Texas Instruments Incorporated

Good day, and welcome to the Texas Instruments 2Q20 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dave Powell. Please go ahead, sir.

Thank you, and good afternoon, and thank you for joining our second quarter 2020 Earnings Conference Call. 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. Our Chief Financial Officer, Rafael Lazzardi is with me today and will provide the following updates. First, I'll start with a reminder of the framework we described during the April learnings call for how we'll navigate the COVID-19 economy. Next, I'll provide insight into second quarter revenue results with more details than usual by end market, including sequential performance since it's more informative at this time. And lastly, Rafael will cover financial results, some insight into one-time items, and our guidance for the third quarter. During the April call, we explained that we will use our three ambitions to drive our decisions as they're particularly helpful in uncertain times like we face with COVID-19. For decades, these ambitions have driven all decisions inside TI. They are to act like owners who own the company for decades. Secondly, to adapt and succeed in a world that's ever-changing. And third, to be a company that you're proud to be a part of and would be proud to have as a neighbor. When we pursue these ambitions, our employees, customers, communities, and owners will all benefit. While second quarter did not experience the depth of the decline we saw in the 2008 financial crisis, nonetheless, we remain cautious on how the economy might behave over the next few years. As a reminder, in April, we provided a broader framework to help you understand how we'll operate through this environment. First, we will maintain high optionality with our operating plan so we can support customers particularly during a time when their ability to forecast will be limited. Next, we'll maintain investments in R&D and in new capabilities, like those for TI.com, since they're 5- to 10-year time horizon decisions and critical to building TI stronger. And finally, we will invest to ensure long-term manufacturing capacity, particularly for the 2022 to 2025 time frame. Making decisions with our ambitions in mind will continue to serve us well, and that, coupled with the framework I just mentioned, should help you understand our actions. We are particularly pleased with our decision to maintain an operating plan that allowed us to maximize our optionality. During the second quarter, we were able to respond to unforecasted demand. We will continue to maintain this posture in the third quarter. Moving on, I'll now provide some insight into our second quarter revenue. There are several key points to summarize what we're seeing in the market. First, overall, the weakness was primarily from the automotive market. Automotive was down about 40% sequentially and down over 40% compared to a year ago. To help appreciate this impact, excluding automotive, TI was up 8% sequentially and down 3% versus a year ago. The automotive market appears to have bottomed in May as North American and European assembly plants resumed operations. Next, the industrial market was up about 2% sequentially and also up 2% from a year ago. There are end markets that are weak and others that are understandably strong, like medical. We do believe that some customers are trying to maintain strong inventory positions to limit exposure to any supply chain disruptions. Personal electronics was up over 20% sequentially and up about 10% compared to a year ago. This can best be explained by work-from-home trends and TI being in a position to support unforecasted demand in the second quarter. Next, communications equipment was up 20% sequentially but down 15% compared to a year ago. Within this market, it's important to note that Analog achieved sequential and year-over-year growth, while Embedded was down in both comparisons following our planned decline in this portion of the business. Enterprise Systems was up sequentially and year-over-year. This strength, similar to personal electronics, is best explained by work-from-home trends and TI being positioned to support unforecasted demand. Rafael will now review profitability, capital management, and our outlook.

Thanks, Dave, and good afternoon, everyone. Second quarter revenue was $3.2 billion, down 12% from a year ago. Gross profit in the quarter was $2.1 billion, or 64% of revenue. From a year ago, gross profit decreased due to lower revenue, and gross profit margin was even. Operating expenses in the quarter were $780 million, down 4% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 23% of revenue. Over the last 12 months, we have invested $1.5 billion in R&D. Operating profit was $1.2 billion in the quarter, or 38% of revenue. Operating profit was down 18% from the year-ago quarter. Net income in the second quarter was $1.4 billion, or $1.48 per share, which included a 33-cent benefit primarily for tax-related items that were not in our prior outlook. The benefit included two cents of restructuring charges to strengthen our embedded business by focusing investments on the best opportunities for long-term growth. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.7 billion in the quarter. Capital expenditures were $130 million in the quarter. Free cash flow on a trailing 12-month basis was $5.7 billion. In the quarter, we paid $823 million in dividends and repurchased $882 million of our stock for a total return to owners of $1.7 billion. In total, we have returned $6.7 billion in the past 12 months. consistent with our strategy to return all free cash flow. Over the same period, our dividends represented 56% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $5 billion of cash and short-term investments at the end of the second quarter. In the quarter, we issued $750 million of debt with a coupon of 1.75% due in 10 years. This resulted in total debt of $6.8 billion with a weighted average coupon of 2.77%. We have repaid $500 million of debt due in second quarter, and we have no further debt due this year. We have $550 million of debt due in 2021. Regarding inventory, TI inventory dollars were up $133 million from first quarter, and days were 166, about as expected. Distribution-owned inventory declined again in second quarter by about $150 million, the seventh consecutive quarter of planned reductions, as we continue the transition to have fewer distributors and bring more customers direct. Tactically and strategically, we are pleased. We have held total inventory dollars steady while increasing the percent of inventory held inside TI and therefore in fewer places. This enables us to continue to maintain short lead times and high availability to meet unforecasted customer demands. For the third quarter, we expect TR revenue in the range of $3.26 to $3.54 billion and earnings per share to be in the range of $1.14 to $1.34. Regarding our factory operating plan, as we have stated, we will maintain high optionality so we can continue to support customers' demands. particularly during a time when their ability to forecast may continue to be limited. We have informed our customers that lead times on our products remain short, and more than 40,000 products are available for immediate shipment on TI.com. Short lead times and high availability are important capabilities that allow us to continue to support our customers' near-term and unforecasted demands. Our product portfolio of mostly long-lived parts afford us to have a steady hand, and therefore, we will take a similar approach to our factory operating plan again in third quarter. In closing, we continue to invest to strengthen our competitive advantages and in making our business stronger. History has shown us that it is in times like these when we can make the most strategic progress. With that, let me turn it back to Dave.