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spk06: Welcome to the Texas Instruments Second Quarter 2023 Earnings Conference Call. I'm Dave Paul, Head of Investor Relations, and I'm joined by our Chief Financial Officer, Ralphie Elizardi. 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. In addition, today's call is being recorded and will be available via replay on our website. 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. Today, we'll provide the following updates. First, I'll start with a quick overview of the quarter. Next, I'll provide insight into second quarter revenue results with some details of what we're seeing with respect to our end markets. And lastly, Rafael will cover the financial results and our guidance for the third quarter of 2023. Starting with a quick overview of the quarter, revenue in the quarter came in about as expected at $4.5 billion, an increase of 3% sequentially, and a decrease of 13% year over year. Analog revenue declined 18%, embedded processing grew 9%, and our other segment declined 10% from the year-ago quarter. Now I'll provide some insight into our second quarter revenue by market. During the quarter, we experienced continued weakness across all markets except automotive. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the industrial market was about flat. Next, the automotive market was up low single digits. Personal electronics was up low single digits after several quarters of sequential declines. And next, communications equipment was down mid-teens. And finally, enterprise systems was down mid-single digits. Rafael will now review profitability, capital management, and our outlook.
spk03: Rafael? Thanks, Dave, and good afternoon, everyone. As Dave mentioned, second quarter revenue was $4.5 billion, down 13% from a year ago. Gross profit in the quarter was $2.9 billion, or 64% of revenue. From a year ago, gross profit decreased primarily due to lower revenue, increased capital expenditures, and the transition of LFAP-related charges to cost of revenue. Gross profit margin decreased 540 basis points. Operating expenses in the quarter were $938 million, up 12% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.6 billion, or 19% of revenue. Operating profit was $2 billion in the quarter, or 44% of revenue, and was down 28% from the year-ago quarter. Net income in the second quarter was $1.7 billion, or $1.87 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 and $7.4 billion on a trailing 12-month basis. Capital expenditures were $1.4 billion in the quarter and $4.2 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $3.2 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $80 million of our own stock. In total, we have returned $6.5 billion in the past 12 months. Our balance sheet remains strong with $9.6 billion of cash and short-term investments at the end of the second quarter. In the quarter, we repaid $500 million of debt and issued $1.6 billion of debt. Total debt outstanding was $11.3 billion, with a weighted average coupon of 3.5%. Inventory dollars were up $441 million from the prior quarter to $3.7 billion, and days were 207, up 12 days sequentially. For the third quarter, we expect TR revenue in the range of $4.36 to $4.74 billion, and earnings per share to be in the range of $1.68 to $1.92. Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%. 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, a 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 opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term. With that, let me turn it back to Dave. Thanks, Rafael.
spk06: Operator, you can now open the lines for questions. In order to provide as many of you as possible the opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you an opportunity for an additional follow-up. Operator?
spk02: Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.
spk04: Thanks for taking my question. I had a high-level question, which is when I compare TI sales growth right down almost 13%, 14% in the near term, down double digits versus peers, it's significantly below. And when I look at your trading 12-month free cash flow of sub-17%, if my model is right, that is the lowest since 2010. But what point will TI say that something needs to change in the strategy to help close the gap on the growth side and to help free cash flow margins get back to the trend line. So I understand that obviously you're not optimizing the model for just one year, but now we have seen this consistent decline in free cash flow per share, which is your preferred metric. So at what point should we start to see free cash flow get back to historical trends?
spk03: Yeah, so thanks Vivek. Let me start, and Dave, if you want to chime in. Big picture step back to what we told you during capital management and the investments that we're making are long-term in nature, as you alluded to in your question, and we are going to enable revenue growth for the company for the next 10 to 15 years. Okay, so that's how we're thinking about it, and that's why we're making these investments on CapEx in particular, about $5 billion per year for the next four years. And we are committed to those investments. We're excited to making those investments regardless of the short-term fluctuations of revenue. And, of course, lower revenue means lower operating cash, which now with the CapEx, That's what you're seeing on the free cash flows. It's not unexpected.
spk06: Yeah, and maybe I'll just add that, Vivek, as you know and have followed us for some time, one of our competitive advantages is manufacturing and technology. So these CapEx investments really are strengthening that advantage over time. You know, it's fairly obvious that those investments will allow us to produce products at significantly lower cost when – to service demand. And controlling those assets in today's world is increasingly important. So customers can see the investments that we're making, not only with that, the other systems that we've got to make it easier to do business with us, combined with the inventory we're putting in place to support their growth. And customer reactions are extremely positive to that. So we believe these will be great investments for all of us long-term. You have a follow-on?
spk04: Yeah, thank you. I guess maybe to say, you know, ask the same question but in a different way, right? And with respect, I mean, TI had the same strategy two or three years ago also, but we saw sales grow worse than peers last year, and sales are again growing worse than peers this year. So it's not a, you know, one-quarter or two-quarter phenomenon. Sales have been undergrowing your peer growth for almost two years now, and Campex is growing while sales are declining. So that's why I'm questioning whether the strategy is still right, whether the results are actually justifying the strategy.
spk06: Yeah, I'll start, Rafael, if you want to add. Again, we've talked about is share doesn't move quickly inside of our markets. I think that depending on the peer you're comparing to, Oftentimes, the market exposure can explain a good portion of it. There's other factors like how much distribution is someone using. As you know, we've transitioned from mostly using distribution to mostly having revenue come direct. So, there was inventory that needed to be burned out of the channel as we made that transition. So, there's multiple factors, I think, going forward. Our confidence in being able to continue to gain share is extremely high. Customer reaction to the capacity that they know they need to have, wanting to know that they've got capacity runway, not from someone's manufacturing supplier, but directly from someone that makes their products, really resonates with customers.
spk02: Okay, thank you.
spk06: We'll go to the next caller, please.
spk02: Our next question comes from the line of Toshia Harry with Goldman Sachs. Please proceed with your question.
spk07: Hi, guys. Thank you for taking the question. My first one is on your Q3 guidance. You know, you're guiding revenue up 1% sequentially. Dave, you called out automotive as the one end market. That continues to be healthy. But anything to point out or any standouts as you think about the sequential trajectory from Q2 to Q3? Or is it a continuation of what you saw in Q2?
spk06: Yeah, you know, I'll just point out that, you know, this last quarter, we saw a weakness across the board in our markets, with the exception of automotive, like you've called out. And just to point out that that continued asynchronous behavior, you know, we had PE weaken back in second quarter a year ago. And the other markets followed, but obviously the exception of that with automotive continued to be strong. And it's up over 20% year-on-year, so definitely very strong growth there. And as we look into third quarter, we're not expecting to see any significant change in our end markets compared to this last quarter. Do you have a follow-on?
spk07: I do, thanks. So inventory on your balance sheet was up, I think, 13% sequentially. Days grew to 207. I know on your capital management call, you revised up the upper range of your target to more than 200. I also appreciate, you know, Dave, the transition from DISD to direct. But at what point do you think you need to, you know, cut production or cut utilization rates and start to manage down inventory? Are you still comfortable with where things are today?
spk03: Yeah, no, thanks for the question, Toshia. Yes, we are comfortable where we are. As a reminder, our objective for inventory is to maintain high levels of customer service and minimize obsolescence. I would point you to slide 13 at our capital management call. That shows the semiconductor cycle over many years, over about 30-some years, and what that informs us on what could happen in the future. And we're planning for the long-term growth through those cycles, not in any one quarter or even any one year. And of course, inventory levels change. always depend on demand expectations, and for the time being, in the near term, they will likely have an upward bias.
spk07: Okay, so just to clarify, you're still running your fabs full at this point?
spk03: Utilization this last quarter was lower than the previous quarter. That was largely a function of adding capacity.
spk02: Okay, thank you.
spk06: Thank you, Christian. Next caller, please.
spk02: Our next question comes from the line of Stacy Raskin with Bernstein Research. Please proceed with your question.
spk01: Hi, guys. Thanks for taking my question. For my first one, just to follow up on that, you said inventories have an upward bias. So that means inventory, like dollars and days, you expect to increase again in Q3?
spk03: Well, the days depends on revenue, of course. But on the dollars, it has an upward bias. So there's a very likely that The dollars will go up in Q3. Of course, you know, and you know this, right, but inventory is on the balance sheet at one point in time, but it's meant to support the future growth. And, you know, 200 days is about a couple quarters worth of inventory at various stages of finish.
spk01: How many quarters is it going to keep going up for, though?
spk03: That's going to depend on revenue expectations beyond now and then the decisions that we make on the factory. And we forecast one quarter at a time. Just know that our thinking is long-term in nature, as I talked, as I mentioned to Toshiya in the previous call, and we're managing through the cycles, right? So not what's going to happen in one quarter or even two quarters, what we think is going to happen over longer than that on inventory, on capacity, we're adding capacity that's going to support us for many years. So it's going to give us plenty of headroom. One more comment on inventory, just for those who maybe have not listened to us very often. But you know this. Our inventory has very low obsolescence. The bulk of it is for catalog parts that the inventory itself last years, in fact, up to 10 years on the shelf. But the product life cycle, are very long with our customers, and we have, in many cases, tens or dozens of customers that buy the product. So the risk of obsolescence is very low in the Zimbabwe.
spk06: Okay, thank you, Stacy. We'll go to the next caller, please. Oh, was that my? Yeah, thank you.
spk02: Our next question comes from the line of Chris Danley with Citigroup. Please proceed with your question.
spk00: Hey, thanks, guys. And by the way, thanks for having a nice, concise conference call. It's unique and semi is much appreciated. My first question is just on lead times and shortages. You know, given all the capacity you're adding in the inventory, can we pretty much say that, you know, TI lead times are the lowest, at least among peers, and the shortages are all gone? Are we pretty much, I guess, quote, unquote, back to normal? And I mean, are there any metrics that you could share with us, sort of now versus three or six months ago on the improvement there?
spk06: Yeah. Chris, what I would, how I would frame it, you know, today is we've got the vast majority of our products are available on TI.com for immediate shipment. And as Rafael talked about, you know, whenever the up germ does come, you know, we'll have product available as well as capacity. behind that to be able to support that demand. Now, if a customer wants to give us an order at lead time, those lead times over the cycle haven't changed that much, so they can place that order, or if they need it inside of that, they can, for the vast majority of the products, have it available. Now, we do have hotspots. We'll probably always have a place where we have a demand and supply imbalance. But those hotspots are closing and closing pretty quickly. As Rafael talked about, we're bringing on capacity every quarter. So that just gives us more flexibility to be able to meet the customer demand when it does vary beyond what we've got on hand. You have a follow-on?
spk00: Yeah. Earlier in the call and in a bunch of the calls, you keep talking about your advantages in manufacturing and, you know, given you have more internal manufacturing and more 300 millimeter than the competitors, are you or, I guess, are you guys getting a little more aggressive on price? Are you able to price below the competition? Is this something that has happened recently? You know, some of your competitors have, I guess, quote unquote, complained about TI getting more aggressive in price recently. I just wanted your response to that.
spk06: Yeah, thanks for the question, Chris. Our pricing strategy hasn't changed. And of course, we regularly monitor the pricing of all of our products. And we may maintain the goal to continue to gain share over time. But there's nothing unusual going on with pricing today. And I'll point out the fact that when we opened up RFAB 1, we had you know, 75% of the tools needed inside of that factory. And, you know, there was hand-wringing back then, if you remember, that we were going to do something unnatural. And what we talked about was putting in place that capacity to support growth, and that's what it did. So thank you, Chris. We'll go to the next question.
spk02: Our next question comes from the line of Harlan Sear with J.P. Morgan. Please proceed with your question.
spk10: Yeah, thank you. Good afternoon. Up into the March quarter, the team had seen three consecutive quarters of increasing cancellations and push outs, right? Sort of the typical sort of customer behavior in a weak demand environment. Did the team continue to see cancellations and push out activity expanding in the June quarter? Or have you guys or, you know, have you or are you seeing signs of stabilization?
spk06: Yeah, the way I describe that is that cancellations remain at elevated levels, and we believe that customers are continuing to work down inventories to get that more in line with their demand. You have a follow-on? Yeah, thanks for that.
spk10: So your embedded business continues to hold up very well, right? I think trailing 12 months, it's up 9% year-over-year versus your analog business, which is down 7%. I know part of it is due to the strategy, the refocusing of the MCU businesses over the past few years, you know, more general purpose, catalog focus, right? But it also seems to be reflecting this broader trend in the industry. If I look at the SIA data, if I look at you and your other MCU competitors where industry MCU trends year over year are holding up much, much better versus analog, I just wanted to get the team's perspective on why the large delta in performance analog versus embedded.
spk06: Yeah, thanks for that question, Harlan, and how you framed it. I would say at a top level, the changes that we have made to our product portfolio, the design in that and the customer response to those products as we've put them out in the marketplace continues to be very strong. Our confidence that business will grow and gain market share over the long term is extremely high based on that. And as we've talked about before, we're putting in place to be able to support that growth for embedded internally, and that is a position that we haven't been in quite some time. Near term, I would say, you know, besides things – We've experienced greater supply constraints over the last two years as Embedded has previously had to rely on foundries to supply that demand. And so those constraints are alleviating. And I think that that's just something that you see across the industry. So thank you, Harlan. And we'll go to the next caller.
spk02: Our next question comes from the line of Blaine Curtis with Barclays. Please proceed with your question.
spk05: Thanks for taking my question. I just wanted to go back to the decision. I mean, I understand the inventory is not going to be obsolete, but, you know, it's eventually going to kind of steal from your future ability to scale gross margins. So, like, I mean, at the current run rate, you know, you're kind of building at like a 23 billion run rate, and it's going to only increase next year. So, What's the harm in pulling it back a bit? I'm just trying to understand the interim here, just pulling back utilizations and not building so much inventory.
spk03: In the big scheme of things, our goal here is to support revenue growth. It's not, frankly, to optimize short-term fluctuations in gross margins. Those are not irrelevant, of course, but it's just the focus is on supporting revenue growth and in the short-term, mid-term, and long-term. And inventory supports short-term to mid-term fluctuations, right, that we can mitigate with having plenty of inventory. And the incremental cost of inventory is really low, as we talked about on the obsolescence side, also on the variable cost nature of what goes into inventory. So it's just things that we keep in mind when trying to make those decisions.
spk05: Yeah, I just wanted to ask on gross margins. I mean, I know you don't give perfect color, but it seems like it's down at least 150 basis points sequentially. Maybe consumer's a mix, but I'm just kind of curious, is it just depreciation layering in, or is there any other puts and takes on gross margins?
spk03: So I assume you're talking about third quarters. So yeah, our guidance, and as you pointed out, we only give top line and EPS, but Our guidance, best estimate that we have in our gross margins, or I'm sorry, that guidance embeds the revenue is flat in that particular case, and it embeds the result in depreciation and other related costs from added capacity over time. On a year-on-year basis, I know you asked sequentially, but just a reminder, on a year-on-year basis, keep in mind that last year we had the Lehigh acquisition FAB cost in restructuring, and now it is in COR in cost of revenue as of December of last year is when it moved.
spk06: Yeah, so you're on your, you know, change in revenue, the increase in or moving of the cost from restructuring into most of that in the cost of revenue. And depreciation. As well as depreciation, so. Thank you, Blayne. We'll go to the next caller, please.
spk02: Our next question comes from the line of Joshua Buchalter with TD Cowan. Please proceed with your question.
spk09: Hey, guys. Thanks for taking my question. I guess I wanted to follow up on the previous one and ask about we understand the depreciation flow through. That is what it is. But could you maybe talk through some of the near to medium-term milestones when the 300-millimeter increased output could start to benefit gross margin and sort of help offset the depreciation headwinds? Thank you.
spk03: Yeah. You know, just what I would tell you is depreciation, the way we depreciate equipment is over five years. Buildings is much longer. Usually they average about 30 years or so. But consider that that equipment lasts a lot longer than five years. We have factories today that that are running on 50 years plus. And, you know, some of that has had upgraded equipment, but broadly speaking, that equipment lasts for decades, not the five years where we depreciate it. So it's probably an unfair comparison to try to put the 300 benefit next to the depreciation and expect, you know, an offset in the short term. I would suggest you think of it from a cash standpoint. We're investing that CapEx is cash. Forget about the depreciation. It's CAPEX is what we're investing. That's going to enable growth by adding that internal capacity, which as Dave alluded to earlier, that is geopolitically dependable capacity. We're putting as many as four fabs in Sherman, two in Richardson, two in Lehigh in Utah, and then assembly test facilities in Asia primarily, Malaysia and Philippines, for example. So that's going to put us in a really great position to grow the top line for a long time. And then what happens there is that that yields a lot of operating cash for the company. And then we can either redeploy or return to the owners of the company after those investments. You following, Josh?
spk09: Yeah, sure. Thank you. I recognize the language is similar last quarter regarding the end market commentary. But did anything change, get any better or worse into a quarter? And in particular, personal electronics grew. You've talked in the past about it sort of being a four-quarter cycle. Is it safe to say that that's sort of bottom now? Thank you.
spk06: Yeah. Again, I think that, you know, overall we had continued to see that asynchronous behavior as we started, you know, back a year ago. And so that has continued. PE, again, we started to see weakness in Q2. So we've completed now. It actually grew first to second. So we've got several quarters of decline. It was up slightly sequentially. And again, we're not expecting much change in our end markets as we look forward. Okay, thank you. And let's go to our last caller, please.
spk02: Our last caller comes from the line of Chris Castle with Wolf Research. Please proceed with your question.
spk08: Yes, thank you. Good evening. I guess just following up on the last few questions, perhaps you could differentiate a little bit about where you think your customers are still burning through inventory as compared to end demand. As you noted, the PE segment you know, started to see weakness earlier. You know, we heard from some others that, you know, it's no longer an inventory issue. It's more of a demand issue. Perhaps you could talk to that for some of your other end markets and, you know, where we could see incremental weakness of customers still need to bring their inventory further.
spk06: Sure. Yeah. Chris, I think if you look across the end markets broadly, you know, you could say that all of them showed weakness and reflective of customers reducing inventories with the exception of automotive. And even inside of that, of course, if you look at industrial, it's not all the sectors aren't identical, meaning you've had strength in aerospace, grid infrastructure, in other sectors like that. And PE is the same way. Not all of the sectors were as weak or as strong as others. But broadly, you could say it was across each of those markets. You have a follow-on?
spk08: I do, thanks. And maybe with a follow-on, I'll hit on the segment that has remained strong, auto. And when this downturn began, I believe your commentary was that auto had remained stable then. You thought that eventually it would come to auto just because it always has in the past. So far, it hasn't. I think it surprised a lot of us, the resilience on that. Has your view changed about the resilience of the auto market? Do you still expect that that has to correct at some point? And if not, why do you think it's different?
spk06: Yeah, so it wouldn't surprise us if it corrected. I don't think anyone can declare certainty on those types of things in the future. But, you know, I think that customers will build inventory. You know, I've got 37 years of experience in the industry now, and that's the way the markets have behaved in the past. So that's generally a good guide in the future. But, you know, I think you can't pound the table and make absolutes, but certainly wouldn't be surprised if that were the case.
spk03: So with that, we'll hand it over to Rafael to wrap this up. Thanks, Dave. Let me wrap up by emphasizing what we have said previously. At our core, we're engineers, and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate value for owners is the long-term growth of free cash flow per share. While we strive to achieve our objectives, 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 are 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: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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