Texas Instruments Incorporated

Good day, and welcome to the Texas Instruments 4th Quarter 21 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dave Paul. Please go ahead, sir.

Good afternoon, and thank you for joining our 4th Quarter and 2021 Earnings Conference Call. Rafael Lazzardi, 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 slash 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 for our capital management update on February 3rd 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 our approach to capital allocation. For today's call, let me summarize what Rafael and I will be reviewing. I'll start with fourth quarter revenue results, including some details of what we're seeing with respect to our customers and markets. I'll then provide the annual summary of revenue breakout by end markets. And lastly, Rafael will cover the financial results some insights into one-time items, and our guidance for first quarter 2022, starting with fourth quarter results in the market environment. The company's revenue grew 19 percent year-over-year, driven by strong demand in the industrial and automotive markets. Analog revenue grew 20 percent year-over-year, and embedded processing grew 6 percent. Our other segment grew 35 percent from the year-ago quarter. Let me now comment on the current environment to provide some context of what we're seeing with our customers and markets. Overall, the quarter came in stronger than we expected. The strength was across most product families and markets and geographies. The market environment is similar to what we reported 90 days ago. Lead times for the majority of our products remain stable, but hotspots continue to exist. However, customers continue to be selective in their expedite requests, increasingly focusing on products that complete a matched set rather than expediting products across the board. This behavior is not specific to any product family, end market, or geography. Discussions with customers confirm a high level of interest in our commitment to expanding our internal manufacturing capacity roadmap, including 300-millimeter wafer fabs, RFAB II and LFAB, our recently announced plans for a multi-FAB site in Sherman, Texas, and the associated assembly test expansions. These investments to strengthen our manufacturing and technology competitive advantage will provide lower costs and greater control of our supply chain. And while there's a growing recognition that the near-term supply-demand imbalance will end at some point, the secular growth of semiconductor content per system will continue to increase, and this requires a robust manufacturing capacity roadmap for 2025 and beyond. Moving on, I'll now provide some insight into our fourth quarter revenue by end market for the year-go-quarter. First, the industrial market was up about 40 percent, driven by broad-based strength across all sectors. The automotive market was up high single digits with strength in most sectors. Personal electronics was down upper single digits off a strong compare from a year ago. Next, communications equipment was up about 25%. Finally, enterprise systems was up about 50% off a weak compare from a year ago. driven primarily by data center and enterprise computing. And lastly, as we do at the end of each calendar year, I'll describe our revenue by end market for 2021. 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 41 percent, automotive 21 percent, personal electronics 24, communications equipment 6, enterprise systems 6, and other was 2 percent. In 2021, Industrial and automotive combined made up 62% of TI's revenue, up about 5 percentage points from 2020, and up from 42% from 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 for application, which will drive faster growth compared to the other markets. Rafael will now review profitability, capital management, and our outlook.

Rafael? Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $3.4 billion, or 69% of revenue. From a year ago, gross profit increased primarily due to higher revenue. Gross profit margin increased 440 basis points. Operating expenses in the quarter were $793 million, up 1% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 18% of revenue. For a year, we have invested $1.6 billion in R&D, an important element of our capital allocation. We are 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. Restructuring charges for $54 million in the quarter. This expense is driven by the Lehigh wafer fab purchase we closed in October. Operating profit was $2.5 billion, or 52% of revenue. Operating profit was up 38% from the year-ago quarter. Net income in the fourth quarter was $2.1 billion, or $2.27 per share, which included a $0.04 cost that was not in our prior outlook, primarily due to the purchase I discussed earlier. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.4 billion in the quarter. Capital expenditures were $1.3 billion in the quarter, which included about $900 million for the L-5 purchase. Free cash flow on a trailing 12-month basis was $6.3 billion, up 15% from a year ago. In the quarter, we paid $1.1 billion in dividends. We have increased our dividend per share by 13%, marking our 18th year of dividend increases. For the year, our dividend represented 62% of free cash flow, underscoring its sustainability. Our balance sheet remained strong with $9.7 billion of cash and short-term investments at the end of the fourth quarter. Total debt outstanding was $7.8 billion with a weighted average coupon of 2.6%. Inventory days were 116, up four days sequentially and remained below desired levels. Now let's look at some of these results for the year. In 2021, cash flow from operations was $8.8 billion. Capital expenditures were $2.5 billion, or 13% of revenue. Free cash flow for 2021 was $6.3 billion, or 34% 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. Turning to our outlook for the first quarter, we expect TIA revenue in the range of $4.5 to $4.9 billion and earnings per share in the range of $2.01 to $2.29. We expect our 2022 annual operating tax rate to continue to be about 14% and our effective tax rate about a percentage point lower than that. This is based on current tax law and would be about the same as we saw in 2021. Next, let me help you model our expectation for expenses for the LFAB purchase. As we have said, we expect to have about $75 million of cost per quarter until we start production, which is still expected in early 2023. These costs continue to be mostly reflected in the restructuring line on the P&L, so it will be visible each quarter to you, and therefore part of our operating profit results. Once the facility begins production, this cost will move and be primarily reflected in cost of revenue. As I close, let me explain why we're so excited about these capacity investments as they strengthen our manufacturing and technology competitive advantage. First, we have significant 300 millimeter capacity coming online with RFAB 2 and LFAB in 2022 and 2023. Second, with the announcement of the Sherman Complex, we have a 300-millimeter roadmap to support growth from 2025 to 2035. Third, customers are excited that our capacity investments are in 45-nanometer to 130-nanometer process technologies that are optimized for analog and embedded and will support their growth in the decades ahead. It is clear that owning and controlling our manufacturing and technology will give us both lower cost and greater control of our supply chain. It is with this confidence we look forward to sharing with you more details of our plans in our capital management call next week. With that, let me turn it back to Dave.