Texas Instruments Incorporated

Good day, and welcome to the Texas Instruments 3Q20 Earnings Release Conference Call. Today's conference is not 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 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 quick overview of the quarter. Next, I'll provide insight into the third quarter revenue results with more details than usual by end market, including some sequential performance since it's more informative at this time. And then lastly, Rafael will cover the financial results, capital management, and our guidance for the fourth quarter of 2020. Let me start with a quick overview with three key points. Revenue was higher than expected and grew 18% sequentially with notable strength from the rebound of automotive and growing demand from personal electronics. Revenue increased 1% from the same quarter a year ago. In April and again in July, we explained we would maintain high optionality with our operating plan so we could support customers, particularly during a time when their ability to forecast will be limited. This approach has served us and our customers well and will continue this posture in the fourth quarter. Finally, while visibility for the near-term demand has improved, we remain cautious as the broader economic impact of the global pandemic could continue for several years. Our approach in an environment like this is to maintain high optionality with our operating plan in the short term, to continue critical investments in R&D and in new capabilities like those for TI.com, and finally, to invest to ensure long-term manufacturing capacity, particularly for the 2022 to 2025 timeframe. We've made these decisions with our overall ambitions in mind, which include running the company with the mindset of a long-term owner. These decisions have continued to serve us well. Looking at our segments, analog grew 18% and embedded processing grew 19% sequentially. On a year-over-year basis, analog grew 7% and embedded processing declined 10%. Our other segment declined 19% from a year ago, primarily due to lower calculator sales where COVID-19 impacted back-to-school sales. Moving on, I'll now provide some insight into our third quarter revenue by end market. First, the automotive market rebounded with about 75% sequential growth and returned to levels similar to a year ago. Revenue has grown from the bottom we saw in May as North American and European automotive assembly plants resumed operations. Next, the industrial market was down low single digits sequentially, roughly a sequential decline, and about even from a year ago. Not surprisingly, there were areas of strength and there were areas of weakness. The diversity within industrial results in relative stability, reinforcing the attractiveness of this highly diverse market. Personal electronics was up more than 20% sequentially and up about 15% compared to a year ago. The strength was broad-based across personal electronics, combined with TI being in a position to support unforecasted demand in the third quarter. Next, comms equipment was down about mid-single digits sequentially and up mid-single digits from a year ago, and enterprise systems was down in both comparisons. Lastly, I'll note a housekeeping item. We've simplified our analog business structure into our power business and our signal chain business. Starting this quarter, our reporting will reflect these changes. Rafael will now review profitability, capital management, and our outlook.

Thanks, Dave, and good afternoon, everyone. Third quarter revenue was $3.8 billion, up 1% from a year ago. Growth profit in the quarter was $2.5 billion, or 64% of revenue. From a year ago, growth profit margin decreased 60 basis points. Operating expenses in the quarter were $793 million, up 2% 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 $1.6 billion in the quarter, or 42% of revenue. Operating profit was up 1% from the year-ago quarter. Net income in the third quarter was $1.4 billion, or $1.45 per share. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.4 billion in the quarter. Capital expenditures were $146 million in the quarter. Free cash flow on a trailing 12-month basis was $5.2 billion. In September, we announced we would increase our dividend by 13%, marking our 17th consecutive year of dividend increases. In the quarter, we paid $825 million in dividends and repurchased $15 million of our stock. In total, we have returned $6.4 billion in the past 12 months, or 123% of free cash flow. Over the same period, our dividends represented 64% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $5.5 billion of cash and short-term investments at the end of the third quarter. Regarding inventory, TI inventory dollars were down $64 million from the prior quarter and days were 137. Distribution-owned inventory declined in third quarter by about $100 million, the eighth consecutive quarter of planned reductions, as we have continued the transition to have fewer distributors and bring more customers direct. As a reminder, as we build closer direct relationships with our customers, we further strengthen one of our competitive advantages, the reach of our market channels. Tactically and strategically, we're pleased with the progress of the transition and the impact for our customers. For the fourth quarter, we expect tier revenue in the range of $3.41 to $3.69 billion and earnings per share in the range of $1.20 to $1.40. Our annual operating tax rate has not changed much, but now runs up to 14% from the year. And that's what you should use for your models in the fourth quarter. For next year, we expect our annual operating tax rate to remain at about 14%. In closing, we continue to invest to strengthen our competitive advantages and in making our business stronger. With that, let me turn it back to Dave.