This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Thank you for standing by. Good day and welcome to the Texas Instruments Q1 2021 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Paul. Please go ahead, sir.
spk00: Good afternoon and thank you for joining our first quarter 2021 Earnings Conference Call. 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. Our Chief Financial Officer, Rafael Luzzardi, 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 first quarter revenue results with more details than usual by end markets, including some sequential performance since it's more informative at this time. Lastly, Rafael will cover the financial results, some insights into one-time items, and our guidance for the second quarter of 2021. Starting with a quick overview of first quarter. The company's revenue increased 5% sequentially and 29% year-over-year, driven by strong demand in industrial, automotive, and personal electronics. On a sequential basis, analog grew 5% and embedded processing grew 7%. On a year over year basis, analog grew 33% and embedded processing grew 17%. Our other segment grew 12% from a year ago quarter. Moving on, given the current environment, again this quarter I'll provide some insight into our first quarter revenue by end market and then some comments on our lead times. First, the industrial market was up about 20% sequentially and up almost 30% from the year ago. The strength was seen across most sectors. The automotive market was about even compared to a very strong fourth quarter 2020, and up about 25% from the year ago. Compared to the pre-COVID-19 levels of fourth quarter 19, our shipments to automotive in both the fourth quarter of 2020 and the first quarter of 2021 were up about 25%, as we work to help our automotive customers recover from their supply chain disruptions. Personal electronics was down about 10% sequentially, and up about 50% compared to the year ago. The strength was broad-based across sectors and customers within personal electronics. Next, communications equipment grew in the high teens sequentially, but was about even from the year ago. Enterprise systems grew upper single digits sequentially and was down about 10% from the year ago. Regarding lead times, over 80% of our products have steady lead times and more than 50,000 parts have off-the-shelf availability via TI.com. However, the growing demand in the first quarter of 2021 did expand our list of hotspots, which required extending some lead times. We will continue that. to add incremental capacity in 2021 and the first half of 2022 with additional support from the startup of our third 300-millimeter wafer fab, RFAB2, that will come online in the second half of 2022. As discussed during our capital management review in February, our competitive advantage of internal manufacturing and technology delivers the benefits of lower costs and greater control of our supply chain which really shows through in a market environment like this. Rafael will now look and review profitability, capital management, and our outlook.
spk05: Thanks, Dave, and good afternoon, everyone. First quarter revenue was $4.3 billion, up 29% from a year ago. Gross profit in the quarter was $2.8 billion, or 65% of revenue. From a year ago, gross profit margin increased 250 basis points. Operating expenses in the quarter were $811 million, up 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 21% of revenue. Over the last 12 months, we have invested $1.5 billion in R&D. Acquisition charges and non-cash expense were $47 million in the first quarter. Acquisition charges will remain at about this level through the third quarter of 2021 and then go to zero. Operating profit was $1.9 billion in the quarter, or 45% of revenue. Operating profit was up 56% from a year-ago quarter. Net income in the first quarter was $1.8 billion, or $1.87 per share, which included a two-cent net benefit that was not in our prior outlook. primarily due to a discrete tax benefit which was partially offset by about $50 million of utility costs related to the February winter storm in Texas. Most of this expense is in our cost of revenue and reported in our other segment results. Let me now comment our capital management results, starting with our cash generation. Cash flow from operations was $1.9 billion in the quarter. Capital expenditures were $308 million in the quarter. Free cash flow on a trailing 12-month basis was $6.3 billion. In the quarter, we paid $940 million in dividends and repurchased $100 million of our stock. In total, we have returned $4.5 billion in the past 12 months. Over the same period, our dividend represented 56% of free cash flow, underscoring its sustainability. Our balance sheet remains strong with $6.7 billion of cash and short-term investments at the end of the first quarter. We retired $550 million of debt in the quarter, leaving $6.3 billion of total debt with a weighted average coupon of 2.77%. Regarding inventory, TI inventory dollars were down $65 million from the prior quarter, and days were 114. For the second quarter, we expect TI revenue in the range of $4.13 to $4.47 billion. and earnings per share to be in the range of $1.68 to $1.92. We continue to expect our annual operating tax rate to be 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.
spk00: Thanks, Rafael. Operator, you can now open the lines for questions. In order to provide as many of you as possible the opportunity to ask a question, please limit yourself to a single question. After our response, we'll provide you the opportunity for an additional follow-up. Operator?
spk02: Thank you. To signal for a question, please press star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, it is star 1 at this time for questions. And first, we'll go to Chris Danley with Citi.
spk01: Hey, thanks, guys. So Q1 clearly was very strong, you know, well above seasonality and above guidance. However, your sequential guidance at flat is well below seasonality. So my question is, are you guys seeing, you know, cancellations and push-outs, or why such weak guidance after a strong Q1? Thanks.
spk00: Yeah, Chris, yeah, thanks for that question. We aren't seeing cancellation or push-outs. I just say that if you look, you know, to your – observations, Q1 was very strong both sequentially and year-on-year. So, you know, at the midpoint, second quarter will be a strong quarter, you know, from a year-on-year standpoint. You have a follow-up?
spk01: Yeah, I mean, I guess it would just be a follow-on to the first question. This would be the lowest sequential guidance you guys have given in some time. So I guess why not guide for a seasonal or even close to seasonal sequential guide?
spk00: Yeah, it really, Chris, it is the best estimate that we have for our revenue for the quarter. And again, I would describe it as following a very strong first quarter. It will be a strong quarter again. So, okay, thank you. We'll go to the next caller.
spk02: And next we'll go to Stacy Raskin with Bernstein Research.
spk06: Hi, guys. Thanks for taking my question. I want to talk about your inventory strategy. I know you have a strategy to build out inventory for customer service. I guess how do I reconcile that with the fact that your inventory dollars are down significantly? and you're still getting some pockets of lead time, of extended lead time, is that just a function of demand, of the pull that's just so strong you can't keep up? And I guess in that light, how do you parse the quality of those orders that you're getting? How do you know, are you just, I mean, are you just shipping whatever is being asked for at this point? And I guess, like, what are the plans for loadings and inventories as we go into Q2? Are you going to try to replenish the inventory that's been drained?
spk05: Yeah, so thanks for the question, Stacey. So first, let me step back and remind everyone, inventory, our objective there is to maintain high levels of customer service, while we minimize obsolescence and improve manufacturing utilization. And as you alluded in the question, we would prefer to have higher levels of inventory. In fact, what, 60 days ago at the capital management strategy, we increased the target for inventory to 130 to 190 days up from 115, 145. Prior to that, so yeah, we'd like to have more inventory, but in the current environment, we're focusing our capacity on fulfilling demand, not on building inventory. Whenever things slow down, which at some point they will, and or as we increase capacity, which we are increasing capacity incrementally, we have been and will continue to do that through the balance of this year into the first half of next year. And then in the second half of next year, we'll have a first output from R5-2. Then as those things come together, then we will be able to build more inventory. I know you had a couple other parts to that question, but why don't you use your follow-up for that if I missed something?
spk06: Okay, I'll use the follow-up. How are you parsing the quality of the orders that you're getting? Are you just shipping whatever is being ordered at this point?
spk05: Yeah, I'm glad you chose that one as the follow-up. I'll just highlight, as you know, we have moved away from distributors over the last couple years. Really, it's been more of a 10-year process, but in the last few years, we pulled the trigger on actually no longer shipping to many distributors that we used to, and now we're going direct with a lot of our customers. to the point where we exited last year with almost two-thirds of our revenue shipping direct. That has put us in a great position, particularly in the current environment, because we now have more direct access to those customers. We have a better understanding of what they really need. We don't have that intermediary in between, frankly, clouding things up, as, frankly, that's the way it happened a lot with the distributors. So then we use that information to – to better allocate our resources, both inventory, manufacturing, et cetera, in order to fulfill demand from our customers.
spk00: That's great. Thank you, Stacy. We'll go to the next caller, please.
spk02: And our next question will come from John Pitzer with Credit Suisse. Yeah, good afternoon, guys.
spk03: Thanks for letting me ask the question. Not original, but a follow-up to the June revenue guide. I'm just curious, Rafael, you said that you would be growing supplies sequentially from March to June, so the implication is you might be able to build some inventory in your own balance sheet. I'm just curious, given how lean inventories are across the channel, why you wouldn't expect incremental supply that you bring on not to be used by your customers and actually show, excuse me, sequential revenue growth?
spk05: You know, I think you're getting a little nuance in that question, picking some of the things I said. Just I would tell you, We drain inventory fourth to first, right? So even if we're increasing output, that doesn't necessarily mean that we'll be able to build inventory. What I said earlier, you shouldn't take that as a statement that we're going to build inventory going into second quarter.
spk00: Yeah, and I would add that we're going to add incremental capacity through inventory. the balance of this year and through the first half of next year until RFAB 2 comes on, which would be in the second half of 2022. So you've got multiple pieces that are moving there. You have a follow-on, John?
spk03: Yeah, just it was nice to see in the March quarter embedded at least sequentially growing faster than analog. And, you know, we've talked about this in the past, Dave, about kind of the growth there has kind of lagged that of analog. Do you feel like within the embedded market, you're turning the corner? And can you help us kind of understand how you guys see the design funnel there and what the growth rate in that market might be beyond kind of the cyclical recovery?
spk05: Yeah, I'll give you a few comments on that. And Dave, if you want to follow up. But high level, we're pleased with the trajectory of embedded. However, we're still in very early phases, right? As we have said before, our goal with embedded was first to stabilize embedded, make some changes that we have made, and then leverage our competitive advantages that we have to have embedded headed in a better direction. And, you know, we're in the early phases, but we're pleased with those early results.
spk00: I agree. Thank you. Thank you, John. And we'll go to the next caller, please.
spk02: Moving on, we'll go to Craig Hettenbach with Morgan Stanley.
spk10: Yes, Dave, thanks for the color on lead times. I guess in the hot spots, you know, maybe 20% or so that's being impacted. Can you just give a sense of what you're seeing there and maybe, you know, your sense of when you would expect the lead times in certain areas to normalize?
spk00: Yeah, there's just a lot of moving pieces on that, Craig. You know, I think it's probably premature to try to pick that. You know, our teams are obviously working very hard with customers to close those demand and fulfill those needs. So it really is just based on technologies and packages and what those customer requirements are. You have a follow-on?
spk10: Sure. Thanks. And then personal electronics, up 50% year-over-year. I know there's been some nice tailwinds, you know, from work from home. Any more color in terms of some of the segments that you're seeing growth and how you feel about that business for Q2? Sure.
spk00: Yeah, so at a high level, what I'd say, you know, we'll give color by end market if there's something unusual going on. You know, when we look out into a quarter, I can say that there's nothing unusual, you know, that we feel the need to call out. When we look back into first quarter and really in the past few quarters in personal electronics, The demand that we've seen there has been very broad-based, both by customer, really across the board that we've seen, as well as by sector. And just as a reminder, inside of personal electronics, we'll have things like handsets and tablets and personal computers, including laptops. televisions, smart speakers, those types of things. So it's a pretty broad category. Printers, so it's pretty broad categories. I think there's nine, ten different sectors that make up personal electronics. And we've seen very strong demand across, really across all of those.
spk05: This is Rafael. I just want to go back to the question late times and You know, and earlier, several people asked about inventory. You know, at the end of the day, things are going to be tight. As long as demand is ahead of supply, things are going to be tight. You know, lead times are going to be tight. But the key point here is we own our own manufacturing and technology, right? That is a key differentiator versus our competitors. It is one of our competitor advantages. So we are in a... in a unique strategic position to be able to have that, control that inventory, be able to add to that capacity incrementally for the next year and a half or so, but then more significantly after that when R5-2 is built and it starts to get equipped. So that's a big difference versus our competitors. It really puts us in a much better position to fulfill customers' demands. both short-term and more importantly over the long haul as we continue to focus on industrial automotive and all those customers that are in those great spaces.
spk00: That's a good caller. Yeah, thank you. Okay, we'll go to the next caller, please.
spk02: Thank you, and that will come from Harlan Sir with J.P. Morgan.
spk07: Good afternoon. Thanks for answering my question. On the extended lead times, maybe a different way to ask the question is, You also have about 20% of your wafer requirements. Most of it is embedded and you outsource 40% of your tests and assembly. I'm just wondering if this is where you're seeing maybe more of the extended lead times just given the capacity is tight at your outsource partners or is it spread across both internal and outsource manufacturers?
spk00: Yeah, it's not specifically there, Harlan. It really is more just based on technology and market-driven or package types. So we've described it as hotspots. So it's kind of a combination of those things when we've got demand that is outstripping the short-term supply. But back to Raphael's point, The fact that we do the majority of that assembly test in-house, most of our peers don't do that. Most of our peers have that assembly outside. So even that 60, 70% is a very large number that we control and do in-house. Also, because we do 80% of our wafers in-house, we can expand that capacity incrementally. Also, we control the cost to a much higher degree than our peers as well. And those are very important things in times like these. So it's a tremendous advantage on top of the fact that it's 300 millimeter where we're adding capacity. So it's coming in at structurally lower cost in addition to it. So you have a follow on?
spk07: Yeah, no, thanks for the insights there. So good again to see the year-over-year momentum in the embedded business. And I know somebody tried to ask a question about this previously, but wondering if you could just – I know you guys refocused some of the sub-segments within embedded last year. Just wondering if you guys could give us a profile of embedded relative to the overall corporate profile. I mean, does it have the same end market exposure as the overall business or – Is it more skewed now towards one or particular end markets? And on a go-forward basis, like, what end markets within embedded are you spending more R&D dollars?
spk00: Yeah. So, you know, I think that, you know, what the investments that we have in embedded, we have directed at the best growth opportunities. So, As we took a step back, we wanted to focus them into that direction. They're biased towards industrial and the automotive markets. The largest portion of our revenue are pointed in those two markets as well. We do have a little bit of revenue in communications enterprise and PE inside of that, The majority of the revenue is in those two markets. So again, as Rafael said, we're in the early stages. Our first objective was to get the revenue stabilized. So we feel very good about the progress that we've made so far. And we're making the investments there because we believe Embedded will be a great contributor to free cash flow growth over the long term. So, you know, we believe that several years from now, we'll look back and we'll be very pleased with the investments that we've made. We'll be very pleased with the free cash flow growth that Embedded will have contributed to the company. So, okay, thank you, Harlan. And we'll go to the next caller, please.
spk02: Thank you. And that will come from Amber Srivastava with Bank of Montreal.
spk09: Hi, thank you very much.
spk02: It's just a question on the...
spk09: on the order patterns that you're seeing, guys. Many of your peers have talked about no cancellations, policies, facets of the business we haven't seen in, you could say never. But are you seeing that, that customers are looking for commitments to capacity and then as a result, you're having to change your clauses with the customers in terms of, you know, cancellation policy or what have you, are there any changes on the front?
spk00: Yeah, so we don't think that that's a good idea to go down that path to force customers to tell us what they need a year from now. You can demand that they tell you what they need in April or May of 2022, but I can assure you they don't know what they need a year from now. We really want to be in a position where we can supply them what they need and be a supplier that they can count on. As well, you know, our competitive advantage of manufacturing technology and owning and controlling that Our manufacturing asset also gives us control of our costs there. So we haven't been in a position where we've had to go in and raise prices as many of our other peers have. And we believe that those two things combined are translating into share gains, right? So when you look at the revenues in this quarter, we believe part of that is share gains. And I'll quickly also point out that you've got to measure that over time. So, don't look at or measure it over just one quarter, but we do believe that will be something that will benefit us for a very long time to come. Do you have a follow-on, Ambrish?
spk09: Yeah, I did. Just quickly on the capacity and the CapEx, so intensity, we should be modeling a different intensity over the next few quarters, correct? We should be within the guided range that you've given as you build the, uh, third FAB. And then is that second half 22, a pull-in versus what you were expecting?
spk05: So, no, it's not a pull-in. That's about what we've always expected. But now let me answer the first part of your question. You know, as you, as you know, very well, you've been following us for a while. Um, we talked about, um, our guide or, you know, for CapEx as percent of revenue, uh, at about 6%, we, we did that, um, you know, at the capital management strategy meeting. And that's a valid number over the long term. And, you know, it's just a model to help you think about our CapEx. But the reality is that in the short term, for, you know, two, three years, we're going to run higher than that in absolute terms and also the percent of revenue as we continue to invest both – you know, short term to get ahead of the current situation, but more importantly, longer term as we continue to strengthen our competitive advantage of having our own manufacturing technology, particularly 300 millimeter, that as we talked about, provides such a great structural cost advantage and controlling our own manufacturing supply, the advantage that clearly during this pandemic and cycle has proven worthwhile.
spk00: Okay. Thank you, Ambresh. And we'll go to the next caller, please.
spk02: Thank you. And that question will come from Timothy Arcuri with UBS.
spk04: Thanks a lot. Dave, I guess I also wanted to ask about the guidance. I know there's some school of thought that because you control your supply chain and that your, you know, model and inventory would sort of drive some share gains and some more upside given what's going on. And I know that you're typically conservative and you have a very tough comp on Q1. But I wonder if maybe customers are not pulling your product because of shortages elsewhere, because it just is sitting there in consignment anyway, waiting for them. And I guess the question is, are you hearing that from any of your customers that they're not pulling due to shortages elsewhere? And maybe that's contributing somewhat to your June guidance.
spk00: Tim, we think that that probably goes on at any point. though we don't believe that that's going on at any significant level. So, yeah, so we don't believe that that's a significant factor that's going on in second quarter. You have a follow on?
spk04: Yeah, yeah, I do. So I guess I'll ask the same thing that I asked last quarter about the share repo. And I know that you guys always say that free cash flow only matters if it's but you didn't buy back much again this quarter. It's like $130 million over the past nine months. And it sort of seems like maybe a bit of a pattern now that it's three quarters in a row. And I know you have a pretty strong intrinsic value model for your stock. So can you just talk about that? Thanks.
spk05: Yeah, sure. No, thanks. First, stepping back, as you alluded to, our goal, our objective is to return all free cash flow to the owners of the company. over the long term. And if you look at our 15, 16-year history on that front, we have been returning all free cash flow and then some to the owners of the company. And we're going to continue doing that over time. Now, over time, over the long term, that means, you know, that doesn't necessarily mean every quarter, certainly not every quarter, maybe not even every year, right? But over the long term, we're going to return all free cash flow to the owners of the company We do that through both dividends and buybacks, and there are different criteria that we look at for each of those, and we've talked about that.
spk00: Okay, we've got time for one more caller.
spk02: Thank you, and that question will come from Tori Spanberg with Stifel.
spk08: Yes, thank you, and congratulations on the record revenues and earnings. First question is, Dave or Rafael, can you step back, just looking at the last 90 days, what is it exactly that changed this last quarter? Did orders continue to accelerate? Did the capacity situation ease? Maybe just walk through exactly what changed.
spk05: I'll give you a few comments. I'm not sure if I have what you're looking for. Demand continues to be strong. We're still in an environment where demand exceeds supply. capacity, right? Now, of course, our revenue has continued growing in that environment and both year and year, clearly, but also sequentially, right? And we are incrementally adding capacity while we do that. We're also, you know, in the, you know, while we have done that, we have over this entire cycle, we have a focus on making the company stronger, right? So, we have Back, if you look at the first phase of this pandemic, back in February or March, when everybody was pulling back, we built through that cycle. So that was a tactical decision enabled by our strategic position of our focus on industrial automotive, on catalog of parts with low risk obsolescence. So we were able to build through that cycle and be prepared for the other side once demand started returning pretty quickly, as it turned out. We also, as we did that, we also gained strategic ground focusing on auto and industrial. So you've seen how we have grown in those spaces. And while we have done that, we have invested for the long term, right? And that's investing in competitor advantages, the most obvious one. is manufacturing technology. We already talked plenty about that here, but there's also our product portfolio, right? We continue to strengthen the R&D in the best spaces. And then the other one is reach of channels, which we really haven't talked about today much, but we continue to strengthen that. And maybe the most obvious one is TI.com and everything we're doing there to support our customers with very, very high availability. In fact, immediate availability in a lot of cases with many parts that's inventory there for customers to buy direct from us on TI.com.
spk08: Yes, thank you. So your operating margin, I think, was just very shy of a record at 45.2%. Referral in the past, you've talked about OPEX kind of being between 20% and 30% of revenue. Now that it's pretty obvious that there's so much demand out there and that it's sustainable, Is it safe to say that that OPEX ratio is going to change going forward, maybe stay at 20%, 25%?
spk05: Yeah, so what I would tell you on that is in the short term, you know, we run OPEX on a trailing 12-month basis at about $3.2 billion. You know, that's not going to change much in the short term, right, because it doesn't need to, right? We feel very good about those investments. We feel very good about where they're going. They're long-term in nature. clearly in R&D, but also, you know, part of SG&A is, you know, the TI.com example. That's, you know, I think of that as an investment, of course, even though it's in SG&A. So I don't see that number, you know, in the short term changing much. But over the long term, you know, over many years, the guidance that we have given you of 20% to 25% still applies. So you should still think of it in those terms. Okay, so I think that was the last one, so let me go ahead and wrap up by reiterating what we have said previously. At our core, we're engineers, and technology is the foundation of our company, but ultimately our objective and best metric to measure progress and generate long-term value for owners is the growth of free cash flow per share. While we strive to achieve our objective, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that's ever-changing, and we will be a company that we're personally proud to be a part of and would want as our neighbor. When we're successful, our employees, customers, communities, and owners all benefit. Thank you, and have a good evening.
spk02: Thank you, and that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.
Disclaimer