Texas Instruments Incorporated

Welcome to the Texas Instruments Third Quarter 2024 Earnings Conference Call. I'm Dave Paul, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Aviva Lahn, and our Chief Financial Officer, Rafael Lazzardi. 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. 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, Haviv will start with a quick overview of the quarter. Next, he'll provide insight into third 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, give an update on our capital management, as well as share the guidance for the fourth quarter of 2024. With that, let me turn it over to Haviv.

Thanks, Dave. Let me start with a quick overview of the third quarter. Revenue in the quarter came in about as expected at $4.2 billion, an increase of 9% sequentially, and a decrease of 8% year-over-year. Analog revenue declined 4% year-over-year, and embedded processing declined 27%. Our other segment declined 5% from the year-ago quarter. Now I'll provide some insight into our third quarter revenue by end market. Our results continue to reflect the asynchronous market behavior that we've seen throughout this cycle. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the industrial market was down low single digits as customers continued to reduce their inventory levels. The automotive market increased upper single digits primarily due to strength in China. Personal electronics grew about 30%, enterprise systems was up about 20%, and communication equipment was up about 25% as the cyclical recovery continued in these three markets. With that, let me turn it over to Rafael to review profitability, capital management, and our outlook.

Thanks, Aviv, and good afternoon, everyone. As Aviv mentioned, third quarter revenue was 4.2 billion dollars. Gross profit in the quarter was $2.5 billion or 60% of revenue. Sequentially, gross profit margin increased 180 basis points, primarily due to higher revenue. Operating expenses in the quarter were $920 million, about flat from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion or 24% of revenue. Operating profit was $1.6 billion in the quarter or 37% of revenue. and was down 18% from the year-ago quarter. Net income in the quarter was $1.4 billion, or $1.47 per share. Earnings per share included a $0.03 benefit for items that were not in our original guidance. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.7 billion in the quarter and $6.2 billion on a trailing 12-month basis. Capital expenditures were $1.3 billion in the quarter and $4.8 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.5 billion. As a reminder, free cash flow includes benefits from the CHIPS Act Investment Tax Credit, which was $220 million in the third quarter and $532 million on a trailing 12-month basis. In the quarter, we paid $1.2 billion in dividends and repurchased $318 million of our stock. In September, we announced we would increase our dividend by 5%, marking our 21st consecutive year of dividend increases. This reflects our continued commitment to return free cash flow to our owners over time. In total, we returned $5.2 billion to our owners in the past 12 months. Our balance sheet remains strong with $8.8 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding is $14 billion with a weighted average coupon of 3.8%. Inventory at the end of the quarter was $4.3 billion, up $190 million from the prior quarter, and days were 231, up two days sequentially. For the fourth quarter, we expect DI revenue in the range of $3.7 to $4 billion, and earnings per share to be in the range of $1.07 to $1.29. We continue to expect our effective tax rate to be about 13% in the fourth quarter. As you're looking at 2025, based on current tax law, we would expect our effective tax rate to remain about the same. 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. Operator, you can now open the lines for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you an opportunity for a follow-up. Operator?

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, as we pull forward questions. Our first question comes from the line of Timothy Akuri with UBS. Please proceed with your question.

Timothy Akuri Thanks a lot. I guess the first question is autos grew. I think that was a little bit of a surprise to a lot of us. Can you talk about what's going on there? You did cite China. But did orders weaken late in the quarter at all? I mean, we saw pretty much every automaker negative pre-announce. So can you talk about maybe what you're seeing in autos? And maybe if you can provide a little commentary for December, what the outlook is there? Is it sort of anything you'd call out in December in terms of markets?

Okay, Tim, let me start with that. This is Havib. So regarding the automotive market, yes, it did grow. We said high single digits around between 7% and 8%. And that was really driven. Most of the growth came from our business in China. I think I've mentioned also in the second quarter, we saw strength in China and automotive drove that growth as well. It kind of recurred in the third quarter. Just to give you some high-level numbers, it grew 20% in Q2 and another 20% in Q3. I think it's not a surprise that there is momentum for EVs in China. Our content is growing there, and that's what really drove the growth in the third quarter. I expect that to, I mean, I think this is not a one quarter thing. I think there is a growing momentum there. Our automotive revenue in China is in an all new time high. So I don't think that goes down in the near future. Now, the rest of the automotive market is different. We are seeing a continued weakness over there. That revenue picked in the third quarter of 23 and in general trended down. If I put China aside, it had a quick correction in Q1, Q4 and Q1. The rest of the markets, I see a continued weakness. I think that's part of, you know, part of our seasonal forecast for Q4.

Yeah, Farhan, Tim?

I do, yeah. Raphael, so if I look at the guidance, OPEX is usually, I think, down low to mid-single digits for December. So if you assume even down mid-singles, you get gross margins sort of in the mid-50s. It's down like 200 basis points, stripping out deep, deep appreciation. So that's a pretty big decline. So I guess are you taking down loadings in December? I do see that, you know, finished goods was up a lot. So if you can talk about that, thanks.

Yeah, so a couple of things in your questions. Let me try to address them. OPEX, nothing unusual, but we do probably expect it to be flat to slightly up. So consider that. As far as fourth quarter, with revenue at the midpoint decreasing, that takes a hit on margins, of course. So we do expect gross margins to be down. Also, depreciation will continue to increase. And, in fact, in October, we began depreciating the building and the clean room for SM1. So that continues to put – that's going to put even more upward pressure on depreciation in fourth quarter.

Thank you. We'll go to the next caller, please. Thank you. Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Thanks for taking my question. First, thanks for providing the end market commentary. I think you mentioned personal electronic demand went up I think 30% sequentially is what I recall. It was up mid-teens in Q2 also. How do we square your strength in personal electronics with the more kind of sluggish demand that we see for PCs and phones? Is it something outside of those areas or are those areas doing What do you attribute the strength in personal electronics? Or do you think the market just kind of bottomed from a cyclical perspective?

Yeah, I think that's a great question. Let me just walk through what we've seen over the last even couple of years. So, I mean, that revenue in the personal electronics market, it peaked in the third quarter of 2021. By the way, the third quarter is typically our peak quarter every year. There is a seasonality strength every third quarter for PE. And it dropped in the first quarter of 23. And since then, we have seen continuous improvement. But I would say, Vivek, that when I look at our third quarter of 24, it's still running at a lower level than the peak. It's running about 20% lower than the 21 peak. So there is still room to grow. And in our case, as I think I've mentioned in some of the calls, When we were short with supply capacity back in 21, 22, we had to take some calls to bias our supply towards industrial and automotive. The personal electronics has a shorter design cycle. We said we'll go attack that once the capacity and inventory are back in place. That's the case right now. So I think we are coming off of a very low trough. Plus, again, having the right parts to go back and win sockets that we couldn't sell before. So that's what I'm seeing right now. In terms of specifically into the third quarter, I think growth was across all the sectors or most of the sectors. The main ones are phones and notebook PCs. But in general, you know, the third quarter, as I've said, is a typical strong quarter for PE. Follow-up to that? Yes, thank you, Dave.

So a bigger picture question, Aviv, is on in the last few calls, there's been a suggestion that perhaps by calendar 26, TI will conceptually be closed, if not more than what you were in calendar 22. And people have kind of rightly then pushed back and said, well, that requires mid-teens sales growth in the next two years, well above the trend line. At what point do you think you will start to see those above seasonal quarters to help us, you know, get to that above trend growth for the next two years. So I understand you're not giving guidance, but what are you seeing in the broader end markets? And you think TI is at a point where, you know, those kind of above seasonal quarters are line of sight, or is it too early to make that judgment? Thank you.

Yeah, first, just to recap on your question, Vivek, thanks. I think you're referring to our capital management call we had in August, so I just would ask people to look at what exactly we presented there. I think you referred to a 2026 scenario, a set of scenarios that we've presented there from flat to growth versus 2018. And, you know, we didn't say we are predicting what revenue would be, but it allows the investors to kind of have a view on free cash flow per share according to, you know, the revenue scenario. And I think it allows you guys to modulate up or down revenue and know what free cash flow will do during that year. Now, more specifically to your question, Look, we talked about three markets that are already in the midst of a cyclical recovery. I think they are not done yet, but they are pointing in the right direction. That's personal electronics, enterprise systems, and communication systems for us coming from a very low trough, but showing momentum. And I think that we are in the process of strengthening that. Unfortunately, these markets are about 25% of our revenue in 23. And in our case, we really need the broad industrial market and the automotive market to join. So if I go to industrial first, revenue peaked in the third quarter of 22. We've seen eight quarters of decline. We are more than 30% down versus the peak. So... I don't think we, I hope, I can't predict it. I don't think we have a lot left, okay? I think the inventory correction is still ongoing, but I do expect that to start to recover. I cannot predict a quarter because usually when we see it, we call it. I will just say we haven't seen it yet, and it's been quite persistent, okay? That's on the industrial side, and I can go even into the sectors. Most of the sectors are showing either still searching for a bottom or hovering at a very low level, okay? So it's about time, but we haven't seen it yet. On the automotive market, I think it's more complex because this is where we see a different story between China and the rest of the market. You know, unfortunately, China is about 20% of our business, so it cannot move the overall automotive number for the company. But I think, as I mentioned before, we are right now at the lower single digit versus the peak, kind of hovering at that minus, Sorry, not lower single digit. I would say upper single digit, but somewhere between 5% to 10% versus the peak on automotive. In China, we have new records being established, and I think there is momentum over there. But the other markets or the other geographies, sorry, on automotive are still searching for that bottom. I do expect when it all adds up, automotive will establish a lower market to trough cycle, not close to the industrial side, but I can't give you a precise time for that, Vivek. All right. Thank you, Vivek.

And we'll go to the next caller, please. Thank you. Our next question comes from the line of CJ News with cancer. Please proceed with your question.

Yeah, good afternoon. Thank you for taking the question. I guess first question, you know, bigger picture, I guess given the cyclical uncertainty, How are you thinking about kind of running utilization rates into Q4 and first half of 25? And as part of that, with inventory at $4.3 billion, are you looking to continue to grow that and elevate utilization or keep it where it is until you really see signs of that cyclical recovery? We'd love to hear your thoughts there.

Yeah, no, happy to do that. So first, bigger picture, and then I'll get into maybe some specifics. But the objective for inventory is to support revenue growth as we prepare for the upturn, as Aviv described in our expectations going forward, particularly in 2025. We do expect to grow inventory in fourth quarter. So we grew a couple hundred million in third quarter. We expect probably a few hundred million in of inventory growth again in fourth quarter. But that is, we have moderated the factory loadings. So factory loadings expect us to go slightly down going into fourth quarter. But despite that, we'll still grow additional inventory. Just to comment a little more on the inventory, we have detailed plans by device at the finished goods level, at the chips level. And those plans are grounded on purchasing behavior and expected demand. And this inventory is very low risk. It sells to many, many customers, and it has a long life cycle. So we feel really good about that.

That's great. CJ, you have a follow-on?

I do. I would hope to follow up on Otto. You talked about that as a surprise in China. I'm curious if you could speak to Chinese OEMs taking share in Europe. That's something that we've kind of picked up and curious about. perhaps maybe the data points we're picking up in Europe related a little more to, you know, share loss there to some of the Chinese OEMs. Are you seeing that?

First, I know, surprise. I think not a surprise because we've seen that trend starting in Q2. So to me, you know, the automotive market in China for TI, it again picked in that end of 23, call it second half of 23. We saw a very sharp correction in Q1. I think it was mainly inventory correction. And then growth in Q2, growth in Q3, it's 20% on top of 20%. So think about it running at 45% of the of the cropping and a new peak. I think that is mainly driven by the China market, right? If you think about I was just there a couple of months ago. I think now the majority of new cars are EVs, right, or some sort of hybrid, and these tend to have more content. And again, our position there is good. The TI is very competitive. So I think that drives growth. Now, our customer base in China is a set of OEMs, but also Tier 1s. And, you know, you guys know the OEM sharing, you're the experts there. But, you know, the tier ones are also, I think, they can build good systems. They are very efficient in cost. Performance is pretty good. So I think they also compete for market share versus the worldwide tier ones. And I think that's part of the dynamics we see in the China market. We see momentum on both.

Thank you. Next caller, please. Thank you. Our next question comes from the line of Ross Seymour with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for asking a question. Aviv, you talked a couple times about China going up 20% sequentially, two quarters in a row. Is there any reason that the other 80% of the business shouldn't have that sort of a cyclical rebound at some point? Is there something that's unique about China that allows it to be more volatile? Or is the expectation that you would have that the other 80% of your business at some point in time should do the same thing?

First, I think at some point of time, all the horses will point in the same direction, and we all are waiting for that. It's been a while, but I think that happens. Again, this asynchronous behavior is so clear to us. You can see an opposite behavior between geographies, between markets. I will say that, again, as we talked about in the previous response or my previous answer, there is a stronger EV momentum in China. On top of it, I think the China, call it culture, call it environment, is the design cycles are quick, inventory corrections are quick. So there is a little bit of a, everything is more accelerated, I would say, over there. And I think that's why we're seeing shorter cycles in terms of the way up, the way down. That would be my guess. But I think we'll all be able, we'll be smarter only when that thing is is done or played out completely. All I can say that I've not seen played out completely on the automotive market outside of China. But I don't think, again, I don't think the pick to trough on the automotive market is going to be as pronounced as industrial simply because the secular growth over there, I believe, is stronger in the short term.

You have a follow-up, Ross? Yeah, I do. One for Rafael. On the OPEX side of things, just a conceptual question. As we look into 2025, what would be the puts and takes on OPEX? And I guess the punchline is you guys have kept OPEX in certain periods of time barely growing year over year. In other years, inflation has been something you guys have had to endure as well. So how do we think about OPEX kind of structurally in 2025?

Yeah. In fact, for 25 and beyond, the way to think about it is we continue to have a disciplined process, as you alluded to, on our investments and our OPEX. But when it comes to R&D, we'll continue to invest there. So you'll see our investments grow over time and continue to grow. Whereas in SG&A, the focus there is efficiency. So continue to drive efficiency. So there the It will probably grow, but at a much lower pace than R&D. And, of course, revenue, the goal is for both of those to be under the revenue growth for the foreseeable future.

Great. Thank you, Ross. And we'll go to the next caller, please.

Thank you. Our next question comes from the line of Stacey Razian with Bernstein Research. Please proceed with your questions.

Hi, guys. Thanks for taking my question. I wanted to drill a little bit more into that China strength. So you're seeing it in auto. Are you seeing any signs of like China strength in analog or anywhere else in any other end market? Is it just completely focused on automotive at this point? And I guess what I'm getting at is I'm trying to judge the propensity of some of the Chinese guys maybe to be buying more. We've got an election coming up. Nobody exactly knows what's going on with the general geopolitical environment. What do you see more broadly in China, both in and outside of auto?

Yes, Stacey, I can tell you what we see. And again, it's helpful to speculate beyond what we see. But in general, just a reminder, as I said, during the upcycle, we had to bias our supply into the industrial and automotive markets. Clearly, and I think we said the company was at about 75% in industrial and automotive in 2023. China was similar, maybe even higher, because we had to take some calls on the consumer or PE side, so just to know where we're starting from. So in automotive, I think, as I said before, I can't tell you the reason for that, but I think part of it is the... I think the China customers are fast-moving. I think they are gaining momentum worldwide, not only in China. The second thing is I think it's acceptance of EVs in China, and there may be some other reasons, as you have mentioned, but we have not seen a clear evidence for that, okay, of a very large inventory buildup or anything like that. That's on your direct question of automotive. On the industrial side, we have not seen China – recovering from the cycle yet. So we, again, it has peaked somewhere in 2022, in China included. And since then, you know, it had a little bit of a sequential growth in Q2, but then it went down again in Q3. So kind of hovering at the bottom. That's the way I would describe it. So we are waiting for that to happen. We have seen a very strong recovery in automotive, actually with a new high. But the industrial numbers are still trending, you know, about 40% or so, maybe even higher in China versus the peak. So a lot of work for us to do in China. I don't think, I think it's just, you know, I think customers, as I said in my prepared remarks, are still working through some inventory over there on the industrial side.

And maybe just to add one thing, when you look at, Stacy, the other three markets that are cyclically recovering, personal electronics, comms, and entertainment. All of the regions are growing and contributing to that.

Yeah, in China included, right. But again, all of a very low number, if you will, in 23. That's right.

I do. Thank you. I know you guys don't guide two quarters ahead, but just mathematically, you know, we've been sort of looking at performance versus normal seasonality. How would you guys define performance? typical seasonality for Q1 and maybe like what is it over the last several years and how would you define it like versus like pre-COVID levels?

So maybe I'll talk about Q4, Stacey. And, you know, some people, it depends how you define seasonality. I like the way you do it. You know, you kind of need to take the outliers away. And I think 2020 and 2021 were the outliers during the uptake. And then typically in the fourth quarter, we see kind of a minus seven to even sometimes close to minus 10. Dave, the Q11, can you add what or?

Yeah, it's usually more flat, more flattish, maybe down a little bit. But fourth quarter and first quarter definitely are seasonally weaker quarters. Second and third are obviously the stronger quarters. Okay, thank you.

That's helpful. Thank you, guys. Okay, next caller, please.

Thank you. Our next question comes from the line of Thomas O'Valley with Barclays. Please proceed with your question.

Hey, thanks for taking the question. I just wanted to clarify some comments you made in the preamble. You kind of talked about the three markets, enterprise, CE, and com, still correcting but showing momentum. So not finished, but showing some progress. Are those still sequentially declining, or are one or two of those actually coming off of the bottom and improving?

No, I think all three are sequentially growing in a fast pace. So I think just to repeat the numbers, I think PE grew 30% sequentially and enterprise grew 20% sequentially and comms grew 25% sequentially. My point is that they are still not at the previous peak, okay? So to me, when I think about momentum, I think I expect momentum to continue to build. I think we are still running below the previous peak that was somewhere in the year 2022. And I expect that momentum to continue. I think also, as I mentioned before, specifically for TI, these are the markets where we were in some cases short in the previous up cycle. And it's our job to go back and address these sockets now when we have enough supply and inventory. Okay?

Thank you for clarifying. Yeah. Yep. And then just broadly, kind of during the pandemic, you saw a lot of growth. And I think most of your peers and yourself started being more vocal about describing both auto and industrial as double-digit growers. So as this kind of correction continues, You're seeing the strength from China in your auto business, and obviously that's a part of the broader business and contributes to that double-digit growth. But looking back now and as you see the recovery, would you think any differently about the growth profiles of those two businesses? You obviously have your competitors coming up in a couple of weeks, kind of going to restate their long-term categories as well. Do you still see that double-digit growth profile as the right way to look at those two businesses?

Yeah, and again, the short answer is yes, I see the same. I will say that even the current cycle on the automotive side is proving it, and I think we will all see that in the short term. When I talk about short term, it's five to ten years. I think the growth in industrial is multi-decades. I think we are in some of the, call it sectors in industrial, We're only in the very, very beginning or early innings. So I think the industrial, and I don't know if we say double digits, but I think TI grew 10% in the last decade, 2013 to 2023. I think the market may be a little bit lower than that, I would guess. But call it high single to maybe 10% would be a good guess. I think the automotive market for TI and also for the market grew faster. But I think it's going to be, you know, I don't think it's going to run multiple decades. Okay, at a certain point in time, there is going to be kind of some sort of saturation in terms of content per vehicle. I don't think we are close to that date now, specifically not in this decade. Hopefully that helps.

Thank you, Tom. And we'll go to the next caller, please.

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question. Great. Thank you.

I wonder if you could help characterize industrial, and I know you've talked about the various sub-segments underneath of that, but is there an inventory correction that's uniform? Are there areas of strength and just any sense of inventory versus demand issues that are kind of dragging that business down?

Yeah, Joe, a great question. I mean, I think we have more than 10 sectors, about 12 sectors in industrial, and the The overall, they all add up to a continuous decline since the third quarter of 22. So it's the eighth quarter of decline. We are seeing most of the sectors I would characterize have found the bottom, but are kind of hovering at that bottom. And think about areas for us like building automation, the energy infrastructure, medical, kind of hovering at that bottom. On factory automation, we are seeing still, and it's a large sector for us. You can think about factory automation and motor drive. It's all these process and factory automation type of plants. We are still seeing a decline. So they have not found a bottom. And then you see a couple of strength areas. Appliances, some people don't have it in industrial. We do. Appliances declined very early. And we've seen some recovery there. And I would also add, in our case, we have power delivery. Power delivery, think about it, the main market is silver, right? So that sits at the bottom of the rack. So we see growth over there. But these are the only two out of 12. So overall weakness in the industrial market. Hopefully that provides more color.

You have a follow-on, Joe?

Yeah, I do. That's helpful. Thank you. In terms of analog versus embedded, I know that's been happening for a while that embedded has underperformed. And there's a focus on kind of turning that around around a narrower focus area. I wonder if you could just characterize what's different about the embedded market on a sequential basis that's weaker.

Yeah, I'll start strategically. We are very pleased with the progress we are seeing in Embedded. You know, Embedded is more, think about its higher AUPs and more visibility, I would say, on design-ins. It's less broad. So when we look at the progress, when we look at momentum with customers, I think we are excited about the future. And, you know, they are going through a cyclical process, exactly like the analog team has done, but they are kind of a year later. So again, embedded is almost 95% industrial and automotive. They've seen growth in 2023 versus the industrial business, versus the analog business that declined double digits. So they started almost a year after Analog think about kind of middle of 23. We've seen four quarters. I think they're also looking at a seasonal quarter in Q4, but momentum there is strong, and I'm excited about the future there. Okay. Thank you.

We'll go to the next caller, please. Thank you. Our next question comes from the line of William Stein with Shure Securities. Please proceed with your question.

Great. Thanks for taking my question. I think earlier in the call, The question was asked, Haviv, you answered it for one or two end markets, but I'm hoping you can talk about how the pacing of orders progressed in the last couple months. I wonder if you might have seen things accelerate to then only decelerate, if there's been any sort of ups and downs that have surprised you. And then I have a follow-up, please.

Yeah, I think what I said about the third quarter, I think you think about it as not a lot of change that I see right now going into the fourth, but it's Q4, right? So there is a seasonality effect. In that sense, I don't see any change versus what we've seen in Q3. If we would see something, I would call it out. but I cannot call out anything. Dave, you want to add anything about the orders?

Yeah, an order rate, I think, behaved normally. They increased each month in the quarter, which is very typical. So we didn't see any large drop-offs or acceleration or deceleration on that front.

And Bill, maybe just to add on that, just a reminder that we have built good service levels of inventories. Rafael mentioned our lead times are very low. So We get a lot of business kind of real time. As it comes, people will call it turn business. So we simply don't have a ton of visibility right now. And customers also, they take part only when they need it. I don't think they're building inventory. So that's the reason that we cannot provide more color beyond what they've said.

Yeah, if I can follow up. It actually dovetails with the follow-on, which is when... When you all have inventory, your customers may not be all charged up about placing tons of backlog. And when they have inventory, even more so, our checks recently have revealed that customers have more inventory than many suppliers thought. They were not really close to the end of the inventory digestion at end customers. And I wonder if you could either dispel that or provide any insight as TI sees it. Thank you.

Yeah, I'll just answer on a high level, and Dave, maybe you can chime in. But look, in general, we don't have visibility into our customer inventory levels. I do think, as we all know, I mean, interest rates are high. It's the end of the year. I don't think there is a lot of desire to build inventory at our customers' shelves, especially when our inventory position is strong, and that's where we want to be. We want to take that burden away from our customers. To us, that means level of service, and we want to do it through not only the down cycle, but also the up cycle. Hence, the preparation of capacity and inventory, as Rafael said. That's the game we want to play in the next up cycle, and that's what drives our capital allocation decisions. Dave, anything specific about the customer inventory?

Yeah, I think the point that you made that we're essentially operating from a very healthy position on inventory, that means that customers don't have to place orders and that is keeping visibility low, but we want to be able to be ready for the upturn when it comes.

Yeah, many of our lead times are well below 10 weeks today. So, I mean, we provide, I call it excellent customer service, and when customers need a part, we have it for them. Right.

Thank you, Will. And we'll go to our last caller, please.

Thank you. And our last question comes from the line of Torres Zandberg with Stifel. Please proceed with your questions.

Yes, thank you for squeezing me in. I had a follow-up question on the industrial market. Obviously, you know, lead times are short and, you know, you have inventory. But I'm just wondering from an end market or a sell-through perspective, is it fair to say that that market is stabilizing? Is it getting worse? I know you called out those two segments that are perhaps starting to stabilize, but any further read on the end consumption there actually getting better or worse?

Yeah, just to repeat, Tori, thanks for the question. Just repeating what I said, I think most of the sectors are hovering, because we've seen like three or four quarters hovering at the same level, more or less. Okay, so I would say, you know, you call it, is there an inventory correction there or not? I mean, seasonality would say that, you know, industrial would grow, for example, in Q2 or Q3, and it didn't. So, you know, you can argue that there is some inventory correction at customers, and that's the reason for my prepared remarks. but at least I do believe that they have stabilized from a revenue perspective. I will say that the only, and these are lots of sectors for TI, I will say that this is not done on the factory automation and motor drive, which is kind of this automation sector for TI. That was my only other color that I've added, Tor, and I don't know, Dave, anything to add here? I think that's good. That's good, okay.

Yeah, just one last question. So going back to the about visibility orders and so forth. When you talk to your customers, especially some of your non-Chinese customers, is there a sense that everyone's just waiting for rates to come down, getting through the U.S. election? Because it does feel like there's some sort of a capping cycle coming, but everyone's just waiting on the sidelines. When you talk to some of your biggest industrial customers, do you get a sense that they're waiting for that, or is this more just about, hey, you know, once spending comes back with better rates and so forth, we're sort of back to the races?

Short answer is no. I don't hear that at least. I don't think if they think that they would tell me anyhow. But what I think is important to remember, and I think they value that because I hear it from the meetings I have, that when they need it, we have it, okay? And we are, you know, most of our portfolio is very diverse, long-lived, and we let the customers know where we have enough inventory to serve them as they need it. And when, you know, there are more kind of, call it unique, smaller part of our portfolio, but the lead times are longer and we require more visibility. I think we are differentiated in that sense. Customers appreciate it. And hopefully we can maintain that level of support through the next cycle and, you know, work on our market share. And I think that that is what customers expect, and I think TI can outperform in that sense. Okay? Very helpful. Thank you. Okay, so let me wrap it up with what we've said previously. At our core, we are 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 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 part of and would want as our neighbor. When we are successful, our employees, customers, communities, and owners all benefit. Thank you, and have a good evening.

This concludes today's conference. You may disconnect your line at this time. Thank you for your participation. Thank you. you Thank you. Thank you. Thank you.

Welcome to the Texas Instruments Third Quarter 2024 Earnings Conference Call. I'm Dave Paul, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Aviva Lahn, and our Chief Financial Officer, Rafael Lazzardi. 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. 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, Haviv will start with a quick overview of the quarter. Next, he'll provide insight into third 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, give an update on our capital management, as well as share the guidance for the fourth quarter of 2024. With that, let me turn it over to Haviv.

Thanks, Dave. Let me start with a quick overview of the third quarter. Revenue in the quarter came in about as expected at $4.2 billion, an increase of 9% sequentially, and a decrease of 8% year-over-year. Analog revenue declined 4% year-over-year, and embedded processing declined 27%. Our other segment declined 5% from the year-ago quarter. Now I'll provide some insight into our third quarter revenue by end market. Our results continue to reflect the asynchronous market behavior that we've seen throughout this cycle. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the industrial market was down low single digits as customers continued to reduce their inventory levels. The automotive market increased upper single digits primarily due to strength in China. Personal electronics grew about 30%, enterprise systems was up about 20%, and communication equipment was up about 25% as the cyclical recovery continued in these three markets. With that, let me turn it over to Rafael to review profitability, capital management, and our outlook.

Thanks, Aviv, and good afternoon, everyone. As Aviv mentioned, third quarter revenue was 4.2 billion dollars. Gross profit in the quarter was $2.5 billion, or 60% of revenue. Sequentially, gross profit margin increased 180 basis points, primarily due to higher revenue. Operating expenses in the quarter were $920 million, about flat from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion, or 24% of revenue. Operating profit was $1.6 billion in the quarter, or 37% of revenue. and was down 18% from the year-ago quarter. Net income in the quarter was $1.4 billion, or $1.47 per share. Earnings per share included a 3-cent benefit for items that were not in our original guidance. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.7 billion in the quarter and $6.2 billion on a trailing 12-month basis. Capital expenditures were $1.3 billion in the quarter and $4.8 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.5 billion. As a reminder, free cash flow includes benefits from the CHIPS Act Investment Tax Credit, which was $220 million in third quarter and $532 million on a trailing 12-month basis. In the quarter, we paid $1.2 billion in dividends and repurchased $318 million of our stock. In September, we announced we would increase our dividend by 5%, marking our 21st consecutive year of dividend increases. This reflects our continued commitment to return free cash flow to our owners over time. In total, we returned $5.2 billion to our owners in the past 12 months. Our balance sheet remains strong with $8.8 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding is $14 billion with a weighted average coupon of 3.8%. Inventory at the end of the quarter was $4.3 billion, up $190 million from the prior quarter, and days were 231, up two days sequentially. For the fourth quarter, we expect DI revenue in the range of $3.7 to $4 billion, and earnings per share to be in the range of $1.07 to $1.29. We continue to expect our effective tax rate to be about 13% in the fourth quarter. As you're looking at 2025, based on current tax law, we would expect our effective tax rate to remain about the same. 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. Operator, you can now open the lines for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you an opportunity for a follow-up. Operator?

Thank you. Again, we will not be conducting any question and answer sessions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, as we pull for questions. Our first question comes from the line of Timothy Akuri with UBS. Please proceed with your question.

Thanks a lot. I guess the first question is autos grew. I think that was a little bit of a surprise to a lot of us. Can you talk about what's going on there? You did cite China. But did orders weaken late in the quarter at all? I mean, we saw pretty much every automaker negative pre-announce. So can you talk about maybe what you're seeing in autos? And maybe if you can provide a little commentary for December, what the outlook is there? Is it sort of anything you'd call out in December in terms of markets?

Okay, Tim, let me start with that. This is Haviv. So regarding the automotive market, yes, it did grow. We said high single digits around between 7% and 8%. And that was really driven. Most of the growth came from our business in China. I think I've mentioned also in the second quarter, we saw strength in China and automotive drove that growth as well. It kind of recurred in the third quarter. Just to give you some high-level numbers, it grew 20% in Q2 and another 20% in Q3. I think it's not a surprise that there is momentum for EVs in China. Our content is growing there, and that's what really drove the growth in the third quarter. I expect that to, I mean, I think this is not the one quarter thing. I think there is a growing momentum there. Our automotive revenue in China is in an all new time high. So I don't think that goes down in the near future. Now, the rest of the automotive market is different. We are seeing a continued weakness over there. That revenue picked in the third quarter of 23, and in general, trended down. If I put China aside, it had a quick correction in Q1, Q4 and Q1. The rest of the markets, I see a continued weakness. I think that's part of our seasonal forecast for Q4. Yeah, Paul and Tim? I do, yeah.

Raphael, so if I look at the guidance, OPEX is usually, I think, down low to mid-single digits for December. So if you assume even down mid-singles, you get gross margins sort of in the mid-50s. It's down like 200 basis points, stripping out deep depreciation. So that's a pretty big decline. So I guess are you taking down loadings in December? I do see that, you know, finished goods was up a lot. So if you can talk about that, thanks.

Yeah, so a couple of things in your questions. Let me try to address them. OPEX, nothing unusual, but we do probably expect it to be flat to slightly up. So consider that. As far as fourth quarter, with revenue at the midpoint decreasing, that takes a hit on margins, of course. So we do expect gross margins to be down. Also, depreciation will continue to increase. And, in fact, in October, we began depreciating the building and the clean room for SM1. So that continues to put – that's going to put even more upward pressure on depreciation in fourth quarter.

Thank you. We'll go to the next caller, please. Thank you. Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Thanks for taking my question. First, thanks for providing the end market commentary. I think you mentioned personal electronic demand went up I think 30% sequentially is what I recall. It was up mid-teens in Q2 also. How do we square your strength in personal electronics with the more kind of sluggish demand that we see for PCs and phones? Is it something outside of those areas or are those areas doing What do you attribute the strength in personal electronics? Or you think the market just, you know, it's just kind of bottomed from a cyclical perspective?

Yeah, I think that's a great question. Let me just walk through what we've seen over the last even couple of years. So, I mean, that revenue in the personal electronics market, it peaked in the third quarter of 2021. By the way, the third quarter is typically our peak quarter every year. There is a seasonality strength every third quarter for PE. And it dropped in the first quarter of 23. And since then, we have seen continuous improvement. But I would say, Vivek, that when I look at our third quarter of 24, it's still running at a lower level than the peak. It's running about 20% lower than the 21 peak. So there is still room to grow. And in our case, as I think I've mentioned in some of the calls, When we were short with supply capacity back in 21, 22, we had to take some calls to bias our supply towards industrial and automotive. The personal electronics has a shorter design cycle. We said we'll go attack that once the capacity and inventory are back in place. That's the case right now. So I think we are coming off of a very low trough. Plus, again, having the right parts to go back and win sockets that we couldn't sell before. So that's what I'm seeing right now. In terms of specifically into the third quarter, I think growth was across all the sectors or most of the sectors. The main ones are phones and notebook PCs. But in general, you know, the third quarter, as I've said, is a typical strong quarter for FPE. You want to follow up, Zedek? Yes, thank you, Dave.

So a bigger picture question, Aviv, is on in the last few calls, you know, there's been a suggestion that perhaps by calendar 26, TI will, you know, conceptually be closed, if not more than what you were in calendar 22. And people have kind of rightly then pushed back and said, well, that requires mid-teens sales growth in the next two years, you know, well above the trend lines. At what point do you think you will start to see those above-seasonal quarters to help us get to that above-trend growth for the next two years? I understand you're not giving guidance, but what are you seeing in the broader end markets? And do you think TI is at a point where those kind of above-seasonal quarters are line of sight, or is it too early to make that judgment? Thank you.

Yeah, first, just to recap on your question, Vivek, thanks. I think you're referring to our capital management call we had in August, so I just would ask people to look at what exactly we presented there. I think you referred to a 2026 scenario, a set of scenarios that we've presented there from flat to growth versus 2018. And we didn't say we are predicting what revenue would be, but it allows the investors to kind of have a view on free cash flow per share according to the revenue scenario. And I think it allows you guys to modulate up or down revenue and know what free cash flow will do during that year. Now, more specifically to your question, Look, we talked about three markets that are already in the midst of a cyclical recovery. I think they are not done yet, but they are pointing in the right direction. That's personal electronics, enterprise systems, and communication systems for us coming from a very low trough, but showing momentum. And I think that we are in the process of strengthening. Unfortunately, these markets are about 25% of our revenue in 23. And in our case, we really need the broad industrial market and the automotive market to join. Okay? So if I go to industrial first, revenue peaked in the third quarter of 22. We've seen eight quarters of decline. We are more than 30% down versus the peak. So... I don't think we, I hope, I can't predict it. I don't think we have a lot left, okay? I think the inventory correction is still ongoing, but I do expect that to start to recover. I cannot predict a quarter because usually when we see it, we call it. I will just say we haven't seen it yet, and it's been quite persistent, okay? That's on the industrial side, and I can go even into the sectors. Most of the sectors are showing either still searching for a bottom or hovering at a very low level, okay? So it's about time, but we haven't seen it yet. On the automotive market, I think it's more complex because this is where we see a different story between China and the rest of the market. Unfortunately, China is about 20% of our business, so it cannot move the overall automotive number for the company. But I think, as I mentioned before, we are right now at the lower single digit versus the peak, kind of hovering at that minus, Sorry, not lower single digit. I would say upper single digit, but somewhere between 5% to 10% versus the peak on automotive. In China, we have new records being established, and I think there is momentum over there. But the other markets or the other geographies, sorry, on automotive are still searching for that bottom. I do expect when it all adds up, automotive will establish a lower market peak to trough cycle, not close to the industrial side. But I can't give you a precise time for that, Vivek. All right. Thank you, Vivek.

And we'll go to the next caller, please.

Thank you. Our next question comes from the line of CJ News with Cancer. Please proceed with your question.

Yeah, good afternoon. Thank you for taking the question. I guess first question, you know, bigger picture, I guess given the cyclical uncertainty, How are you thinking about kind of running utilization rates into Q4 and first half of 25? And as part of that, with inventory at $4.3 billion, are you looking to continue to grow that and elevate utilization or keep it where it is until you really see signs of that cyclical recovery? We'd love to hear your thoughts there.

Yeah, no, happy to do that. So first, bigger picture, and then I'll get into maybe some specifics. But the objective for inventory is to support revenue growth as we prepare for the upturn, as Aviv described in our expectations going forward, particularly in 2025. We do expect to grow inventory in fourth quarter. So we grew a couple hundred million in third quarter. We expect probably a few hundred million growth. of inventory growth again in fourth quarter. But that is, we have moderated the factory loadings. So factory loadings expect us to go slightly down going into fourth quarter. But despite that, we'll still grow additional inventory. Just to comment a little more on the inventory, we have detailed plans by device at the finished goods level, at the chips level. And those plans are grounded on purchasing behavior and expected demand. And this inventory is very low risk. It sells to many, many customers, and it has a long life cycle. So we feel really good about that.

That's great. CJ, you have a follow-on?

I do. I would hope to follow up on Otto. You talked about that as a surprise in China. I'm curious if you could speak to Chinese OEMs taking share in Europe. That's something that we've kind of picked up and curious about. perhaps maybe the data points we're picking up in Europe related a little more to, you know, share loss there to some of the Chinese OEMs. Are you seeing that?

Yeah, first, I know, surprise. I think not a surprise because we've seen that trend starting in Q2. So to me, you know, the automotive market in China for TI, it again picked in that end of 23, call it second half of 23. We saw a very sharp correction in Q1. I think it was mainly inventory correction, and then growth in Q2, growth in Q3. It's 20% on top of 20%, so think about it running at 45% of the profit, and a new peak. I think that is mainly driven by the China market, right? If you think about I was just there a couple of months ago. I think now the majority of new cars are EVs, right, or some sort of hybrid, and these tend to have more content. And again, our position there is good. The TI is very competitive. So I think that drives growth. Now, our customer base in China is a set of OEMs, but also Tier 1s. And, you know, you guys know the OEM sharing, you're the experts there. But, you know, the tier ones are also, I think, they can build good systems. They are very efficient in cost. Performance is pretty good. So I think they also compete for market shares versus the worldwide tier ones. And I think that's part of the dynamics we see in the China market. We see momentum on both.

Thank you.

Next caller, please. Thank you. Our next question comes from the line of Ross Seymour with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for asking a question. Aviv, you talked a couple times about China going up 20% sequentially, two quarters in a row. Is there any reason that the other 80% of the business shouldn't have that sort of a cyclical rebound at some point? Is there something that's unique about China that allows it to be more volatile? Or is the expectation that you would have that the other 80% of your business at some point in time should do the same thing?

First, I think at some point of time, all the horses will point in the same direction. And we all are waiting for that. It's been a while, but I think that happens. Again, this asynchronous behavior is so clear to us. You can see an opposite behavior between geographies, between markets. I will say that, again, as we talked about in the previous response or my previous answer, there is a stronger EV momentum in China. On top of it, I think the China, call it culture, call it environment, is the design cycles are quick, inventory corrections are quick. So there is a little bit of a, everything is more accelerated, I would say, over there. And I think that's why we're seeing shorter cycles in terms of the way up, the way down. That would be my guess. But I think we'll all be able, we'll be smarter only when that thing is is done or played out completely. All I can say is that I've not seen it played out completely on the automotive market outside of China. But I don't think, again, I don't think the pick-to-trough on the automotive market is going to be as pronounced as industrial, simply because the secular growth over there, I believe, is stronger in the short term.

Do you have a follow-up, Ross?

Yeah, I do. One for Rafael. On the OPEX side of things, just a conceptual question. As we look into 2025, what would be the puts and takes on OPEX? And I guess the punchline is you guys have kept OPEX in certain periods of time barely growing year over year. In other years, inflation has been something you guys have had to endure as well. So how do we think about OPEX kind of structurally in 2025?

Yeah. In fact, for 25 and beyond, the way to think about it is we continue to have a disciplined process, as you alluded to, on our investments and our OPEX. But when it comes to R&D, we'll continue to invest there. So you'll see our investments grow over time and continue to grow. Whereas in SG&A, the focus there is efficiency. So continue to drive efficiency. So there the It will probably grow, but at a much lower pace than R&D. And, of course, revenue, the goal is for both of those to be under the revenue growth for the foreseeable future.

Great. Thank you, Ross. And we'll go to the next caller, please.

Thank you. Our next question comes from the line of Stacey Razian with Bernstein Research. Please proceed with your questions.

Hi, guys. Thanks for taking my question. I wanted to drill a little bit more into that China strength. So you're seeing it in auto. Are you seeing any signs of like China strength in analog or anywhere else in any other end market? Is it just completely focused on automotive at this point? And I guess what I'm getting at is I'm trying to judge the propensity of some of the Chinese guys maybe to be buying more. We've got an election coming up. Nobody exactly knows what's going on with the general geopolitical environment. Just what do you see more broadly in China, both in and outside of auto?

Yes, actually, I can tell you what we see. And again, it's helpful to speculate beyond what we see. But in general, just a reminder, as I said, during the upcycle, we had to bias our supply into the industrial and automotive markets, okay? So Clearly, and I think we said the company was at about 75% in industrial and automotive in 2023. China was similar, maybe even higher, because we had to take some calls on the consumer or PE side, so just to know where we're starting from. So in automotive, I think, as I said before, I can't tell you the reason for that, but I think part of it is the... I think the China customers are fast-moving. I think they are gaining momentum worldwide, not only in China. The second thing is I think it's acceptance of EVs in China, and there may be some other reasons, as you have mentioned, but we have not seen a clear evidence for that, okay, of a very large inventory buildup or anything like that. That's on your direct question of the automotive. On the industrial side, we have not seen China – recovering from the cycle yet so we again we it has picked somewhere in 2022 in china included and since then you know it had a little bit of a sequential growth in q2 but then it went down again in q3 so kind of hovering at the bottom that's the way i would describe it so we are waiting for that to happen we have seen a very strong recovery in automotive actually with a new high But the industrial numbers are still trending, you know, about 40% or so, maybe even higher in China versus the peak. So a lot of work for us to do in China. I don't think, I think it's just, you know, I think customers, as I said in my prepared remarks, are still working through some inventory over there on the industrial side.

And maybe just to add one thing, when you look at, Stacey, the other three markets that are cyclically recovering, personal electronics, comms, and entertainment. All of the regions are growing and contributing to that.

Yeah, in China included, right. But again, also a very low number, if you will, in 23. That's right.

Do you have a follow-up, Stacy? I do. Thank you. I know you guys don't guide two quarters ahead, but just mathematically, you know, we've been sort of looking at performance versus normal seasonality. How would you guys define performance? typical seasonality for Q1? And maybe like what is it over the last several years and how would you define it like versus like pre-COVID levels?

So maybe I'll talk about Q4, Stacey. And, you know, some people, it depends how you define seasonality. I like the way you do it. You know, you kind of need to take the outliers away. And I think 2020 and 2021 were the outliers during the uptake. And then typically in the fourth quarter, we see kind of a minus 7 to even sometimes close to minus 10. Dave, the Q11, can you add what or?

Yeah, it's usually more flat. It's more flattish, maybe down a little bit. But fourth quarter and first quarter definitely are seasonally weaker quarters. Second and third are obviously the stronger quarters. Okay, thank you.

That's helpful. Thank you, guys. Okay, next caller, please.

Thank you. Our next question comes from the line of Thomas O'Malley with Barclays. Please proceed with your question.

Hey, thanks for taking the question. I just wanted to clarify some comments you made in the preamble. You kind of talked about the three markets, enterprise, CE, and com, still correcting but showing momentum. So not finished, but showing some progress. Are those still sequentially declining, or are one or two of those actually coming off of the bottom and improving?

No, I think all three are sequentially growing in a fast pace. So I think just to repeat the numbers, I think PE grew 30% sequentially and enterprise grew 20% sequentially and comms grew 25% sequentially. My point is that they are still not at the previous peak, okay? So to me, when I think about momentum, I think I expect momentum to continue to build. I think we are still running below the previous peak that was somewhere in the year 2022. And I expect that momentum to continue. I think also, as I mentioned before, specifically for TI, these are the markets where we were in some cases short in the previous up cycle. And it's our job to go back and address these sockets now when we have enough supply and inventory, okay?

Thank you for clarifying. Yeah. Yep. And then just broadly, kind of during the pandemic, you saw a lot of growth. And I think most of your peers and yourself started being more vocal about describing both auto and industrial as double-digit growers. So as this kind of correction continues, you're seeing the strength from China in your auto business. And obviously, that's a part of the broader business that contributes to that double-digit growth. But You know, looking back now, and as you see the recovery, would you think any differently about the growth profiles of those two businesses? You obviously have your competitors coming up in a couple weeks, kind of going to restate their long-term categories as well. Do you still see that double-digit growth profile as the right way to look at those two businesses?

Yeah, and again, the short answer is yes, I see the same. I will say that even the current cycle on the automotive side is proving it, and I think we will all see that in the short term. When I talk about short term, it's five to ten years. I think the growth in industrial is multi-decades. I think we are in some of the, call it, sectors in industrial growth. We're only in the very, very beginning or early innings. So I think the industrial, and I don't know if we say double digits, but I think TI grew 10% in the last decade, 2013 to 2023. I think the market may be a little bit lower than that, I would guess, but call it high single to maybe 10% would be a good guess. I think the automotive market for TI and also for the market grew faster. But I think it's going to be, you know, I don't think it's going to run multiple decades. Okay, at a certain point in time, there's going to be kind of some sort of saturation in terms of content per vehicle. I don't think we are close to that date now, specifically not in this decade. Hopefully that helps.

Thank you, Tom. And we'll go to the next caller, please.

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Great. Thank you. I wonder if you could help characterize industrial, and I know you've talked about the various sub-segments underneath of that, but is there an inventory correction that's uniform? Are there areas of strength and just any sense of inventory versus demand issues that are kind of dragging that business down?

Yeah, Joe, a great question. I mean, I think we have more than 10 sectors, about 12 sectors in industrial, and the The overall, they all add up to a continuous decline since the third quarter of 22. So it's the eighth quarter of decline. We are seeing most of the sectors I would characterize have found the bottom, but are kind of hovering at that bottom. And think about areas for us like building automation, the energy infrastructure, medical, kind of hovering at that bottom. On factory automation, we are seeing still, and it's a large sector for us. You can think about factory automation and motor drive. It's all this process and factory automation type of plants. We are still seeing a decline. So they have not found a bottom. And then you see a couple of strength areas. Appliances, some people don't have it in industrial. We do. Appliances declined very early. And we've seen some recovery there. And I would also add, in our case, we have power delivery. Power delivery, think about it, the main market is silver, right? So that sits at the bottom of the rack. So we see growth over there. But these are the only two out of 12. So overall weakness in the industrial market. Hopefully that provides more color.

You have a follow-on, Sean?

Yeah, I do. That's helpful. Thank you. In terms of analog versus embedded, I know that's been happening for a while that embedded has underperformed. And there's a focus on kind of turning that around around a narrower focus area. I wonder if you could just characterize what's different about the embedded market on a sequential basis that's weaker.

Yeah, strategically, we are very pleased with the progress we are seeing in Embedded. You know, Embedded is more, think about its higher AUPs and more visibility, I would say, on design-ins. It's less broad. So when we look at the progress, when we look at momentum with customers, I think we are excited about the future. And, you know, they are going through a cyclical process, exactly like the analog team has done, but they are kind of a year later. So again, embedded is almost 95% industrial and automotive. They've seen growth in 2023 versus the industrial business, versus the analog business that declined double digits. So they started almost a year after Analog think about kind of middle of 23. We've seen four quarters. I think they're also looking at a seasonal quarter in Q4, but momentum there is strong, and I'm excited about the future there. Okay, thank you.

We'll go to the next caller, please. Thank you. Our next question comes from the line of William Stein with Truist Securities. Please proceed with your question.

Great. Thanks for taking my question. I think earlier in the call, The question was asked, Haviv, you answered it for one or two end markets, but I'm hoping you can talk about how the pacing of orders progressed in the last couple months. I wonder if you might have seen things accelerate to then only decelerate, if there's been any sort of ups and downs that have surprised you, and then I have a follow-up, please.

Yeah, I think what I said about the third quarter, I think you think about it as not a lot of change that I see right now going into the fourth, but it's Q4, right? So there is a seasonality effect. In that sense, I don't see any change versus what we've seen in Q3. If we would see something, I would call it out. but I cannot call out anything. David, you want to add anything about the orders?

Yeah, order rates, I think, were behaving normally. They increased each month in the quarter, which is very typical. So we didn't see any large drop-offs or acceleration or deceleration on that front.

And, Bill, maybe just to add on that, just a reminder that we have built good service levels of inventories. Rafael mentioned our lead times are very low, so... We get a lot of business kind of real time. As it comes, people will call it turn business. So we simply don't have a ton of visibility right now. And customers also, they take parts only when they need it. I don't think they're building inventory. So that's the reason that we cannot provide more color beyond what they've said.

Yeah, if I can follow up. It actually dovetails with the follow-on, which is when... When you all have inventory, your customers may not be all charged up about placing tons of backlog. And when they have inventory, even more so, our checks recently have revealed that customers have more inventory than many suppliers thought. They were not really close to the end of the inventory digestion at end customers. And I wonder if you could either dispel that or provide any insight as TI sees it. Thank you.

Yeah, I'll just answer on a high level, and Dave, maybe you can chime in. But look, in general, we don't have visibility into our customer inventory levels. I do think, as we all know, I mean, interest rates are high at the end of the year. I don't think there is a lot of desire to build inventory at our customers' shelves, especially when our inventory position is strong, and that's where we want to be. We want to take that burden away from our customers. To us, that means level of service, and we want to do it through not only the down cycle, but also the up cycle. Hence, the preparation of capacity and inventory, as Rafael said. That's the game we want to play in the next up cycle, and that's what drives our capital allocation decisions. Dave, anything specific about the customer?

Yeah, I think the point that you made that we're essentially operating from a very healthy position on inventory. That means that customers don't have to place orders and that is keeping customers visibility low, but we want to be able to be ready for the upturn when it comes.

Yeah, many of our lead times are well below 10 weeks today. So, I mean, we provide, I call it excellent customer service, and when customers need the part, we have it for them. Right.

Thank you, Will. And we'll go to our last caller, please.

Thank you. And our last question comes from the line of Torres Zandberg with Stifel. Please proceed with your questions.

Yes, thank you for squeezing me in. I had a follow-up question on the industrial market. Obviously, you know, lead times are short and, you know, you have inventory. But I'm just wondering from an end market or a sell-through perspective, is it fair to say that that market is stabilizing? Is it getting worse? I know you called out those two segments that are perhaps starting to stabilize, but any further read on the end consumption there actually getting better or worse?

Yeah, just to repeat, Tori, thanks for the question. Just repeating what I said, I think most of the sectors are hovering, because we've seen like three or four quarters hovering at the same level more or less, okay? So I would say, you know, you call it, is there an inventory correction there or not? I mean, seasonality would say that, you know, industrial would grow, for example, in Q2 or Q3, and it didn't. So, you know, you can argue that there is some inventory correction at customers, and that's the reason for my prepared remarks. but at least I do believe that they have stabilized from a revenue perspective. I will say that the only, and these are lots of sectors for TI, I will say that this is not done on the factory automation and motor drive, which is kind of this automation sector for TI. That was my only other color that I've added, Tor, and I don't know, Dave, anything to add here? I think that's good.

Yeah, just one last question. So going back to the topic about visibility orders and so on and so forth. When you talk to your customers, especially some of your non-Chinese customers, is there a sense that everyone's just waiting for rates to come down, getting through the U.S. election? Because it does feel like there's some sort of a capping cycle coming, but everyone's just waiting on the sidelines. When you talk to some of your biggest industrial customers, do you get a sense that they're waiting for that, or is this more just about, hey, you know, once spending comes back with better rates and so forth, we're sort of back to the races?

Short answer is no, I don't hear that at least. I don't think if they think that they would tell me anyhow. But what I think is important to remember, and I think they value that, because I hear it from the meetings I have, that when they need it, we have it, okay? And we are, you know, most of our portfolio is very diverse, long-lived, and we let the customers know where we have enough inventory to serve them as they need it. And when, you know, there are more kind of unique, smaller part of our portfolio, but the lead times are a little longer and we require more visibility. I think we are differentiated in that sense. Customers appreciate it. And hopefully we can maintain that level of support through the next cycle and, you know, work on our market share. And I think that that is what customers expect, and I think TI can outperform in that sense. Okay? Very helpful. Thank you. Okay, so let me wrap it up with what we've said previously. At our core, we are 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 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 part of and would want as our neighbor. When we are successful, our employees, customers, communities, and owners all benefit. Thank you, and have a good evening.

And this concludes today's conference and may disconnect your line at this time. Thank you for your participation.