Q1 2021 Texas Instruments Inc Earnings Call
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Please standby we're about to begin.
Thank you for standing by good day, and welcome to the Texas instruments Q1, 2021 earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Dave Pahl. Please go ahead Sir.
Good afternoon, and thank you for joining our first quarter 2021 earnings conference call.
For any of you who missed the release you can find it on our website at <unk> Dot Com Slash IR.
Call is being broadcast live over the web and can be accessed through our website a.
A replay will be available through the web and this call will include forward looking statements that involve risks and uncertainties that could cause ti's results to differ materially from management's current expectations and we encourage you to review the notice regarding forward looking statements contained in the earnings release published.
Today as well as Ti's, most recent SEC filings for a more complete description.
Our Chief Financial Officer, Rafael was already is with me today and will provide the following updates.
First I'll start with a quick overview of the quarter.
Next I will provide insight into the first quarter revenue results with more details and usual by end markets, including some sequential performance since it's more informative at this time.
Lastly, Raphael will cover the financial results some insights into onetime items and our guidance for the second quarter of 2021.
Starting with a quick overview of first quarter, the company's revenue increased 5% sequentially and 29% year over year, driven by strong demand and industrial automotive and personal electronics.
On a sequential basis analog grew 5% and embedded processing grew 7%.
On a year over year basis analog grew 33% and embedded processing grew 17%.
Our other segment grew 12% from a year ago quarter.
Moving on given the current environment again this quarter I'll provide some insight into our first quarter revenue by end market and then some comments on our lead times.
First the industrial market was up about 20% sequentially.
And up almost 30% from the year ago.
The strength was seen across most sectors.
The automotive market was about even compared to a very strong fourth quarter 2020 and.
And up about 25% from a year ago.
Compared to the pre COVID-19 levels of fourth COVID-19, our shipments to Automotives and both the fourth quarter of 2020, and the first quarter of 2021 were up about 25% as we work to help our automotive customers recover from their supply chain disruptions.
Personal electronics was down about 10% sequentially and up about 50% compared to the year ago.
The strength was broad based across sectors and customers within personal electronics.
Next communications equipment grew in the high teens sequentially.
But was about even from a year ago.
Enterprise systems grew upper single digit sequentially and was down about 10% from a year ago.
Regarding lead times over 80% of our products have steady lead times and more than 50000 parts have off the shelf availability via Ti dot com.
However, the growing demand and the first quarter of 2021 did expand our list of hotspots, which required extending some lead times.
We will continue to add incremental capacity and 2021 and the first half of 2022 with additional support from the startup of our third 300 millimeter wafer fab our fab two that will come online and the second half of 2022.
As discussed during our capital management review and February our competitive advantage of internal manufacturing and technology delivers the benefits of lower costs and greater control of our supply chain, which really shows through in a market environment like this.
Raphael will outlook and review profitability capital management and our outlook.
Thanks, Dave and good afternoon, everyone.
First quarter revenue was $4 3 billion up 29% from a year ago growth.
Gross profit and the quarter was $2 8 billion or 65% of revenue.
From a year ago gross profit margin increased 250 basis points.
Operating expenses and the quarter were $811 million up 2% from a year ago and about as expected on a trailing 12 month basis operating expenses were 21% of revenue.
Over the last 12 months, we have invested $1 $5 billion and R&D.
Acquisition charges, and noncash expense were $47 million and the first quarter.
Acquisition charges will remain at about this level through the third quarter of 2021, and then go to zero.
Operating profit was $1 9 billion and the quarter or 45% of revenue on.
Operating profit was up 56% from a year ago quarter.
Net income and the first quarter was $1 8 billion or $1 87 per share, which included a <unk> <unk> net benefit that was not in our prior outlook, primarily due to a discrete tax benefit which was partially offset by about $50 million of utility costs related to the February winter.
In Texas most.
Most of this expense is and our cost of revenue and reported in our other segment results.
Let me now comment on our capital management results, starting with our cash generation.
Cash flow from operations was $1 9 billion and the quarter.
Capital expenditures were $308 million and the quarter free cash flow on a trailing 12 month basis was $6 3 billion.
In the quarter, we paid $940 million and dividends and repurchased $100 million of our stock and.
In total we have returned $4 5 billion and Nebraska 12 months.
Over the same period, our dividend represented 56% of free cash flow underscoring its sustainability.
Our balance sheet remains strong with $6 7 billion of cash and short term investments at the end of the first quarter.
We will retire $550 million of debt in the quarter, leaving $6 3 billion of total debt with a weighted average coupon of 277 to seven and 7%.
Regarding inventory inventory dollars were down $65 million from the prior quarter and days were 114.
For the second quarter, we expect revenue and the range of 4.132 for $4 7 billion and earnings per share to be and the range of $1 68 to $1 92.
We continue to expect our annual operating tax rate to be about 14%.
In closing, we continue to invest and strengthen our competitive advantages and and making our business stronger with that let me turn it back to Dave.
Thanks, Raphael operator, you can now open the lines for questions and in order to provide as many of you as possible the opportunity to ask a question. Please limit yourself to a single question. After our response, we'll provide you the opportunity for and additional follow up operator.
Thank you to signal for a question. Please press star one on your telephone keypad also if you are using a speaker phone. Please make sure. Your mute button is turned off to allow your signal to reach our equipment. Once again. It is star one at this time for questions and.
First we'll go to Chris Danley with Citi.
Hey, Thanks, guys.
Q1, clearly was very strong well above seasonality and above guidance. However, your sequential guidance that flat is well below seasonality. So my question is are you guys seeing.
Cancellations and push outs.
By that such weak guidance after a strong Q1.
Yes, Chris.
Thanks for that question, we arent seeing cancellations or push outs I would just say that if you look.
To your <unk>.
<unk>.
Q1 was very strong both sequentially and year on year, so at the midpoint.
Our second quarter will be a strong quarter.
And from a year on year standpoint, you have a follow on.
Okay.
Yes.
So just be a follow on to the first question and this would be the lowest sequential guidance you guys have Kevin and sometimes so I guess why not why not guide for a seasonal or even close to seasonal sequential guidance.
Yes.
Chris is just it is the best estimate that we have.
For our revenue for the quarter.
And.
Again, I would describe it as.
Following a very strong first quarter.
It will it will be a strong quarter again.
So okay. Thank you we'll go to the next caller.
And next we'll go to Stacy Raskin with Bernstein research.
Hi, guys. Thanks for taking my question on.
I wanted to talk about your inventory strategy I know you have a strategy to build out inventory for customer service.
I guess, how do I reconcile that with the fact that your inventory dollars are down and Youre still getting some pockets of lead time.
And we can does that just a function of demand pull that's just how strong you can't keep up and I guess and that light how do you parse the quality of those orders.
And Youre getting how do you know.
I mean, you just shipping whatever is being and store at this point and I guess on like what are the plans the loadings and inventories.
We go into Q2, youre going to try to replenish the inventory that's been great.
Yeah. So thanks, Ron a question on safety.
So first let me step back and remind everyone inventory. Our objective there is to maintain high levels of customer service. Many mines, while we minimize obsolescence and improve on manufacturing utilization and.
And as you alluded in the question.
We would prefer to have higher levels of inventory in fact, what 60 days ago a day.
Capital management strategy, we increased the target for inventory to 130 to 190 days up from 115 140 volume prior to that so yes, we'd like to have more inventory, but and the current environment.
We're focusing our capacity on fulfilling demand.
Not on building inventory whenever things.
Slowdown was at some point and there will or and or as we increase capacity, which we are increasing capacity incrementally.
Have been and will continue to do that through the balance of this year and through the first half of next year.
And then and the second half of next year, we will have our first output from our five two.
Those things come together, then we will be able to do to build the.
More inventory.
I know you've had a couple of other parts of that question, but once you use your follow up for Ed If I Miss something.
Okay I'll use the follow on a lot.
And as a result.
So how are you parsing the quality and the orders that youre getting all shipping whatever is being ordered at this point.
Yeah, and I'm glad you I'm glad you chose that one as a follow on.
I'll just highlight a few.
Now we have moved away.
From distributors over the last couple of years really its been more of a 10 year process, but and the last few years.
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And we pulled the trigger and actually no longer ship into too many distributors that we used to and now we're going direct with a lot of our customers.
And to the point, where we exited last year with almost two thirds of our revenue shipping direct that has put us in a great position, particularly in the current environment.
Because we have we now have more direct access to those customers who have a better understanding of what they really need we have we don't have that intermediary in between frankly clouding things up.
And frankly, that's the way it happened a lot.
With the distributors so.
And we use that information to.
To better allocate our resources, both inventory and manufacturing et cetera in order to fulfill.
Demand from our customers.
And that's great. Thank you Stacey and I will go to the next caller. Please.
And our next question will come from John Pitzer with Credit Suisse.
Yes. Good afternoon, guys. Thanks for let me ask the question.
And that original but a follow up to the June revenue Guide I'm. Just curious Rafael you said that you would be growing supply sequentially from March to June so the implication is.
Might be able to build some inventory and your own balance sheet I'm, just curious given how lean inventories are.
Across the channel.
Why would you wouldn't expect incremental supply that you bring on not to be used by your customers and actually show and excuse me sequential revenue growth.
I think youre getting.
Little new ones and that question, a pick and big and some other things I've said, just I would I would tell you.
We drained inventory.
Fourth to first.
So even if we're increasing output that doesn't necessarily mean that we'll be able to build inventory.
What I said earlier, you shouldn't take that as a statement that we're going to build inventory going into the second quarter and.
I would add that we're going to add incremental inventory.
And incremental capacity through.
The balance of this year and through the first half of next year until our fab two comes on which would be and the second half of 2022.
So you've got multiple pieces that are moving there follow on John Yes. It's just it was nice to see and the March quarter and embedded at least sequentially growing faster than analog and and we've talked about this and the past Dave about kind of the the growth. There has kind of lagged that of analog do you feel like within the embedded market youre turning the corner.
And it can you help us kind of understand how you guys see the design funnel, there and what the growth rate and that market might be beyond kind of the cyclical recovery.
Yeah, I'll give you a few a few comments on net and David do you want to you on a follow up but high level and we're pleased with.
With the trajectory of embedded.
However were still even very early phases rider as we have said before our goal with and embedded was firstly to stabilize.
On a stabilized embedded and make some some changes that we have made on and then leverage our competitive advantages.
That we have to to have embedded headed and a better direction and.
And we are and the early phases, but we're pleased with those early results.
Great. Thank you thank.
Thank you John and we'll go to the next caller. Please.
Moving on we'll go to Craig head and Bock with Morgan Stanley.
Yes, Dave Thanks for the color on lead times I guess on the hotspot maybe.
And maybe 20% or so that's been and package can you just give a sense of what you're seeing there and navy.
And when you would expect that the lead time and certain areas.
On the lines.
Yes, Theres, just a lot of moving pieces on that Craig.
I think it's probably premature to try to.
Hi.
Pick that.
And our teams are obviously working very hard with customers too.
Close those demand.
And fulfill those needs.
It releases based on technologies and packages and what those customer requirements.
And those customer requirements are.
You have follow on.
Yes.
Sure Thanks and.
And then personal electronics up 50% year over year I know, there's been some nice tailwind from work from home.
Any more color in terms of some of the segments that you are seeing growth and how you feel about that business for Q2.
Yes, so at a high level, what I'd say, we'll give color on.
By end market, if there is something unusual going on.
When we look out into a quarter I can say that there is nothing unusual.
On that that we feel the need to call out when we look back into first quarter and really in the.
On the past few quarters and personal electronics the.
And the demand that we've seen there has been.
Very broad based.
Both by customer.
And really across the board that we've seen.
As well as by sector, So and just as a reminder.
Inside of personal electronics will have.
Things like handsets and tablets and.
And personal computers, and including laptops televisions smart speakers those types of things so it's a pretty broad category printers.
So it's pretty broad categories, and I think there is 910 different sectors that make up on a person.
Personal electronics so.
And we've seen very strong demand across really across all of those.
This is Rafael I just wanted to go back to the question on lead times and then.
And earlier several people asked about inventory at the end of the day.
Things are going to be tied a slowing of demand ahead of supply things are going to be tight and our lead times are going to be tight.
But the key point here is we own our own manufacturing and technology right that is a key differentiator versus on competitors. It is one of our competitive advantages.
And so we are in.
And that strategically and a unique strategic position to be able to have that control that inventory be able to add to that capacity incremental and Florida next year, and a half or so but they are more significantly after that and when RFS II is built and it starts to get equipped so so that's a big difference versus our competitors and there is really puts us in a.
And a much better position to fulfill customer's demand both short term and more importantly over the long haul.
As we continue to focus on industrial automotive all of those customers that are in those and those great spaces.
Good color, yes. Thank you.
Okay. We'll go to the next caller please.
Thank you and that will come from Harlan sur with Jpmorgan.
Okay.
Good afternoon, and thanks for answering my question.
On the extended lead times, and maybe a different way to ask the question. You also asked about 20% of your wafer requirements. Most of it and is embedded and you outsource 40% of your test and Assembly I'm. Just wondering if this is where youre seeing maybe more of the extended lead times just given the capacity is tight at your outsourced partners or.
Or is it spread across both internal and outsource manufacturers.
Yes, it's not.
It's not specifically there Harlan it really is more just based on technology and market driven or on a package types.
So we've described it as hotspots, so it's kind of a combination of those things when.
We've got demand that is outstripping the short term supply but back to Ron.
<unk> point.
Fact that we do the majority of that the Assembly test and house most of our peers don't do that.
Most of our peers have that.
And the assembly outside.
So even at 60% 70%.
Large number that we control and and do in house.
Also because we do 80% of our wafers.
And in house.
We can expand that capacity incrementally.
Also we control the cost.
And to a much higher degrees and then our peers as well.
And those are very important things.
In times like these so this is a tremendous advantage.
And on top of the fact that 300 millimeter, where we're adding capacity so it's coming and it's structurally lower costs. In addition to it. So you have a follow on.
Yes, no. Thanks for the insights there so.
Good good again can see the year over year momentum and the embedded business and I know somebody tried to ask a question about this.
Previously, but wondering if you could just.
I know you guys, we focus some of the sub segments within embedded last year. Just wondering if you guys could give us a profile of embedded relative to the overall corporate profile and does it have the same and market exposure as the overall business or is it more skewed towards one on particular end markets and on the go forward.
And just like what end markets within embedded are you spending more R&D dollars.
Yeah, So I think that.
What the investments that we have and embedded.
We have directed.
At at the best growth opportunities, so and as we took a step back we wanted to focus them into that direction there.
And they're biased towards industrial and the automotive markets.
The largest portion of our revenue are pointed in that in those two markets.
And as well we.
We do have a little bit of revenue in communications enterprise and P inside of that but.
The majority of the revenue is and.
And those two markets so again as Raphael said.
And the early stages.
Our first objective was to.
To get the revenue stabilized so we feel very.
And good about the progress that we've made so far.
And we're making the investments there because we believe embedded and will be a great contributor to free cash flow growth over the long term so.
We believe that.
Several years from now we'll look back and we will be very pleased with the investments that we've made will be very pleased with the free cash flow growth.
Embedded pools have contributed to the company so.
Okay. Thank you heartless and we'll go to the next caller. Please.
Thank you and that will come from and bearish Srivastava with bank of Montreal.
Hi, Thank you very much.
Just a question on the.
On the order patterns that youre seeing guys many of your peers.
<unk>.
And have talked about no cancellations policies.
First itself of the business, we haven't seen and.
And you could say never but I.
Are you seeing that customers are looking for commitments to capacity and then as a result.
And we're having to change your clauses.
Customers in terms of.
Cancellation policy or what have you.
Are there any changes on that front.
Yes.
So.
We don't think that Thats.
It's a good idea to go down that path.
Force customers to <unk>.
Tell us what.
What they need a year from now.
On.
You can demand that they tell you what they need.
In April or May of 2022, but I can assure you they don't know what they need a year from now.
We really want to be in a position, where we can supply them, what they need and.
<unk> be a supplier that they can count on.
As well.
Our.
The competitive advantage of manufacturing technology, and owning and controlling that.
Our manufacturing asset also gives us control of our cost there. So we haven't been in a position where we've had to go in and raise prices.
As many of our other peers have so.
And we believe that those two things combined are translating into and the share gains right. So on.
And when you look at the revenues and this quarter. We believe part of that is share gains and quickly also point out that you've got to measure that over time.
Don't look at <unk>.
And our measured over just one quarter.
But.
We do believe that that will be something that will benefit us for a very long time to come.
And a follow on on bridge, yes. It did.
Just a quickie on the capacity and Capex and.
Intensity, we shouldn't be modeling a different intensity over the next few quarters correct, we should be within the guidance range that you've given as you build towards that and then is that second half 'twenty to a pull in versus what you were expecting.
So no it's not a bull and Thats about what we have always I expected, but now let me answer that first of all your question.
As you as you know very well you've been following us for a while.
We've talked about our guide for Capex as a percentage of revenue.
About 6% we did that.
No.
And at the capital management strategy meeting and that is Thats, a valid number over the long term.
And it's just a model.
To help you.
You think about our our capex.
But the reality is that in the short term for two to three years, we're going to run higher than that.
In absolute terms and also as a percentage of revenue as we continue to invest.
Both.
Short term to to get ahead of the of the current situation, but more importantly longer term as we continue to strengthen our competitive advantage.
And having our own manufacturing technology and <unk>.
<unk> 300 millimeter and as we've talked about provide such assets is a great.
Structural cost advantage and controlling our own.
And our own manufacturer and supply and being as did clearly during this pandemic and cycle has is proving worthwhile.
Okay. Thank you Andre and we'll go to the next caller. Please.
Thank you and that question will come from Timothy Arcuri with UBS.
Thanks, a lot Dave I guess I also wanted to ask about the guidance.
No. There is from school of thought that because you control your supply chain and that your model and inventory would sort of drive some share gains and some more upside given what's going on and I know that you are typically conservative and you have a very tough comp on Q1.
And I wonder if maybe customers are not pulling your product because of shortages elsewhere, because it just is sitting there and consignment anyway waiting for them and.
The question is are you hearing that from any of your customers that they're not pulling due to shortages elsewhere and maybe that's contributing somewhat to your June guidance.
Tim we think that that probably goes on.
At any point.
And though we don't believe that Thats.
Going on at any significant.
And any significant level.
So yes, so we don't believe that Thats.
A significant factor thats.
Going on and second quarter.
Follow on.
Yes, yes, I do so I guess I'll ask the same thing that I asked last quarter about the share repo and I know that you guys always say that free cash flow and only matters. If it's if it's returned but you didnt buyback much again this quarter its like $130 million over the past nine months.
And it's sort of seems like maybe a bit of a pattern now that its three quarters in a row, so and I know you have a pretty strong and intrinsic value model for your stock. So can you just talk about that thanks.
Yes, sure and I'll. Thanks.
Firstly on stepping back.
As you alluded to our our goal our objective is to return all free cash flow to the owners of the company.
Over the long term and if you look at on our.
<unk> 15, and 16 year history on that front.
We have been returning all free cash flow and then some.
So the owners of the company.
And we're going to continue doing that over time now over time over the long term that means.
That doesn't necessarily mean every quarter and certainly not every quarter and maybe not even every year, but over.
The long term, we're going to return all free cash flow to the owners of the company, we do that through both dividends and buybacks and theyre different criteria that we look at it.
And for each of those and we've talked about that.
Okay, We've got time for one more caller.
Thank you and that question will come from tore Svanberg with Stifel.
Stifel.
Yes, Thank you and.
Regulations on the record revenues and net earnings.
The first question.
Dave will Rafael could you step back.
Just looking at the last 90 days what is it exactly that changed this last quarter.
And the orders continue to accelerate the capacity situation is and maybe just walk through exactly what changed.
I'll give you a few.
A few comments and I'm not sure if I forever when Youre looking for video on demand continues to be strong.
We're still in an environment where demand exceeds supply.
Capacity right now of course, we are.
Our revenue has continued to grow in that environment on both year on year, clearly, but also sequentially right.
And we are incrementally adding capacity.
While we do that we're on.
Also in the.
While we have done that we have over this entire cycle.
We have.
Our focus on making the company stronger right. So we have back if you look at the first phase of this.
This pandemic.
In February or March when everybody was pulling back we built through that cycle. So that was a.
A tactical decision enabled by our strategic position.
And of our focus on industrial automotive on catalog kind of on.
On the bars with low risk also lessen so we're able to build through that cycle and we prepare for it for the other side once demand.
Started returning pretty quickly to turn out well.
We also as we did that we also gain that strategic ground focusing on add on on.
On auto and industrial so.
And so you've seen.
And how we have grown and those are in those spaces and while we have done that we have invested for the long term right in and Thats invested and competitive advantage of the most obvious one.
Is the manufacturer and technology, we already talked plenty about that here, but there is also our product portfolio will continue to strengthen their R&D and the best basis and then the other one for each of our channels, which we really haven't talked about today, much but will continue to strengthen that and maybe.
And maybe the most obvious one and as tier dot com and everything we're doing there.
To support our customers with.
Very very high availability, and fact immediate availability and a lot of cases with many parts.
Inventory, therefore for customers to buy direct from us on Datacom.
And a voluntary.
Yes. Thank you.
On your operating margin and I think it was just shy of a record.
At 45, 2%.
Rafael in the past you've talked about opex kind of being between 20 and 30% of revenue now now that it's pretty obvious that there's so much demand out there and that it is sustainable is it safe to say that that opex ratio is going to change going forward and maybe stay at 20% to 25%.
Yes, so what I would tell you on that is in the short term we were on Opex on a trailing 12 month basis and about $3 $2 billion.
And I'm going to change margin the short term rate because.
Because it doesn't need to we feel very good about those investments we feel very good about where they're going they're long term in nature.
On.
Clearly and R&D, but also part of SG&A as is.
If you have a common example.
Think of that is on investment of course, even those and is in SG&A.
And so I don't see that number and the short term change and much Boulevard and long term.
And many years the guidance that we have given you of of 20% to 25% still apply and so as we you should still think of it.
And those terms.
Okay. So I think that was the last one and so let me go ahead and wrap up by reiterating what we have said previously on our core where engineers and technology is the foundation of our company, but ultimately our objective and best metric to measure our progress and generate long term value for our owners is the growth of free cash flow per share.
While we strive to achieve our objective and we will continue to pursue our three ambitions. We will act like owners, who will own the company for decades, we will adapt and succeed in a world that's ever changing and we will be a company that we're personally proud to be a part of and would want us our neighbor and.
And were successful our employees customers communities and owners all benefit. Thank you and have a good evening.
Thank you and that does conclude today's conference we'd like to thank everyone for their participation you may now disconnect.
Yes.
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