Texas Instruments Incorporated

Good day, everyone, and welcome to today's Texas Instruments Q4 2020 Earnings Release Conference Call. At this time, I would like to turn things over to Mr. Dave Paul. Please go ahead, sir.

Good afternoon, and thank you for joining our fourth quarter and 2020 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.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. First, let me provide some information that's important for your calendars. We plan to hold a call to review our capital management on February 4th at 10 a.m. Central Time. Similar to what we've done in the past, Rafael and I will summarize our progress and provide some insight into our business and approach to capital allocation. For today's call, let me start by summarizing what Rafael and I will be reviewing. First, I'll start with a quick overview of the quarter. And next, I'll provide some insight into fourth quarter revenues results. And as we've done the past few quarters, we'll provide details by end market, including sequential performance, since it's more informative at this time. I'll also provide the annual summary of revenue breakdown by end markets. And lastly, Rafael will cover the financial results, some insight into one-time items, and our guidance for the first quarter of 2021. So starting with a quick overview of the fourth quarter. The company's revenue increased 7% sequentially and 22% year over year, driven by strong demand in automotive, personal electronics, and the industrial markets. Analog revenue grew 9% and embedded grew 11% sequentially. On a year-over-year basis, analog revenue grew 25%, and embedded grew 14%. Our other segment grew 4% from a year-ago quarter. Moving on, I'll now provide some insight into the fourth quarter revenue by end market. First, the automotive market continued its rebound following the second quarter bottom with 19% sequential growth and 25% year-over-year growth. The industrial market was up 7% sequentially and 16% from the year ago. The strength was seen across most market sectors. Personal electronics was up 11% sequentially and up 39% compared to a year ago. The strength was broad-based across sectors and customers within personal electronics. As expected, communications equipment was down 28% sequentially and down 8% from the year ago. Enterprise systems was down 2% sequentially and down 13% from a year ago. And lastly, as we do at the end of each calendar year, I'll describe our revenue by end market for 2020. We break our end markets into six categories that are grouped by their life cycles and market characteristics. The six end markets are 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 37%, automotive 20%, personal electronics 27%, Communications equipment 8%, enterprise systems 6%, and other was 2%. Looking at the changes versus 2019, industrial increased one percentage point, automotive declined 1%, personal electronics increased four, communications equipment declined three, enterprise systems was even, and other declined one percentage point. In 2020, industrial and automotive combined made up 57% of TI's revenue, about even with last year, and up 42% in 2013. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive. Our industrial and automotive customers are increasingly turning to analog and embedded technology to make their end products smarter, safer, more connected, and more efficient. These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth compared to our other markets. Rafael will now review profitability, capital management, and our outlook.

Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2.6 billion, or 65% of revenue. From a year ago, gross profit increased primarily due to higher revenues. Gross profit margin increased 230 basis points. Operating expenses in the quarter were $786 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 $47 million in the fourth quarter. Acquisition charges will remain at about this level through the third quarter of 2021. Operating profit was $1.8 billion, or 44% of revenue. Operating profit was up 45% from the year-ago quarter. Other income and expense was $162 million in the quarter due to a one-time benefit related to the signing of a multi-year royalty agreement. Net income in the fourth quarter was $1.7 billion, or $1.80 per share, which included a $0.16 benefit that was not in our prior outlook, primarily due to the royalty agreement we just mentioned. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.1 billion in the quarter. Capital expenditures were $212 million in the quarter. Free cash flow on a trailing 12-month basis was $5.5 billion, down 5% from a year ago. In the quarter, we paid $937 million in dividends. We have increased our dividend per share by 13%, marking our 17th year of dividend increases. We repurchased $15 million of our own stock for a total return of cash to owners in the fourth quarter of about a billion dollars. For the year 2020, we've returned $6 billion, consistent with our strategy to return all free cash flow to our owners. Over the same period, our dividend represented 62% of free cash flow, underscoring its sustainability. Our balance sheet remains strong with $6.6 billion of cash and short-term investments at the end of the fourth quarter. Total debt was $6.8 billion with a weighted average coupon of 2.77%. Inventory days were 123, down 21 days from a year ago, and down 14 days sequentially. Now let's look at some of these results for the year. In 2020, cash flow from operations was $6.1 billion. Capital expenditures were $649 million, or 4.5% of revenue. Free cash flow for 2020 was of $5.5 billion, or 38% of revenue. Our cash flow reflects the strength of our business model. As we have said, we believe that growth of free cash flow per share is the primary driver of long-term value. And after our creative investments in the business, the remaining cash will be returned over time via dividends and share repurchases. Over the last 12 months, we paid $3.4 billion in dividends and purchased $2.6 billion of our shares. reducing outstanding share count by 1.4% in 2020. Turning to our outlook for the first quarter, we expect TR revenue in the range of $3.79 to $4.11 billion, and earnings per share to be in the range of $1.44 to $1.66. We expect our 2021 annual operating tax rate to continue to be about 14%, and our effective tax rate about a percentage lower than that. a percentage point lower than that. In closing, 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, broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best market opportunities, 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.