Q2 2020 Texas Instruments Inc Earnings Call
[music].
Please standby.
Good day and welcome to the Texas instruments to Q 20 earnings release Conference call.
Today's conference is being recorded.
At this time wed like to turn the conference over to Mr., Dave Pahl. Please go ahead Sir.
Thank you and good afternoon, and thank you for joining our second quarter 2020, <unk> earnings Conference call.
And the abuse amidst the release you can find it on our website at <unk> Dot Com Slash IR.
This call is being broadcast live over the web and can 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.
Our Chief Financial Officer, Rafaellas already is with me today.
And we'll provide the following updates.
First I'll start with a reminder of the framework. We described during the April earnings call for how we will navigate the cobot 19 economy.
Next I'll provide insight into second quarter revenue results with more details unusual by end market, including sequential performance since it's more informative at this time.
And lastly, Raphael will cover financial results.
Some insight into onetime items in our guidance for the third quarter.
During the April call. We explained that we will use our three ambitions to drive our decisions as that are particularly helpful. In uncertain times like we face cobot 19.
For decades, these ambitions have driven all decisions inside.
They are to act like owners, who own the company for decades.
Secondly to adapt and succeed in a world is ever changing.
And third to be accompany that you are proud to be a part of and will be proud to have as a neighbor.
When we pursue these ambitions are employees customers communities and owners will benefit.
While second quarter did not experience the depth of the decline we saw in the 2008 financial crisis.
Nonetheless, we remain cautious on how the economy might behave over the next few years.
As a reminder, in April we provided a broader framework to help you understand how will operate through this environment.
First we will maintain high optionality with our operating plan. So we can support customers, particularly during a time when their ability to forecast will be limited.
Next we'll maintain investments in R&D and a new capabilities like those for tie Dot com.
Since there are five to 10 year time horizon decisions and critical to building stronger.
And finally, we will invest to ensure long term manufacturing capacity, particularly for the 2020 to 25 timeframe.
Making decisions with our ambitions in mine will continue to service well.
And that coupled with the framework I just mentioned should help you understand our actions.
We're particularly pleased with our decision to maintain an operating plan that allowed us to maximize our optionality.
During the second quarter, we were able to respond to unforecasted demand.
We will continue to maintain this posture in the third quarter.
Moving on I will now provide some insight into our second quarter revenue.
There are several key points to summarize what we're seeing in the market.
First overall, the weakness was primarily from the automotive market.
Automotive was down about 40% sequentially and down over 40% compared to a year ago.
To help appreciate this impact excluding automotive CCI was up 8% sequentially and down 3% versus a year ago.
The automotive market appears to have bottomed in may as North American and European Assembly plants resumed operations.
Next the industrial market was up about 2% sequentially and also up 2% from year ago.
There are end markets that are weak and others that are understandably strong like medical.
We do believe that some customers are trying to maintain strong inventory positions to limit exposure to any supply chain disruptions.
Personal electronics was up over 20% sequentially and up about 10% compared to a year ago.
This can best be explained by work from home trends and tie being in a position to support unforecasted demand in the second quarter.
Next communications equipment was up 20% sequentially, but down 15% compared to a year ago.
Within this market, it's important to note that analog achieved sequential and year over year growth.
While embedded was down in both comparisons following our plan decline in this portion of the business.
Enterprise systems was up sequentially and year over year.
This strength similar to personal electronics is best explained by work from home trends anti being positioned to support Unforecasted demand.
Rob sales will now review profitability capital management and our outlook.
Thanks, Dave and good afternoon, everyone.
Second quarter revenue was $3.2 billion down 12% from a year ago.
Gross profit in the quarter was $2.1 billion or 64% of revenue.
From a year ago gross profit decreased due to lower revenue and gross profit margin was Eva.
Operating expenses in the quarter were $780 million down, 4% from a year ago and about as expected.
On a trailing 12 month basis operating expenses were 23% of revenue.
Over the last 12 months, we have invested $1.5 billion in R&D.
Operating profit was $1.2 billion in the quarter or 38% of revenue.
Operating profit was down 18% from the year ago quarter.
Net income in the second quarter was $1.4 billion or $1.48 per share, which included at 33 cents benefit primarily for tax related related items that were not in our prior outlook.
The benefit included two cents of restructuring charges to strengthen our embedded business by focusing investments on the best opportunities for long term growth.
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.
Capital expenditures were $130 million in the quarter.
Cash flow on a trailing 12 month basis was $5.7 billion.
In the quarter, we paid $823 million in dividends and repurchased $882 million of our stock.
Total return to owners of 1.7 billion.
In total we have returned $6.7 billion in the past 12 months consistent with our strategy to return all free cash flow.
Over the same period, our dividends represented 56% of free cash flow underscoring their sustainability.
Our balance sheet remains strong with $5 billion of cash and short term investments at the end of the second quarter.
In the quarter, we issued $750 million up that were coupon of 1.75% due in 10 years.
This resulted in total debt of $6.8 billion will weighted average coupon of 2.77%.
We have rebased $500 million a bed due in second quarter and would have NOL further debt due this year, we have $550 million of that due in 2021.
Regarding inventory the inventory dollars were up $133 million from first quarter and days were 166 about as expected.
Distribution own inventory decline again in second quarter by about $150 million that seventh consecutive quarter of planned reductions as we continue the transition to have fewer distributors and bring more customers direct.
Tactically and strategically we are pleased.
We have held total inventory dollars steady, while increasing the percentage of inventory held insight and therefore fewer places.
This enables us to continue to maintain short lead times and high availability to meet Unforecasted customer demands.
For the third quarter, we expect the air revenue in the range of $3.26 billion to $3.54 billion, an earnings per share to be in the range of $1.14 cents to $1.34 cents.
Regarding our factory operating plan as we have stated we will maintain high optionality. So we can continue to support customers demand, particularly during a time when their ability to fourq estimate continued to be limited.
We have informed our customers that lead times for our products remain short a more to 40000 products are available for immediate shipments on deductible.
Short lead times and high availability are important capabilities that allow us to continue to support customers near term and unforecasted demand.
Our product portfolio of mostly long lived part afford us to have a steady hand, and therefore, we will take a similar approach to our factory operating plan again in third quarter.
In closing, we can do to invest to strengthen our competitive advantages and in making our business stronger.
History has shown us that it is in times like these when we can make the most strategic progress 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 additional follow up operator.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, if you're using a speakerphone. Please make sure that your mute function is turned off to layer signal to reach our equipment.
Once again that Istar want to ask a question.
We'll take our first question from Stacy Wrestle with Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my question.
First question I have you still mentioning that using some of your industrial customers.
Hi, good gold I guess inventories and making sure the borrowing position is still strong but as you will lead times are shrinking your building equaled 40000 products are ready to ship why would any of your customers actually have any need to.
To pre buy anything and if so do you do you think what you're seeing always maybe just more indicative of what the actual end Golden state might look like on like how do we hardly.
Square that circle.
Yes Stacy.
It's a good question and I think.
As we talked about last quarter, we saw us.
Some unusual order patterns.
As we talked about revenue run it up.
Really strong into March and.
Things abating, they certainly didnt abate as we as we thought that they would we saw supply constraints across the industry.
And sometimes.
As customers orders.
As they look at building inventory.
Our visibility and you know.
At.
At their dock when we ship from product. So they may decide to build some finished good inventory. So we don't have visibility visibility into that so that's really not a number that we can look into a system to provide us that.
It's really just more more instincts and experience.
And I will and also just talking to.
Our field teams and getting input from that from that standpoint. So.
That's a that's the debt when we look at the numbers at the that's where that soundness eight up yeah. Just state we have to add to that a few comments one.
Out of our 100000, our soul of customers I would guess 70 to 80000 or those are in industrial right. So it's frankly, just difficult to draw conclusions as such a huge number of customers that that have different needs using proceeds and the way they behave.
The other thing I would tell you that only about develop purchasing manager at one of these customers and I'm ordering 200 different parts for our board are they really going to treat.
You know certain supplier a little differently than others, if they decided to build inventory due.
The stock off and feel safer up probably not right. So so thats another dynamic that may we.
You should take into account and not at all cases right. It's not in all cases, so there's price some of that and Thats just the caution that that would provide we have fallen Stacy.
Yeah, I guess, just a follow up on that a little bit. So if I will just one of the trajectory. We've had over the last few quarters Q1, you were above seasonal Q2 X auto Youre club seasonal your Q3 guidance kind of at the low end of seasonal kind of losses, so far like priests outside of although it doesn't seem like the pandemic is having any real in.
Tacked on to it at all.
I just find titles. So what are you hearing from your customers if anything as to that effect in terms of what they're seeing.
On the impact that that took the pandemics, having on the supply chain because as far as I can tell it's not having much impact overall I guess Scott.
Well.
I'll remind you that the number we've turned in was down 12 right. So.
It was up to about eight excess capital X. auto right.
Correct, Yes, and unfortunately, we have to report the numbers with auto in Soho out you know foot that is that as the reality not auto was down 40.
So that is that is real.
And the auto manufacturers closed down because of coated so a few quite go so far.
This is it didnt have an impact.
And if you look inside of that you saw strength in some areas.
Like.
The work from home trends like Pcs and tablets soon.
Servers from inside of enterprise right. So.
We're seeing some strength.
Thats due to that to.
Which is also driving that so there's some things that are moving around the is that we saw.
And the other thing that if you look longer term.
When we.
As we entered the year as you know.
I think we've described back in January.
That we were seeing signs of stabilization with the fourth quarter results as we had worked our way through the bottom of cycle, we're starting to see those signs of stabilization now.
With those signs of stabilization again, we just turned in a down 12 overall so.
Those are the results.
And we do have to report the numbers all in but I think it is important in we wanted to give the color of of auto because that was the driver of the weakness from from a year ago. So thanks basic will vote for the next caller. Please.
Thank you will hear now from Vic audio with Bank of America is class.
Thanks for taking my question I wanted to actually pick up from that point on automotive I'm curious.
Filer day, what can you are expecting your automotive business to do in.
Q3.
When I look at your auto sales I think you mentioned down over 40%, they're kind of inline with you and I know just speaking on one quarter. This is not representative of the trend, but some of your auto Peters said they benefited from content growth and so forth. So my question is what do you think about just a broader automotive market heading into Q.
And do you think you can start to get back to a point where.
You know you get some content growth on top of whatever units a company that you might see.
Yes, you have it back I think thats, a glut a great clarification. So obviously, we're reporting is just our shipments.
When when factories close they stopped taking product.
You know that for our revenues overall.
A large portion of our revenues overall our on consignment.
So there is not the inventory sitting between us and those manufacturing lines.
In General I described the automotive market as being a more mature.
Supply chain so those.
Supply chains will react faster.
Than let's say, an industrial supply chain would perhaps and so when we have those factories opened back on they begin to to pull a pull those units. So.
We will try to predict.
What the overall market is going to do we can measure.
When customers are pulling that demand.
Our confidence in and in content growth three and five years from now in automobiles remains very high.
Ed, but just trying to draw the dots of a cyclical recovery, which is spend time trying to trying to do that so you have fallen.
Yes, thanks, Dave So on the factory plan I separate account growth that you mentioned that you expect.
The order of factory planned in Q3, two will be the same as Q2 and we saw inventory go up in Q2, what do you think your inventory level, it's very doable in Q3, and you know what I'm trying to do is try to align.
So the guidance seems to be season, unless as it was asked before even the range of outlook seems to be very in line with normal guidance, but your commentary seems to be more conservative you know certainly visibility on the macro side seems to be a little.
More difficult so I'm just trying to.
Get a better sense for.
You know what does your plan for production in Q3 tell us about your visibility on to your end customers and and didn't have enough demand.
Yes, sure first a couple of things.
First the environment continues to be uncertain, so I want to make sure that's the that's clear.
We we remain cautious I'll. This economy will behave for the next several years. Okay. So so that is that is very important that is.
That is part of the way we're looking at this.
At the same time.
We want to keep our optionality maximize that optionality.
And what that means is a be able do meet unforecasted demand from our customers like we just did in second quarter and we plan to continue that in third quarter and beyond.
The the recent we can do that strategically we're just very well positioned the bars that we sell our tend to be the majority of them catalog pars itself too many many customers.
That last a long long time, so if we end up.
Building inventory that's inventory is not going to go bad we don't have and will have to scrap it.
So that so that plays a that plays very well in our favor essentially is the various symmetrical bet.
That we're making where they also is really high. The downside is is limited so we're going to continue operating that way.
Great. Thank you for back to we'll go to the next caller. Please.
Thank you will hear now from Toshiya Hari with Goldman Sachs.
Hi, guys. Thanks for taking the question then congrats on the execution.
Just wanted to go back to sort of performance or performance by segment.
Obviously in Q2, it was a significant beat in terms of in terms of revenue and Dave. Thank thanks very much for driving.
Color on a sequential basis on your end of year over year year over year basis, but relative to what youre thinking internally, where did that come from was it broad based or was it focused and one or two businesses.
Well I think that.
In general if you look at the areas of strength that we had.
Certainly in.
Areas that were driven by.
The work from home the Pcs.
You know tablets.
The servers.
Those are areas that we saw.
Strength.
Automotive, obviously when things shutdown they shut down.
And.
That was had turned off.
Pretty much like a light switches the numbers would.
Would would show.
And.
I think that inside of inside of industrial you've got the numbers of down or the 2% or so from a transition standpoint, so yes definitely.
Definitely the strength that we saw.
We had in the work from home areas following.
Hi, I do.
As you guys know M&A is clearly a topical.
The group right now and.
Yes, I was just hoping you could remind us what sort of the criteria is when it comes to M&A for you guys have CCI.
And.
Sort of a two part question is it fair to say that your your posture is a little bit more conservative or cautious given the current macro and.
And Joe book, geopolitical backdrop, as well where evaluation why or is it pretty much a pretty much a business as usual for you guys on the M&A front. Thank you.
Yes, no that is a good question it's interesting the way you frame that so let me.
Hey, first remind everybody our framework and.
Any acquisition that we consider.
Needs to meet two criteria, the firstly needs to be a good strategic fit so that means an analog company weve catalog parts differentiated bard's that then going to auto in industrial because that's where we focus as where their content growth is happening.
And that would align well with our strategy, but the next pieces of the price needs to make sense and that is.
After once you make the purchasing 345 years are you, meaning that the cost of capital you, beating the cost of capital and think of it on a cash and cash standpoint, I missed a 100 Bucks in my cost of capital is 10 at 10% when I am I going to get $10 a after tax.
Net investment guide beat that $10 and get 15 or 20 overtime.
So that is that's our criteria. That's the one was that for many years and we continue to have it on your second part of your question you know we marked a week conserving frankly.
In summary in any environment like we are going through the rest of the they that's a great time too.
To make the most of opportunities. So we're we're not concerned but we're we're following the same framework here, we have followed and and based on our framework, we evaluate M&A opportunities but.
More importantly, we are we're continuing to invest internally, we're making our competitive advantages stronger we continue to invest in R&D, we haven't scumbag that at all we continue to invest and things like the I Dot com.
And our retail market channels and affords our manufacturing technology, where we are we broke ground on the on the new facility the new.
The second our fab in Richardson, and we're going to be invest into do have the building ready over the next 18 to 24 months, though we continue to do that to strengthen the company and now is a great continuity, we're very well positioned from a balance sheet standpoint from a BNL free cash flow standpoint.
A lot better than our competitors. So thats a good time to take advantage of it.
Great. Thank you to ship will go to the next caller. Please.
Thank you will hear from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. Thanks, Let me ask a question and congrats on the strong results I wanted to go into the source of the upside that Dave Rafale, you guys talked about the work from home side I think everybody understands.
Why that was better but the big question that still outstanding to me is the sustainability of that so can you just talk about the upside surprise you think it's sustainable I know you're not guiding by end markets you never do but how do you envision the second half of the year in those same area that upside.
Yeah, Ross I think that when we look at our business longer term.
We look at where we're investing for growth industrial automotive is.
Where are the investments go specialty industrial.
Thats, where we expect growth to be when we look at three and five and 10 year growth the perhaps for the next couple of decades. So.
We believe that growth is very sustainable.
And that's really where we're focused.
I'll say that some of the growth that we're seeing.
Is due because of the optionality that.
That Raphael talked about.
Weve.
Recently updated our customers, we've got 40000 products that we have immediate availability on today.
So if that does the.
The demand is sustainable through the second half you know we've got the products available to shift.
Into any of those any of our markets.
Overall in the short term.
But our long term prospects I think are really would so what's more important follow.
Hi, Dave Thanks for that answer I wanted to switch over to the two product segments. Two main ones analog and embedded just wanted to see if there's any update on your views on the embedded side. I know you said there was a little bit of a restructuring built into that 33 cents gain I guess as a little bit of an offset but the big picture question is you're now down to the lowest percentage of sales embedded has been.
And since at least in my model at 2012.
And the year over year decline is so much larger than the analog side. So can you just talk a little bit about when do you think that business bottoms out what's sort of restructuring needs to be done and then do you think that business is a growth driver over time for the company or is it something that we should just envision is remaining a much smaller for that part of the company than it once was.
Yes, I think when we look at the embedded the business. The embedded market is we've talked about before its shares many of the attributes that the analog market does.
And we believe that it will.
Be it has been and will continue to be contributed to free cash flow growth.
When you look at that business and look at the share gains that has had look at 16 17 and.
Really the better part of 18. It has had its had share gains gave some of that back in 19.
Core so.
But here more recently, we talked about last quarter, you saw some sequential growth out of that business.
All in.
We talked about the fact that.
Without auto you would've seen the sequential growth in that business. This quarter. So I think we're seeing signs of.
Stabilization.
Inside of that business so.
We have taken actions to strengthen that business.
You know its view.
Dive into that we've got.
Across Microcontrollers and.
Processors, there's eight businesses.
Three of them actually we've increased resources.
Two of them, we've actually decreased the resources in three of them have.
We have stayed about the same so that's a portfolio management that you've seen a stake.
Across our businesses over the years so.
We do believe a that that business will be a contributor to to free cash flow. There. So theres a lot of.
Work going on to ensure that.
That is.
So okay. Thank you very much Ross and we'll go to the next caller.
Thank you will hear from Chris Danley with Citi. Please go ahead.
Hey, Thanks, guys.
But I think you mentioned that you thought there's some inventory build out there I believe you said it was just an industrial can you give us a sense of how much you think that helped and.
What gives you confidence it's not occurring in any other product lines and did you guys notice anything.
Any kind of strength by certain geographies out there.
Yeah, Chris you know.
You know that you've heard the you've heard US talk you've heard me say.
A couple times in the past that I've joked that have never once taken to a double order or in order to for an inventory build.
And and obviously customers don't market that way when when they send an order in.
So is that is something that we can't see as I've talked about before with.
60, 65% of our revenue on consignment, we don't have.
We don't have inventory of our product sitting in front of the manufacturing lines. So our visibility ends right there so.
So we don't have a system that tells us if customers are building inventory, but.
Just a when you look at the numbers and you look at the strength and you add things up that's what our intuition tells us. So we're just mindful of that we think it's important just a point that out.
So could it be in other areas that could be but to our belief is it's not it's not significant.
But but we think it's important to pointed out yes, and let me just that do that on your cost. So your question was on the customer side, Let me remind you of the distribution side, where we do have visibility we drained a $150 million of our distributor distributor owned.
Inventory that's on top of the 50 million we during the last quarter. So so far year to date is 200 million and we think we'll be able to drain. Another 150 million are so for the rest of the year. So we'll probably end up draining 350 million or so of inventory and that makes a lot of things just given the changes in this.
In addition that we're making we're bringing more customers direct. So then we can control netting but there will be on a essentially on our balance sheet as we as we build more inventory on our balance sheet. So we can support those customers.
Direct the other comment I'll make roughly regarding that.
That given that drain now we only have about three weeks of inventory in the dispute channel.
Down about a week from from the prior quarter, but I'll tell you that metric.
It's already less meaningful then then it was before and it will continue to be less meaningful as we make that distribution channel smaller.
Over time, so, but I just wanted to give the.
The data points. So you have it you have a follow up Chris.
Actually it's on that last statement so.
You said that you've got three weeks of inventory in the Disty channel I guess, if we look at your days of inventory right. Now. It's 107 days I mean, your balance sheet looks like the feds from from the first glance should we expect this study at the new normal going forward like right around 170 days or or should this be the same sort of dollar.
<unk> level or I guess, what's what should we sort of calibrate our our models to for inventory going forward at T. I.
Yeah.
A few comments one is the.
As I just said the distribution on inventory, we've been draining for seven quarters in a row.
So you look at the entire ecosystem right, including the distribution inventory plus our inventory.
Over the last.
Couple of years, while we seven eight quarters is relatively flat right. So you have to.
I think it makes sense, we think it makes sense.
So think about it that way and then the other angle as I mentioned earlier, we talked about in our in our prepared remarks.
Is the great optionality that having that inventory gives us.
And we just show that in second quarter, and we'll continue to do it because it is actually metric asymmetric bet that having that inventory, there's a there's a working capital.
Cost associated with that but but this crap risk on that is really really low yes, the potential upside of serving our customers well with very low lead times in many cases as a as we said immediate availability.
We think that a longer term is something that customers.
Do and we'll continue to Bridget.
Okay. Thank you Chris will go to the next caller please.
Thank you we'll take our next question from Ambrish Srivastava.
Okay and though.
Hi, Thank you very much.
Dave apologize for the background noise economic activity is humming along around where I live.
Girls gross margin.
Quarter margin was much higher than what a normal flow through model that suggests I was wondering is it just a factor how low embedded is and that's the mix that's contributing to.
The gross margin being so strong this quarter.
Let's say something else going on.
Because you'd let you know flat.
Yeah.
What I would tell you know it's.
As we have guided for many years, you should think of revenue coming in and out of 70% to 75%. That's a good guide to.
Who use the over the entire cycle of course anyone quarter to be little more or a little less.
And then over the longer term of course, 300 millimeter and continuing to add revenue on 300 millimeter has a structural cost advantage.
That helps our margin discontinued due to be a tailwind on margins has been and we'll continue to.
Following a breach.
Oh, yes back to Microcontrollers embedded on it now that you in looking at the data I'm sure you've been looking at before this is Terry and it's good to see that stabilizing and you'll see some signs of stabilization, especially how low it is.
I would say it you could provide as between the connected into processor side that would help explain.
The divergence that we have seen from the overall analog over the last.
Three years as Youre pointing up first if we look back at two years only the last six or seven quarters has it really being diverging from the industry.
Yeah, you know, there's there's not that much difference in.
The trend between Microcontrollers and the processor business.
And really if you look at the longer trend line and that's really what shared doesnt move around quickly inside of those businesses.
Whether its analog in or embedded overall, and then if you drop down into.
Microcontrollers or processors. So again, if you look at kind of 16 and 17 into the three quarters of 18.
Those businesses.
Really did have a real strong track record of share gains.
And the deterioration began happened in.
In 19.
You gave some of them back so.
Again, we're taking the actions to strengthen that business, we believe to.
What we're doing we'll get that business performing and.
Having it to be a strong contributor to to free cash flow. So.
I can't reach and I think we have time for us for one more color.
Please.
Thank you we'll take our next question from William Stein with Suntrust.
Great. Thanks for squeezing me in.
There's a very slow moving but I think long term relatively meaningful risk.
As it relates to.
China trying to develop.
A domestic strong.
Semiconductor capability.
Some might argue that given the current state of affairs, both economically and politically that perhaps there could be some acceleration.
In that regard recently and I'm, hoping you might update us as to what you're seeing from this competitive threat.
Yeah. So just to give you some some thoughts on that or you know we think of that.
In a way similar as we think our competitors, meaning that our competitor advantage is put us in a in a good place to compete.
Again, the or Americana, Oreo piano competitors as well as a as the Chinese and having one of our own manufacturing with 300 millimeter that puts us gives us a structural cost advantage. The other one is the is the broadest portfolio in the industry close to 100000 differ.
In parts, and Thats, particularly relevant way of industrial and automotive where.
Indication of industrial for example, there probably 80000 different customers right. So.
You want to be able to do have been bars suite of parsing, the analog space and embedded space. It makes it more likely that they'll buy from you and makes the investment on the sales the side more worthwhile.
And then.
With the diversity divers among the.
Long lived positions that that that results in do.
And.
And partially because of those.
Advantages and the way that a structure, it's just difficult due to go after ines space right until when we have seen.
You know where companies in China really anywhere wafers go after.
Is the.
The kind of vertical markets in places like memory or or digital spaces that is frankly, just easier to go after Easter do good revenue growing quickly and then you can reinvest that and go from there.
In the analog space, we have you know average prices in the 30 to 40 cents.
Bedded is higher than that but not.
Not that much higher.
It's just hard and 80000 different customers that you go after the 100000 different barge is a daunting pass right nine possible. So we're very respectful of that and our job is to stay ahead of all our competitors might have where they are American European Asian.
So we want to you we should come from due to invest in that in those advantages in manufacturing in the broad portfolio to reach of channels to to make that klima, even even harder every year.
A follow up.
Yeah I appreciate that.
That answer it sounds like there's no meaningful change recently in this threat ground to to any others.
I wanted to follow up on the distribution commentary around.
I think another 150 million of inventory to go when we think about the 50 million. The 150 done in the quarter and I think you said 150 left in the back half should we think about that as proportional to the amount or to the percentage of distribution business. That's.
Going to transition this year and is that still on track to finish.
By the end of year.
Yeah. So it is on track to finish by the end of a year and and what happens there by the end of a year. We're just going to have a much smaller distribution footprint the number of distributors.
That that we engage with.
And at the same time.
We have we will have transition a fair amount of customers to the shipping direct.
So then fewer distributor deal what's left of distribution will be with beer distributors more of our revenue.
Going direct and that is yeah, I guess it is proportional to that.
Does that drain of inventory the youre referring to.
But it also includes a reduction in inventory of the distributors of will be with us.
As as well that its data.
Yes, I'm glad you mentioned that there. So yes, so part of what what that reduction is is that the distributors that are going to that we're going to stay with foremost bard.
I will be on full consignments, so anything that we sell with them and there's a few exceptions in Japan for example, but other than that.
It will there will be in full consignment, so really the they're going to have zero owned inventory for the most.
So that is also reflect that in the 50 50.
So I think that wasn't have questions. Let me just.
Wrap up by summarizing what we have said previously we will continue to invest in and strengthened our for competitive advantages, which are many factory on technology portfolio breast market reach and diverse on long lived products. We will also continue to pursue our three ambitions. We will act like owners will own the company for decades.
We will adapt world that ever changing and we will be a company that were personally proud to be part of and would be proud to have as a neighbor. When we're successful our employees customers communities and owners will all benefit. Thank you very much.
Hey, given that does conclude todays conference. Thank you for your participation you may now disconnect.
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Good day, and welcome to Texas instruments to Q 20 earnings release Conference call Today's conference is being recorded.
At this time wed like to turn the conference over to Mr., Dave Pal. Please go ahead Sir.
Thank you and good afternoon, and thank you for joining our second quarter 2020 earnings Conference call.
For any of you who missed the release you can find it on our website at <unk> Dot Com Slash IR.
This call is being broadcast live over the web and can 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.
Our Chief Financial Officer, Rafaellas already is with me today.
And we'll provide the following updates.
First I'll start with a reminder of the framework. We described during the April earnings call for how will navigate the cobot 19 economy.
Next I'll provide insight into second quarter revenue results with more details unusual by end market.
Including sequential performance since it's more informative at this time.
And lastly, Raphael will cover financial results.
Some insight into onetime items in our guidance for the third quarter.
During the April call. We explained that we will use our three ambitions to drive or decisions as that are particularly helpful. In uncertain times like we face cobot 19.
For decades, these ambitions have driven all decisions inside.
They are to act like owners, who own the company for decades.
Secondly to adapt and succeed in a world is ever changing.
And third to be accompany that you are proud to be a part of and will be proud to have as a neighbor.
When we pursue these ambitions are employees customers communities and owners will benefit.
Well second quarter did not experience the depth of the decline we saw in the 2008 financial crisis. Nonetheless, we remain cautious on how the economy might behave over the next few years.
As a reminder, in April we provided a broader framework to help you understand how we operate through this environment.
First we will maintain high optionality with our operating plan. So we can support customers, particularly during a time when their ability to forecast will be limited.
Next we'll maintain investments in R&D and a new capabilities like those for CPI Dot com. Since there are five to 10 year time horizon decisions and critical to building stronger.
And finally, we will invest to ensure long term manufacturing capacity, particularly for the 2020 to 25 timeframe.
Making decisions with our ambitions in mine will continue to service well.
And that coupled with the framework I just mentioned should help you understand our actions.
We are particularly pleased with our decision to maintain an operating plan that allowed us to maximize our optionality.
During the second quarter, we were able to respond to unforecasted demand.
We will continue to maintain this posture in the third quarter.
Moving on I will now provide some insight into our second quarter revenue.
There are several key points to summarize what we're seeing in the market.
First overall, the weakness was primarily from the automotive market.
Automotive was down about 40% sequentially and down over 40% compared to a year ago.
To help appreciate this impact excluding automotive T I was up 8% sequentially and down 3% versus a year ago.
The automotive market appears to have bottomed in may as North American and European Assembly plants resumed operations.
Next the industrial market was up about 2% sequentially and also up 2% from year ago.
There are end markets that are weak and others that are understandably strong like medical.
We do believe that some customers are trying to maintain strong inventory positions to limit exposure to any supply chain disruptions.
Personal electronics was up over 20% sequentially and up about 10% compared to a year ago.
This can best be explained by work from home trends and tie being in a position to support unforecasted demand in the second quarter.
Next communications equipment was up 20% sequentially, but down 15% compared to a year ago.
Within this market, it's important to note the analog achieved sequential and year over year growth.
While embedded was down in both comparisons following our plan decline in this portion of the business.
Enterprise systems was up sequentially and year over year.
This strength similar to personal electronics is best explained by work from home trends anti being positioned to support Unforecasted demand.
Raphael ill now review profitability capital management and our outlook.
Thanks, Dave and good afternoon, everyone.
Second quarter revenue was $3.2 billion down 12% from a year ago.
Gross profit in the quarter was $2.1 billion or 64% of revenue.
From a year ago gross profit decreased due to lower revenue and gross profit margin was even.
Operating expenses in the quarter were $780 million down, 4% from a year ago and about as expected.
On a trailing 12 month basis operating expenses were 23% of revenue.
Over the last 12 months, we have invested $1.5 billion in R&D.
Operating profit was $1.2 billion in the quarter or 38% of revenue.
Operating profit was down 18% from the year ago quarter.
Net income in the second quarter was $1.4 billion or $1.48 per share, which included at 33 cents benefit primarily for tax relate related items that were not in our prior outlook.
The benefit included two cents of restructuring charges to strengthen our embedded business by focusing investments on the best opportunities for long term growth.
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.
Capital expenditures were $130 million in the quarter.
Cash flow on a trailing 12 month basis was $5.7 billion.
In the quarter, we paid $823 million in dividends and repurchased $882 million of our stock for a total return to owners of 1.7 billion.
In total we have returned $6.7 billion in the past 12 months consistent with our strategy to return all free cash flow.
Over the same period, our dividends represented 56% of free cash flow underscoring their sustainability.
Our balance sheet remains strong with $5 billion of cash and short term investments at the end of the second quarter.
In the quarter, we issued $750 million up that you about coupon of 1.75% due in 10 years.
This resulted in total debt up $6.8 billion, where a weighted average coupon of 2.77%.
We have rebates $500 million of that do in second quarter and would have not further dead. Due this year, we have $550 million of that due in 2021.
Regarding inventory the inventory dollars were up $133 million from first quarter and days were 166 about as expected.
Distribution own inventory decline again in second quarter by about $150 million that seven consecutive quarter of planned reductions as we continue the transition to have fewer distributors and bring more customers direct.
Tactically and strategically we are pleased.
We have held total inventory dollars study, while increasing the percentage of inventory held inside the eye and therefore in fewer places.
This enables us to continue to maintain short lead times and high availability to meet Unforecasted customer demands.
For the third quarter, we expect the our revenue in the range of $3.26 billion to $3.54 billion, an earnings per share to be in the range of $1.14 cents to $1.34 cents.
Regarding our factory operating plan as we have stated we will maintain high optionality. So we can continue to support customers demand, particularly during that time when their ability to forecast made continues to be limited.
We have informed our customers that lead times on our products remain short a more to 40000 products are available for immediate shipments on Theyll Dot com.
Short lead times and high availability are important capabilities that allow us to continue to support customers near term and unforecasted demand.
Our product portfolio of mostly long lived part afford us to have a steady hand, and therefore, we will take a similar approach to our factory operating plan again in third quarter.
In closing, we can do to invest to strengthen our competitive advantages any making our business stronger.
History has shown us that it is in times like these when we can make the most strategic progress 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 additional follow up operator.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, if you're using a speakerphone. Please make sure that your mute function is turned off to layer signal to reach our equipment.
That's going to start want to ask a question.
Well take our first question from Stacy Wrestle with Bernstein Research. Please go ahead.
Hi, guys for taking my question.
First question right have you still mentioned that you think some of your industrial customers.
We're trying to build a I guess inventories and making sure that they're all them on position is still strong but if your lead times are shocking you're building, you'll 40000 products are ready to ship why would any of your customers actually have any need to.
To pre buy anything and if so do you do you think what you're seeing right now is it maybe just more indicative of what the actual end demand state might look like.
How do we hardly a square that circle.
Yes Stacy.
It's a good question I think you know as we've talked about last quarter, we saw.
Some unusual order patterns.
As we talked about revenue run up a really strong into March and.
Things abating, they certainly didnt abate as we as we thought that they would we saw supply constraints across the industry.
And sometimes.
As customers orders.
As they look at building inventory.
Our visibility and you know.
At the at their doctors, we shipped from products. So they may decide to build some finished good inventory. So we don't have visibility visibility into that so that's really not a number that we can look into a system to provide us that.
It's really just more more instincts and experience.
And also just talking to.
Our field teams and getting input from that from that standpoint. So.
That's a that's that when we look at the numbers that that's where that soundness.
Yeah. Just stated you have to add to that a few comments one.
Out of our hundred thousand or so customers I would guess 70 to 80000 those are in industrial right. So it's frankly, just difficult to draw conclusions as such a huge number of customers that that have different need using proceeds and the way they behave.
The other thing I would tell you that you don't worry about the bottom purchasing manager at one of these customers and I'm wondering do under different barge for a board or are they really going to treat the you know a certain supplier a little differently than others, they decided to build inventory due.
The stock up and feel safer up probably not right. So ah. So that's another dynamic that may we.
Yes, just taking into account and not at all cases right right not in all cases, so there's probably some of that and that's just the caution that that would provide we follow Stacy yeah. I guess, just a follow up on that a little bit something else I will just one of the trajectory. We've had over the last few quarters Q1, you above seasonal Q2 X auto you were above seasonal.
Your Q3 guidance kind of at the low end of season, what kind of losses I'm. So far like please outside of all though.
It doesn't seem like the pandemic is having any real impact on us at all.
I just find tools right I mean, what's what are you hearing from your customers if anything as to that effect in terms of what they're seeing.
The impact that that that took the pandemics, having on the supply chain because as far as I can tell.
I've had the much implantable at all I guess Scott.
Well you know a I'll remind you that a the number we've turned into was down 12 right. So.
Hey, Thanks Apple.
X all right.
Correct, Yes, and unfortunately, we have to report the numbers with auto in so who out you know foot that is the that is reality not auto was down 40.
So that is the that is real.
And the auto manufacturers closed down because of coated so a few quite go so far.
It says it didnt have an impact.
And you know if you look inside of that you saw strength in some areas.
Like.
The work from home trends like Pcs and tablets and.
Servers from inside of enterprise right. So.
We're seeing some strength a that's due to that to a which is also driving that so you know there's some things that are moving around the is that we saw.
And the other thing that if you look go longer term.
You know when we.
As we entered the year as you know.
I think we've described back in January.
We were seeing signs of stabilization with the fourth quarter results as we had worked our way through a you know the bottom of cycle, we're starting to see those signs of stabilization now.
With those signs of stabilization again, we just turned in a down 12 overall so.
Those are the results and we do have to report the numbers all in but I think it is important we wanted to give the color of of auto because that was the driver of the weakness from from a year ago. So thanks basic we'll go to the next caller. Please.
Thank you will hear now from Vic area with Bank of America Ice class.
Thanks for taking my question I wanted to actually pick up from backed up point on automotive I'm curious Rockefeller day, what people are expecting your automotive business to do in.
Q3, because when I look at your auto sales I think you mentioned in down over 40%, they're kind of inline with you and I know just speaking on one quarter. This is not representative of the trend, but some of your auto Peters said, they benefited from content growth and and so forth. So my question is what do you think about just a broader automotive market heading.
Into acute C.N. and do you think you can start to get back to a point where.
You know you get some content growth on top of whatever units a company that you might see.
Yes, you have it back I think that's a glut great clarification. So obviously, we're reporting is just our shipments.
When when factories close they stopped taking product.
You know that for our revenues overall.
A large portion of our revenues overall our on consignment.
So there is not the inventory sitting between us and those manufacturing lines.
In General I described the automotive market as being a more mature.
Supply chain so those.
Supply chains will react faster.
Then, let's say an industrial supply chain would perhaps and so when we those factories open back on they begin to to pull a pull those units so.
We don't try to predict what the overall market is going to do we can measure.
When customers are pulling that demand.
Our confidence in and in content growth.
Three and five years from now and automobiles.
Remains very high add but just try to draw the dots of a cyclical recovery, which is spend time trying to trying to do that so you have fallen.
Yeah. Thanks, Dave So on the factory plan I.
You mentioned that you expect.
Youre factory planned in Q3 to be the same as Q2 and we saw inventory go up in Q2, what do you think your inventory levels, They do and cutesy and you know what I'm trying to do is try to align youre Tutsi guidance seems to be season, unless as was asked before.
Even the danger of outlook seems to be very in line with novel guidance, but your commentary seems to be more conservative you know certainly you know visibility on the macro side seems to be allergan more difficult. So I'm just trying to.
Get a better sense for.
You know what does your plan for production and Cutesy tell us about your visibility on New York and customers and and didn't have enough demand.
Yeah sure first a couple of things Oh first the environment continues to be uncertain. So a I want to make sure that's a that's clear.
We we remain cautious how this economy will behave for the next several years. Okay. So ah. So that is out there is very important that is a that is part of the way we're looking at this.
The same time.
We want to keep our optionality maximize that optionality.
What that means is a be able to meet a unforecasted demand from our customers like we just did in second quarter and we plan to continue that are in third quarter and beyond.
The the reason we can do that strategically we're just very well positioned that bars that we sell our tend to be the majority of them catalog bars itself too many many customers.
That last a long long time, so if we end up Ah.
Build in a inventory that's inventory is not going to go bad we don't have and will have to scrap it.
So that so that plays a that plays a very well in our favor essentially some various symmetrical bet.
That we're making where they off stays really high the downside is a is limited so we're going to continue calibrating that way.
Great. Thank you for the back we'll go to the next caller. Please.
Thank you will hear now from Toshiya Hari with Goldman Sachs.
Hi, guys. Thanks for taking the question then congrats on execution.
Just wanted to go back to took performance or performance by segment.
Obviously in Q2, it was a significant beat.
In terms of in terms of revenue and Dave. Thank thanks, very much for giving.
Color on a sequential basis some of your end of year over year year over year basis relative to what Youre thinking internally, where did that come from was broad based or was it focused and a one or two businesses.
Well I think that in general if you look at the areas of strength that we had.
Certainly in.
Areas that were driven by.
The work from home.
The Pcs.
Tablets.
The servers.
Those are areas that we saw.
Strength.
Automotive, obviously when things shutdown they shut down.
And.
That was had turned off.
Pretty much like a light switches the numbers would.
Would would show.
And.
I think that inside of inside of industrial you've got the numbers of of down or the 2% or so from a transition standpoint, so yes definitely.
Definitely the strength that we saw.
We had in the work from home areas following.
I do.
You guys know M&A is clearly topical.
The group right now and Russell I was just hoping you could remind us what sort of the criteria is when it comes to M&A for you guys have T I.
And.
I'm sort of a two part question is it fair to say that your your posture is a little bit more conservative or cautious given the current macro and.
And Joe book, geopolitical backdrop, as well where evaluation why or is it pretty much a pretty much a business as usual for you guys on the M&A front. Thank you.
Yeah, No. That's a good question it's interesting the way you frame that so let me.
Hey, first remind everybody our framework and any acquisition that we consider.
Needs to me to criteria of the firstly needs to be a good strategic fit so that means an analog company with catalog.
Cards differentiated barred that then going to auto and industrial because that's what we focus that's where their content growth is happening.
And that would align well with our with our strategy, but the next pieces of the price needs to make sense and that is there once you make the purchasing three four or five years are you, meaning they are the cost of capital you, beating the cost of capital and think of it on a cash and cash standpoint, I missed 100 Bucks in my call forgot that always.
At 10%, what am I gonna get $10 a after tax.
And that investment Guy beat that $10 and get 15 or 20 overtime.
So that is that's our criteria. That's the one would that for many years and we continue to have it on your second part of your question. Yeah. We marked a week conserving frankly, you know in every in any environment like we're going through some today, that's a great time to to make the most of opportunities. So we're we're not concerned about were.
Following the same frame or yeah, we have followed and and based on that framework, we evaluate M&A opportunities but.
More importantly, we're we're continuing to invest internally, we're making our competitive advantage is stronger we continue to invest a in R&D, we haven't scumbag that at all we can do you didn't do math and things like the I Dot com.
And our retail market channels and of course, our manufacturing technology, where we are well we broke ground on the on the new facility the new Oh, the second our fab in Richardson and we're going to be invest into do have the building ready over the next 18 to 24 months, though we continue to do that's it.
Within the company and now he's a great time to do it we're very well positioned from a balance sheet sanborn from a BNL free cash flow standpoint.
A lot better than our competitors. So that's a good time to take advantage of it.
Great. Thank you to ship will go to the next caller. Please.
Thank you will hear from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. Thanks, Let me ask a question and congrats on the strong results.
Good to go into the source of the upside that Dave Rafale, you guys talked about to the work from home side I think everybody understands.
Why that was better but the big question that still outstanding to me is the sustainability of that so can you just talk about the upside surprise do you think it's sustainable I know you're not guiding by end markets you never do but how do you envision the second half of the year in those same area that upside.
Yeah, I, you know Ross Ah I think that and we look at our business a longer term.
We look at where we're investing for growth industrial automotive is.
Where are the investments go, especially industrial.
That's where we expect growth to be when we look at three and five and 10 year growth the perhaps for the next couple of decades. So.
We believe that growth is very sustainable.
And that's that's really where we're focused.
I'll say that or some of the growth that we're seeing.
As due because of the optionality that that Raphael talked about.
Recently updated our customers, we've got 40000 products that we have immediate availability on today.
So if that ER.
The demand is sustainable through the second half you know we've got the products available to ship.
Into any of those than any of our markets a overall in the short term.
But our long term prospects a I think are really would so what's more important follow.
I do thanks for that answer I wanted to switch over to the two product segments. Two main ones analog and embedded just wanted to see if there's any update on your views on the embedded side. I know you said there was a little bit of a restructuring built into that 33 cents gain I guess as a little bit on offset but the big picture question is you're now down to the lowest percentage of sales embedded has been.
And since at least in my model 2012.
In the year over year decline is so much larger than the analog side. So can you just talk a little bit about when do you think that business bottoms out what's sort of restructuring needs to be done do you think that business is a growth driver over time for the company or is it something that we should just envision is remaining a much smaller core that part of the company than it once was.
Yeah, I think when we look at the embedded the business the embedded market as we've talked about before its shares many of the attributes that the analog market does.
And we believe that it will.
To be it has been and will continue to be it contributed to free cash flow growth.
When you look at that business and look at the share gains that it's had look at 16 17 and.
Really the better part of 18. It has had its had share gains you gave some of that back in 19.
Core so.
But here more recently, we talked about last quarter, you saw some sequential growth out of that business all in.
We talked about the fact that without auto you would've seen a sequential growth in that business. This quarter. So I think we're seeing signs of stabilization.
Inside of that business so.
We have taken actions to strengthen that business.
Few dive into that we've got to across Microcontrollers and.
Processors, there's eight businesses.
Three of them actually we've increased the resources.
Two of them, we've actually decreased the resources in three of them have.
I have stayed about the same so that's a portfolio management that you've seen a stake.
Across our businesses over the years so.
We do believe Ah that that business will be a contributor to.
To free cash flow there so theres a lot of.
Work going on to ensure that.
That is.
So okay. Thank you very much Ross and we'll go to the next caller.
Thank you will hear from Chris Danley with Citi. Please go ahead.
Hey, Thanks, guys.
I think you mentioned that you thought there's some inventory build out there I believe you said it was just an industrial can you give us a sense of how much you think that helped and.
What gives you confidence it's not occurring in any other product lines and did you guys notice anything.
Any kind of strength by certain geography is out there.
Yeah, Chris you know.
You know that you've heard the you've heard US talk you've heard me say.
Multiple times in the past that I've joked that have never once taken to a double order or in order to for an inventory build.
And and obviously customers don't market that way when when they send an order and.
So.
That is something that we can't see as I've talked about before with.
60, 65% of our revenue on consignment, we don't have.
We don't have inventory of our product sitting in front of the manufacturing lines. So our visibility ends right there so.
So we don't have a system that tells us if customers are building inventory, but.
Just a when you look at the numbers and you look at the strength and you add things up that's what our intuition tells us. So we're just mindful of that we think it's important just a point that out.
So could it be in other areas that could be but to our belief is it's not it's not significant.
But but but we think it's important to pointed out yeah, and let me just add to that on there on your cost. So your question with them the customer side, let me remind you of the distribution side, where we do have visibility, we drained $150 million of odd distribute the distributor owned.
Inventory that's on top of the 50 million, we doing last quarter. So so far year to date is 200 million and we think we'll be able to drain another 150 million or so for the rest of the year. So we'll probably be enough draining 350 mailing or so of inventory and that makes a lot offenses given the changes in this.
In addition that we're making we're bringing more customers direct. So then we can control nothing but there will be on a essentially on our balance sheet as we as we build more even during our balance sheet. So we can support those customers a direct the other comment I'll make recruited regarding that.
That given that drain now we only have about three weeks of inventory in the dispute channel are down about a week from a from the prior quarter, but I'll tell you that metric.
It's already less meaningful then that it wasn't before and it will continue to be less meaningful as we make that distribution channel smaller.
Over time, so, but I just wanted to give the.
The data points, so usually you have it.
You have a follow up our grip.
Actually it's on that last statement so.
You said that that you've got three weeks of inventory in the Disty channel I guess, if you know if we look at your days of inventory right. Now it's 100 Seventys stem in your balance sheet looks like the feds from from the first glance should we expect this study at the new normal going forward like right around 170 days or or should this be the same sort of dollar.
Our level or I guess, what's what should we sort of calibrate our our models to for inventory going forward at Ti <unk>.
Yeah, well a few comments one is the.
As I, just said a the distribution on inventory, we've been draining for seven quarters in a row.
So you look at the entire eco system right, including the distribution inventory plus our inventory.
Over the last.
Couple of years, while these seven eight quarters is relatively flat right. So you have to.
I think it makes sense, we think it makes sense.
The think about it that way and then the other angle as I mentioned earlier, we talked about in our in our prepared remarks.
As a great optionality that having that inventory gives us.
And we just show that in second quarter, and we'll continue to do it because it is actually metric asymmetric bet that are having that inventory theres, a it's a working capital a cost associated with that but but this crap risk on that is really really low yet the potential upside of serving our.
Customers well with very low lead times in many cases as a as we said immediate availability or we think that a longer term is something that customers.
Do and we'll continue to Bridget.
Okay. Thank you Chris will go to the next caller please.
Thank you we'll take our next question from Ambrish Srivastava.
No.
Hi, Thank you very much.
Dave I apologize for the background noise economic activity is humming along around where I live.
Girls gross margin B.
The margin was much higher than what's a normal flow through model would suggest I was wondering if there's just a factor how no embedded is and that's the mix that's contributing to.
The gross margin being so strong this quarter.
Let's say something else going on.
Because usually you know flat.
Right.
Yeah.
What I would tell you know it's.
As we have guided a for many years you should think of revenue coming in at out at 70% to 75%. That's a good guide due.
To use a over the entire cycle of course anyone quarter could be little more a little less.
And then over the longer term of course, 300 millimeter and continuing to add revenue under under millimeter has a structural cost advantage.
That helps our margin discontinued due to a there'll be a tailwind on margins has been on what can do.
The following a breach.
Oh, yes did back to Microcontrollers embedded on it now that you in looking at the data I'm sure you've been looking at before that is generally and it's good to see that stabilizing and you'll see some signs of stabilization, especially how low it is.
Some insights you could provide us between the connected in the process inside that would help explain the divergence that we've seen from the overall analog over the last.
Three years as you were pointing up first if we look back at two years only the last six or seven quarters hasn't really being diverging from the industry.
Yeah, you know, there's there's a not that much difference in.
The trend between Microcontrollers and the processor business.
And really if you look at the longer trend line and that's really what shared doesn't move around quickly inside of those businesses.
Whether its analog in or embedded overall within a few dropdown into.
Microcontrollers or processors. So again, if you look at kind of 16 and 17 in the three quarters of 18.
Those businesses.
Really did have a real strong track record of share gains.
And the deterioration began happened in.
And in 19.
We are gave some of them back so.
[music].
Again, we're taking the actions to strengthen that business, we believe that.
What we're doing we'll get that business performing and.
Having it to be a strong contributor to to free cash flow. So.
I can't reach and I think we have time for us for one more color.
Please.
Thank you we'll take our next question from William Stein with Suntrust.
Great. Thanks for squeezing me in.
There's a very slow moving but I think long term relatively meaningful risk.
As it relates to.
China trying to develop.
A domestic strong.
Semiconductor capability some might argue that given the current state of affairs, both economically and politically that perhaps there could be some acceleration.
In that regard recently and I'm, hoping you might update us as to what you're seeing from this competitive threat.
Yeah. So just to give you some some thoughts on that or you know we think of that a.
In a waste the monarch as we think our competitors, meaning that our competitor advantage is put us in a in a good place to compete.
Again, the or Americana or you are being a competitor's this as well as a as the Chinese and having one of our own manufacturing with 300 millimeter that puts those that gives us a structural cost advantage. The other one is the is the broadest portfolio in the industry close to 100000.
In parts, and Thats, particularly relevant way of industrial and automotive where.
Indicates of industrial for example, there probably 80000 different customers right. So.
You want to be able to do have been bars suite of a parsing the analog space and embedded space. It makes it more likely that they'll buy from you and makes the investment on the sales the side more worthwhile.
And then.
With the diversity a diverse among the.
We live positions that that that results in do.
And.
And partially because of those advantages and the way that a structure. It's just difficult due to go after it as space right. So when we have seen.
We are companies in China really anywhere where they first go after is a.
The kind of vertical markets in places like memory or or digital spaces that is frankly, just easier to go after Easter do good revenue growing quickly and then you can reinvest that and go from there.
In the analog space, we have you know average prices in the 30 to 40 cents.
Bedded, he's hired and that would not.
Not that much higher.
It's just hard and 80000 different customers that you go after the 100000 different barge is a daunting a pass right nine possible. So we're very respectful of that and our job is to stay ahead of all our competitors might have where they are American European Asian.
So we want to you we should come from doing best that those advantages in manufacturing and in the broad portfolio in a range of channels due to make that climb a even even harder every year.
A follow up.
Yeah.
I appreciate that that answer it sounds like there's no meaningful change recently in this threat ground to many others.
I wanted to follow up on the distribution commentary around I.
I think another 150 million of inventory to go when we think about the 50 million. The 150 done in the quarter and I think you said 150 left in the back half should we think about that as proportional to the amount or to the percentage of distribution business that's going.
To transition this year and is that still on track to finish.
By the end of year.
Yeah. So it is on track to finish by the end of a year and ER and what happens there is by the end of a year. We're just going to have a much smaller distribution footprint the number of distributors.
That Ah that we engage with.
And at the same time.
We have we will have transition a fair amount of customers to the shipping direct.
So then fewer distributor you know what's left on distribution will be with fear distributors more of our revenue.
Going direct and that is yeah, I guess it is proportional to that does that drain of inventory that that you're referring to.
But it also includes a reduction in inventory as of the distributors of will be with us.
As as well that its data, but yeah I'm glad you mentioned I think so yeah. So part of what what that reduction is is that the distributors that are going to that we're going to stay with afforded most bard there'll be a full consignments. So anything that we sell a with them and there's a few exceptions in Japan for example, but other than that.
It will there will be in full consignment, so really the they're going to have zero owned inventory for the most.
So that is also reflect that in the 350.
So I think that wasn't I've questions, let me just.
To wrap up by summarizing what we have said previously we will continue to invest in and strengthened our for competitive advantages, which are many factory on technology portfolio breast market reach and diverse on long lived products. We will also continue to pursue our three ambitions. We will act like owners will own the company for decades.
We will adapt world that's ever changing and we will be a company that were personally proud to be part of and would be proud to have as a neighbor. When we're successful our employees customers communities and owners will all benefit. Thank you very much.
Hey, Kevin that does conclude todays conference. Thank you all for your participation you may now disconnect.