about as expected given the strength in this end market in the year-ago quarter. In fourth quarter 2019, analog revenue declined 5% and embedded processing revenue declined 20% compared with the same quarter a year ago. Analog's year-on-year rate of decline went from 8% in the third quarter to 5% in the fourth quarter, and embedded's decline slightly increased from 19% to 20% over the same period. When we look at the market since 90 days ago, we moved from the third quarter where customers were increasingly cautious to the fourth quarter where results and behavior throughout the quarter reflected what we believe is best described as demand stabilizing. Based on history, this would imply that customer and channel inventory that built up during 2017 and 2018 would now mostly be depleted. This suggests that demand this year will be more a function of our customers' end demand, and therefore the macroeconomy, which may continue to be uncertain. Moving on, I'll now provide some details on the fourth quarter by segment and end markets. From the year-ago quarter, analog revenue declined 5% due to declines in signal chain, high volume, and power. Embedded processing revenue declined 20% from the year-ago quarter, primarily due to processors. Connected microcontrollers also declined. Our other segment declined 24% from the year-ago quarter. For the year in total, analog declined 5% and embedded declined 17%. analog and embedded combined were 92% of revenue. From an end market perspective, in the fourth quarter, all markets declined year-on-year 3% to 4% with the exception of communications equipment. Communications equipment declined about 50% from the year-ago quarter, about as expected as all major customers, geographies, and technologies declined. Next, as we do at the end of each calendar year, I'll describe our revenue by end market for 2019. 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. As a percentage of revenue for the year, industrial was 36%, automotive 21%, personal electronics 23%, communications equipment, 11, enterprise systems, six, and other was 3%. Looking at the changes versus 2018, automotive increased by one percentage point, enterprise systems decreased by one percentage point, and the remaining markets were unchanged. In 2019, industrial and automotive combined made up 57% of TI's revenue, up one percentage point from last year, and up from 42% in 2013. We've established momentum in these markets, and we see great opportunity ahead. Next, one of our competitive advantages is diversity and longevity, which can be measured in multiple dimensions. From a diversity perspective, we have over 100,000 customers and tens of thousands of devices, In 2019, almost two-thirds of our revenue came from customers who bought $100 million or less of our products. In 2019, our top 10 devices represented about 5% of our revenue, and the top 100th device was less than one-tenth of 1% of our revenue. From a longevity perspective, over 40% of our revenue came from devices that we've been producing for at least 10 years. Our investments are directed to continue to diversify our growth across products, markets, and customers, strengthening this competitive advantage. Next, we are announcing today that we will be closing our last two six inch or 150 millimeter wafer fabs, which are both more than 50 years old. This will be a multi-year plan and is expected to be completed no earlier than 2023, and no later than 2025. There are no charges in this quarter's results and we'll keep you updated as needed in the future. Separately, our plans to build our next 300 millimeter factory in Richardson, Texas are underway with dirt moving and cranes on site. We expect the building shell to be complete by the end of 2021 and ready to install tools when needed to meet market demand. which will allow us to continue to support growth and strengthen our manufacturing and technology competitive advantage. So to wrap up, we remain focused on analog and embedded, the best products. We remain focused on the industrial and automotive markets, the best markets since 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 our outlook.

Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2.1 billion, or 63% of revenue. From a year ago, gross profit decreased primarily due to lower revenue. Gross profit margin decreased 220 basis points. Operating expenses in the quarter were $798 million, down 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 22% of revenue. For the year, we have invested $1.5 billion in R&D, an important element of our capital allocation. We're 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 $50 million. Acquisition charges will remain at about $50 million through the third quarter of 2021. Operating profit was $1.2 billion, or 37% of revenue. Operating profit was down 18% from the year-ago quarter. Operating margin for analog was 42%, down from 47% a year ago, and for embedded processing was 25%, down from 30% a year ago. 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. Net income in the fourth quarter was $1.1 billion, or $1.12 per share. which included a one-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 $163 million in the quarter. Free cash flow on a 12-month basis was $5.8 billion, down 4% from a year ago. In the quarter, we paid $841 million in dividends, an increase of 17% per share, marking our 16th year of dividend increases. We repurchased $489 million of our stock for a total return to owners of $1.3 billion. In total, we have returned $6 billion in the past 12 months, consistent with our strategy to return all free cash flow to our owner. Over the same period, our dividends represented 52% of free cash flow, underscoring their sustainability. Our balance sheet remained strong, with $5.4 billion of cash and short-term investments at the end of the fourth quarter. Total debt was $5.8 billion, with a weighted average coupon of 2.99%. Inventory days were 144, down eight days from a year ago, and up five days sequentially. We are pleased with our inventory, and it is positioned to support growth. Now let's look at some of these results for a year. In 2019, cash flow from operations was $6.6 billion. Capital expenditures were $847 million, or 6% of revenue. Free cash flow for 2019 was $5.8 billion, or 40% 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 free cash flow to owners. Over the last 12 months, we've paid $3 billion in dividends and purchased $3 billion of our own shares. reducing outstanding share count by 1.4% in 2019 and by 46% 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 $3.12 billion to $3.38 billion, and earnings per share to be in the range of $0.96 to $1.14, which includes an estimated $20 million discrete tax benefit. we continue to expect our 2020 annual operating tax rate to be about 15%. As usual, details of our expectations for taxes can be found on our IR website under Financial Summary Data. 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 manufacturing and technology, 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 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.