Q4 2019 Earnings Call
Good day, and welcome to the Texas instruments fourth quarter, 2019, and 2019 year in earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Dave Paul. Please go ahead Sir.
Good afternoon, and thank you for joining our fourth quarter in 2019 earnings Conference call Rafaellas Arty Ti Chief Financial Officer is with me today.
For any of you who missed the release you can find and on our website at <unk> Dot Com Slash IR.
This call is being broadcast live over the web and can be accessed through our website a replay will be available through the web.
This call will include forward looking statements that involve risks and uncertainties that could cause T.I.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 T.I.s. Most recent SEC filings for a more complete description.
First let me provide some information that's important for your calendars, we plan to hold a call to review our capital management strategy on February 4th at 10 am Central time.
Similar to what we've done in the past Raphael and I will provide insight into our strategy.
For todays call, let me start by summarizing what Raphael and I will be reviewing I'll be covering the following topics.
First a high level summary of the financial results for the fourth quarter.
Second I'll provide some comments about what we're seeing with added insight by segment and end market and explain why we would characterize the market is showing signs of stabilizing.
And finally since this is the end of the calendar year I'll provide a summary of our performance by end market for 2019.
Raphael will then review profitability capital management results and then the outlook.
After which we'll open the call for QNX.
Starting with the high level summary, the fourth quarter financial results.
Revenue was $3.35 billion, a decrease of 10% from a year ago, and EPS was $1.12 per share, including a one cents benefit not in our original guidance.
Revenue came in above the midpoint of our guidance with the relative strength across all markets.
At the company level, our year on year decline, a beat up slightly from 11% in the third quarter to 10% in the fourth quarter.
While this is only a marginal improvement all end markets reduce their rate of decline substantially with the exception of communications equipment.
Where the year over year decline increased about as expected given the strength in this end market in the year ago quarter.
And fourth quarter 2019 analog revenue declined 5% in embedded processing revenue declined 20% compared with the same quarter a year ago.
Analogs year on year rate of decline went from 8% in the third quarter to 5% in the fourth quarter.
And embedded decline slightly increased from 19% to 20% over the same periods.
When we look at the market since 90 days ago, we moved from the third quarter, where customers were increasingly cautious to the fourth quarter, where results and behavior throughout the quarter reflected what we believe is best described is demand stabilizing.
Based on history, this would imply that customer and channel inventory that built up during 2017, and 18 would now mostly be depleted.
This suggests that demand this year will be more a function of our customers end demand and therefore, the macro economy, which may continue to be uncertain.
Moving on I will now provide some details on the fourth quarter by segment and end market.
From a year ago quarter analog revenue declined 5% due to declines in signal chain high volume and power.
Embedded processing revenue declined 20% from a year ago quarter, primarily due to processors connected Microcontrollers also declined.
Our other segment declined 24% from the year ago quarter.
For the year in total analog declined 5% and embedded declined 17%.
Analog and embedded combined were 92% of revenue from an end market perspective in the fourth quarter all markets declined year on year, 3% to 4% with the exception of communications equipment.
Communications equipment declined about 50% from the year ago quarter about as expected as all major customers geographies and technologies declined.
Next as we do at the end of each calendar year I'll describe our revenue by end market for 2019.
We break this into six categories industrial automotive.
Personal electronics, which includes products such as mobile phones, Pcs tablets and Tvs.
Communications equipment enterprise systems, and other which is primarily calculators.
As a percentage of revenue for the year industrial was 36%.
Automotive, 21% personal electronics 23 communications equipment 11 enterprise systems, six and other was 3%.
Looking at the changes versus 2018 automotive increased by one percentage point enterprise systems decreased by one percentage point and the remaining markets were unchanged.
In 2019, industrial and automotive combined made up 57% of T.I.s revenue up one percentage point from last year and up from 42% in 2013.
We have established momentum in these markets and we see great opportunity ahead.
Next one of our competitive advantages is diversity and longevity.
Which can be measured in multiple dimensions.
From a diversity perspective, we have over 100000 customers and tens of thousands of devices in 2019, almost two thirds of our revenue came from customers, who bought $100 million or less of our products.
In 2019, our top 10 devices represented about 5% of our revenue.
And the top 100 device was less than 110th of 1% of our revenue.
From a longevity perspective over 40% of our revenue came from devices that we've been producing for at least 10 years.
Our investments are directed to continue to diversify our growth across products markets and customers strengthening this competitive advantage.
Next we are announcing today that we will be closing our last two six inch or a 150 millimeter wafer fabs, which are both more than 50 years old.
This will be a multiyear plan and is expected to be completed no earlier than 2023 and no later than 2025.
There are no charges in this quarter's results and we'll keep you updated as needed in the future.
Separately, our plans to build our next 300 millimeter factory in Richardson, Texas are underway with dirt moving and cranes on site.
We expect the building shell to be complete by the end of 2021 and ready to install tools when needed to meet market demand.
Which will allow us to continue to support growth and strengthen our manufacturing and technology competitive advantage.
So to wrap up we remain focused on analog and embedded the best products.
We remain focused on the industrial and automotive markets.
The best markets since there will be the fastest growing semiconductor markets as they have increasing semiconductor content and also provide diversity and longevity.
All of this translates to a high terminal value of our portfolio.
Raphael will now review profitability.
Capital management and our outlook.
Thanks, Dave and good afternoon, everyone gross profit in the quarter was $2.1 billion or 63% of revenue.
From a year ago gross profit decreased primarily due to lower revenue.
Gross profit margin decreased 220 basis points.
Operating expenses in the quarter were $798 million down to parse them from a year ago and about as expected.
Well at the Rolling 12 month basis operating expenses were 22% of revenue.
For the year, we have invested $1.5 billion in R&D, an important element of our capital allocation.
We're pleased with our disciplined process of allocating capital to R&D.
We believe will allow us to continue to grow our topline over the long term.
Acquisition charges and noncash expense were $50 million.
Acquisition charges will remain at about $50 million through the third quarter of 2021.
Operating profit was $1.2 billion or 37% of revenue.
Operating profit was down 18% from the year ago quarter.
Operating margin for analog with 42 person down from 47% a year ago.
And for embedded processing with 25% down from 30% a year ago.
Our focus investments on the best sustainable growth opportunities with differentiated positions will enable both businesses to contribute nicely through free cash flow growth overtime.
Other income and.
Net income in the fourth quarter was $1.1 billion or $1.12 Pershare, which included a one cents benefit for items that were not in our prior outlook that we have discussed.
Let me now comment on our capital management results, starting with our cash generation.
That's all from operations with $1.8 billion into quarter.
Capital expenditures were $163 million in the quarter.
Free cash flow on a trailing 12 month basis was $5.8 billion down 4% from a year ago.
In the quarter, we paid $841 million in dividends, an increase of 17% per share.
Market, our 16 year of dividend increases.
We repurchased $489 million of our stock for a total return to owners of $1.3 billion.
In total we have returned $6 billion in the past 12 months consistent with our strategy to return all free cash flow through our owners.
Over the same period, our dividends represented 52% of free cash flow on their score in their sustainability.
Our balance sheet remains strong with $5.4 billion of cash and short term investments at the end of the fourth quarter.
Total debt was $5.8 billion who's our weighted average coupon of 2.99%.
Inventory days were 144 down eight days from a year ago and up five days sequentially.
We're pleased with our inventory and it is positioned to support growth.
Now, let's look at some of this results for a year.
In 2019 Guy so from operations was $6.6 billion.
Capital expenditures were $847 million or 6% of road.
Free cash flow for 2019 was $5.8 billion or 40% of revenue.
Our cash flow reflects the strength of our business model.
That's we have said, we really free cash flow growth, especially on a per share basis is most important to maximizing shareholder value in the long term.
And we'll be valued only if productively invested in the business or return to shareholders.
We remain committed to return all free cash flow to owners.
Over the last 12 month, we paid $3 billion in dividends and purchased $3 billion of our own shares.
Reducing outstanding shark down by 1.4% in 2019 and by 46 person since the end of 2004.
When we initiated a program designed to reduce our share count.
Turning to our outlook for the first quarter, we expect revenue in the range of 3.12 billion to $3.3 billion and earnings per share to be in the range of 96 cents to $1.14.
Which includes an estimated $20 million discrete tax benefit.
We continue to expect our 2020 annual operating tax rate to be about 15%.
As usual details of our expectations for taxes can be found on our IR website under financial summary data.
In closing as Dave mentioned, we will stay focused in the area of that add value in the long term.
We continue to invest in our competitive advantages with our manufacturer and technology portfolio breath market reach and diverse and long lip products.
We will continue to strengthen disadvantages through disciplined capital allocation and by focusing on the best products analog and embedded processing and the rest markets industrial and automotive, which we believe will enable us to continue to improve and deliver free cash flow per share growth over the long term.
With that let me turn it back today.
Thanks, Raphael operator, you can now open the lines for questions in order to provide as many of you as possible and opportunity to ask a question. Please limit yourself to a single question.
After our response will provide you an opportunity for an additional follow up operator.
Thank you if you would like to ask the question. Please signal by pressing star one on your telephone keypad. If you were using your speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
Well take our first question from John Pitzer with Credit Suisse.
Hey, guys congratulation on the solid results I guess staying healthy I'll just relative to the March quarter guidance at the Midpoints, you're guiding down about 3% sequentially, which is in line with kind of historic seasonality for the March quarter us, but typically off the bottom of the cycle you can get some above seasonal on at the midpoint to.
Year over year, it's just modestly getting better from December to March. So I'm, just wondering what if there's anything specific in the March quarter as to why it's not a little bit better than seasonal and specifically anything around distribution strategies that might be a headwind in Q1, and then I will follow ups.
Yeah, John Oh, I'll take that and Raphael can can add a if he'd like I think.
So to answer the last part of that question. There's nothing in the sequential guidance that would suggest the Ah theres any headwinds from from distribution.
We've talked about before that we would expect the.
As we make the transmission and distribution it will look a similar from a revenue headwind.
As we've seen it was consignment so so.
Now there will be some there, but we've already got some.
The headwinds from the transitions that we've made in consignment and I think the second part is you know as we're seeing those signs of stabilization and we talked about the ER.
History would suggest that the growth is going to reflect the end demand of the customers and therefore, the macro economy. So as we go through the year. That's the that's what will be the driving force overall.
There is the only other thing I would add is a as Dave mentioned during the prepared remarks.
Comps equipment was down year on year significantly as there was a tough compare a year ago well one Q.
20 is going to have an even tougher compare on a on consequent maybe recall what was going on in one to 19 on the front was growing growing pretty significant radio year on year, Okay. Johnny I follow on.
And then my second question is just around the embedded business I know the D.S.A.M.C. you data is not necessarily the best proxy for that business, but when you kind of compare year results to that data up until this most recent correction you guys were to sort of consistently outgrowing. The ESI AMC you data you're embedded business has now gone through five or six core.
Is this kind of under growing and I'm. Just wondering if you can help us talk talk through maybe potential share losses. I know you talked about CP, you, specifically being weak with an embedded is that's specific to an end market like coms or how do we think about that.
Yes, So first John I think a you're putting in a good context and is a as you've stated we believe share changes just need to be judged over a long long periods of time and so if you look at a revenue performance of embedded over the last several years, we've had that significant significant amount of outperformance.
As you pointed out in 17 and 18.
Last year, we probably gave some of that back so.
I just point out that in the most recent quarter.
At the CCI level, so analog and embedded we saw that those signs of stabilization.
But in every market.
So behaving similarly, except communications equipment.
So thanks, John will go to the next caller please.
Thank you we'll take our next question from Ross Seymore of Deutsche Bank.
Hi, guys. Thanks, So let me ask a question trying to get to the the trajectory and maybe this stabilization in turn.
Dave I know you said it was pretty broad based and how you upside at the fourth quarter of last year, but can you give us what the sequential changes were by the end markets. I know you give the year over year separately, but if you could give that for the fourth quarter that'd be helpful.
Yeah, certainly Ross so I'm sick. So these are all sequential compares.
Industrial declined.
Mid single digits Automotives.
Was it was about even personal electronics declined high single digits.
Toms equipment declined about 20%.
In enterprise systems grew in the in the low single digits you have fallen Ross.
Yeah I just wanted to think about the you talked about shutting down the two six inch fab. She told us about starting up to 300 millimeter. So maybe a two parter. If I may can you talk about the utilization plans in the first quarter and how do we think about Capex I know you said, you're moving dirt and you have cranes, there, but how did that six or 700 million dollar cost that you said for the.
300 millimeter fab, how does that fold and in 2020.
Yes so.
Roger answer you asked a bunch of questions there right I'll I'll answer ones I remember so first let me emphasize that yes, we're closing to our two fabs as still have a song 150 millimeter equipment.
And there are over 50 years old and they'll be close by US earliest 2023 Rs laid us 2025 somewhere in that that timeframe. We have about a billion I have dollars of revenue the run through a through those factories and of course, we're moving most of that revenue virtually all to 300 millimeter saw significant our cost advantage.
As we have talked about.
Over the years.
The new factory. So let me talk about the new factory, Yeah. We got dirt moving cranes are there plans are underway. We should have the building finished by the end of 2021 and at that point, we're going to put equipment as needed to to support.
To support demand.
From a capex Sam when you want a model that at 6% of revenue do we just finished only 19 capex at 6% of revenue and you should model that going forward at about that thing though.
Okay. Thank you Ross and we'll go to the next caller. Please.
Thank you. Our next question comes from Chris Danely Citigroup.
Hey, Thanks, guys I'm going to put the hindsight is 2023 to the test here. So you're now that we've kind of gone through this dipped and recovery maybe just talk about why you think your your sales in bookings sell off so sharply in the late summer and then what's.
A wire the customers a little more I guess, a little more optimistic right now and then do you feel better about your business now versus let's call. It six months ago over the summer.
Okay, well I'll I'll start off and Raphael if we want to add anything I think when you know as we go through any cycle.
There are all similar and a lot of ways in different and others and to put it in context you'd have to go back.
Order of 18 running up to that we had to 10 quarters of a of year on year growth. So you never know as you're going through that are you going to have 10, or 12 or 14 quarters of year on year growth, but you expect at some point that the industry run below.
And so as we started that we thought we were what we are seeing was mostly.
Inventory.
Industry, rather correction as we're working through that certainly trade tensions.
Probably a long dated that that cycle and part of the reasons why we saw that that other leg down later last year.
And you can it so in can you remind me the second part I'll do we feel better about the business.
I think that strategically we felt to a that we continue to stay focused on on improving our for competitive advantages.
We havent slowed down investments and we talk about our Fabs under way.
You look at the Opex investments that we have made those have stayed steady focused on areas of diversify our growth in industrial and automotive. So I think we feel just as good today as we did about the business. The cycles will will come and go yes, I use that as Dave mentioned strategically we are well positioned have been.
And that doesn't hasn't changed so we continue to feel as good as ever on that front and then operationally. We just we got to be ready for whatever the market throws at us. So is if this was a is going to last longer we got to be ready for additive.
Things are going to head south, but we also got to be ready if its things turn around and and then we're going to start seeing a year on year grows, though and on our business model.
Allows us to do that and the we well positioned with great. Yeah, So long Chris Yeah.
Just a longer term question on the embedded processing business. So if you look at the last.
Couple of years as it has materially underground the overall business and we're still running that I think it's about 10%.
Lower margins in the corporate average so what what do you guys thinking about what should we be thinking about.
Sort of the long term goals are aspirations for the embedded business just in terms of.
Relative revenue growth or profits do we expect it to improve or are not improve and if it's not going to improve.
It is or is there anything you can do that to change that.
Yeah, I'll give you a few comments on that.
As far as expectations, you mentioned margin you know frankly, that's not a.
Embedded is lower margin and ALOG, but that is a non issue as long as their embedded contributes to free cash flow growth. That's the that's the measuring stick.
Obviously a topline.
As a has gone through that some challenges IRDA, they've talked about earlier, but longer term.
With their focus on auto and industrial in all our businesses, but that includes embedded we feel confident that that business will grow longer term.
Great. Thank you Chris My go to the next caller please.
Thank you well take our next question from Toshiya Hari of Goldman Sachs.
Hi, guys. Thanks, a lot for taking my question.
I was hoping to better understand what you're seeing in the coms business.
Hi, I appreciate the year ago quarter was a was a high compare.
But the business was down 50% as Dave you noted.
I'm curious how big hallway was was a as a percentage of that decline in Q4.
More importantly, how are you guys thinking about the trajectory for this business into 2020.
Then I've a follow up yes sure yes, so it's a long way last year was 3% to 4% of our revenue that's really unchanged from what was the.
The prior year.
And I think if you look at coms equipment overall.
You know if you will just look at the shape of the growth curve you had the year kind of balanced with strong growth in the first part.
Followed by very weak growth and the second half so.
The way that it's behaving I don't think is well isn't a surprise to us.
As we were going through that.
Very strong growth we.
Tried to remind everyone at the time that that market to is a market thats just choppy.
And.
So it's that we primarily.
Early phases of technology deployments.
I think longer term as we've talked about on our capital management to.
Presentation, we don't believes that that will be a growth driver for us for us or for the industry.
And Thats just based on the number of subscribers that are out in the market and what the capital spending by operators will be longer terms. So we really think that growth in our industry will be driven by industrial and automotive and hence why weve biostar our investments into into those areas.
Yes follower.
Yeah, great and sort of related to that Dave It was encouraging to see R&D intensity. Your R&D as a percentage of sales pick up in 2019 versus 2018 have you had felt like R&D was in wasn't decline for for a number of years. So it's good to see that pick up.
Can you remind us switch product areas technologies and margins that you guys are focused on I realize it's going to be industrial and automotive, but if you can give a little bit more color within those two end markets that will be helpful. Thank you.
So now of course from an end markets down barges that is a industry automotive that's where we're focusing.
From a from a product standpoint is some better.
And analog but of course inside of that there's a there's a bunch of diesel.
I'll mention a few months.
The highest level is a into in the case of analog is a signal chain mpower.
Those are my Florida, because there is but.
And underneath that Theres, just a bunch of things going on there is there's a within power. There's all kinds of power categories, and then within signal chain that but they have you want to GAAP and I'll just say when we think of allocating capital to R&D, There's really three major buckets and the largest bucket is a goes directly to product creation.
New products, we released three to 400 new products a year.
The other two is kind of a shared.
Centralized R&D function.
That develops our process technologies packaging.
Tools at our engineers use like Spice models and those types of things and then the third category is kilby labs were longer term.
Higher risk investments are made new materials, new new markets and those types of things. So that's where the R&D has been directed.
Described the R&D last year is steady stable.
And.
I think that even in a down market keeping those investments stable keeping focused on.
In investing in our for competitive advantages.
Is really important overall so thank you. So she will go next caller. Please.
Thank you we'll take our next question from Harlan sur of JP Morgan.
Good afternoon. Thanks for taking my question looks like that year over year declines improved quite a bit in auto and industrial moving from down high single digits year over year to down low single digits going from September to December .
The 18 sub segments within these two end markets or by geography, where do you guys see signs of improvement or was it pretty broad based.
Yes. So is the latter is very very broad based which I think you know.
Continues to be encouraging on that front.
And again, just given the diversity of our customers as well as a diversity intentional diversity of our investments.
To have that growth be broad based it's good to see that that that's the way. The business is performing yes follow up yes, absolutely. As you guys mentioned you know looks like the team is all shipping to consumption. The guidance for this quarter is for a seasonal decline, but given that Q2 in Q3 are typically seasonally slower quarters do you guys anticipate in.
We've seen stuck between low factory loadings here in the March quarter.
You know we.
We only talked about a utilization in factory loadings, when theres significant inflection points and is a particular comparison for the first we don't expect significant.
Inflection points. So we're not talking a lot of course wafer low digitalization is always a function of but we expect the floor for future growth.
Yes, yes, and will vary those based on order patterns and as the as we see demand coming from customers. So.
Thank you Harlan we'll go to the next caller please.
Thank you we'll take our next question from Ambrish Srivastava of bank of Montreal.
I just wanted to feedback.
The comments on stabilization, both these businesses industrials and autos and specifically industrials I forget, but I think this trail took in sub segments.
So when you talk about.
Stabilization and I'm, assuming well you never had any channel inventory build type you. Your your channel inventory was pretty normal to the cycle in your lead times never extended out. So can you just help us understand a little bit what's the source of stabilization. This it can be the channels. It's the end customer, but then you.
You have thousands of end customers. So what's the rate for this thing to get comfort that you are seeing stabilization in that business specifically.
Well embraced yeah. So it's a it's reflected in the stabilization is reflected in the order patterns. The demands that we see through consignment and actually the results themselves. So.
We went from third quarter.
There.
Those markets were declining in high single digits, eight 9% to some of them at a 10.
So we're all as markets were declining at three 4% so.
In those numbers suggest that there is a bottoming process and even though we're holding in consignment programs were holding that inventory on our balance sheet certainly our customers have inventory of their products and then they have inventories that are down down their channels. So.
Just as the Bullwhip effect would suggest that you have a small change in end demand is that moves its way back.
That magnify so we can see the results of that beginning to to abate given pharma.
I did.
Free cash flow margins. So have you guys have power true that 20 535 range you had given a couple of years ago.
And just at 40% in revenues down.
Not getting the mats right somewhere in the high single digit been free cash flows down 4%. So would it be fair to assume that target should be moved up and we are here you talked about.
How about capital allocation and a couple of external.
So let me take that so so thanks for Q on that so we do have the capital management on call coming off a very fourth so expect all of you to.
Sign up off what I have enjoyed over there.
And we will talk about the various objective there, but about give you a preview we're not changing those objectives.
And specifically that one that you talked about we're not a and the reason for that yeah. We just finished at 40% free cash flows the as percent of revenue, but the focus is not that person right. The way we maximize.
Finally for the owner of the company's growing the free cash flow per share.
For a long time to them so.
So so we focus on that and Thats, how we buy valley.
Okay. Thank you embraced and I believe we have time for one more color. Please.
Thank you we'll take our next question from Tory Sandberg Stifel.
Yes. Thank you for sticking in the first of all coming back to the.
Sort of recovery question.
Stabilization that eventually called rates are you starting to see Backload further out now or do you think it's kind of more just in time and kind of is waiting for how macro unfolds throughout the year.
Yes, Toria now just for those that aren't as familiar with US I was just the.
Remind everyone or or just point out that.
Two thirds of our revenues.
Our supported by consignment, where we actually don't carry backlog.
But we do get demand forecast in most of the time that at least six months so of demand that we can see.
So and then there is no inventory as Don breach was pointing out is earlier call. There was no inventory between us than those manufacturing lines for for those customers. So that's actually the strongest signal that we will get the when we're looking at the future demand, but certainly the backlog pays the please.
Part of that so.
I'd, just say that in general that it's consistent with the with the outlook that that we have.
Our lead times haven't changed.
It hasn't really changed at all so they have remained stable so.
That allows customers to have confidence that they can get product when they need it.
You have fallen.
Yeah, and I apologize for ending on this topic, but there's there's a lot of concerns about China in sourcing, including analog and embedded processing I was just wondering what what the company strategy is on that topic I mean, as it is sort of life as normal or do you actually the longer.
On the strategy.
As it relates that particular topic.
Yeah, I'll I'll start and if Raphael wants to tends to add anything and certainly as we've worked through the year with the with the trade tensions and is that has unfolded, we certainly heard discussions.
The Chinese customers and them wanting to ensure that they've got alternatives you know, but in the end our customers are just very pragmatic and.
We're looking for components was the highest performance the lowest cost the most dependable delivery and those are all areas that were very very strong competitively and so.
Okay, Okay that I'll turn it over to Raphael too to wrap things up alright. So let me finish to a few comments on key items will you remember we will remain focused on analog and embedded divest products and industrial automotive the best markets.
Next we will be disciplined in executing our capital management strategy and remain committed to returning free cash flow to the owners of the company.
And lastly, we believe growing free cash flow per share over the long term is what will maximize value for the owners of the company.
Okay. Thank you for joining us Tonight Goodnight.
This concludes today's conference. Thank you for your participation you may now disconnect.