Q1 2022 Texas Instruments Inc Earnings Call
Please standby were about to begin.
Good day and welcome to the Texas instruments first quarter 'twenty two earnings release conference call.
Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Dave Paul. Please go ahead Sir.
Good afternoon, and thank you for joining our first quarter 2022 earnings conference call for any of you who missed the release you can find it on our website at <unk> Com Slash IR Scott.
This call is being broadcast live over the web and can be accessed through our website at.
A replay will be available through the web. This call will include forward looking statements that involve risks and uncertainties that could cause ti's results to differ materially from management's current expectations.
We encourage you to review the notice regarding forward looking statements contained in the earnings release published today as.
As well as Ti's, most recent SEC filings for a more complete description our chief Financial Officer. Raphael is already is with me today and will provide the following updates.
First I'll start with a quick overview of the quarter.
Next I'll provide insight into first quarter revenue results with some details of what we're seeing with respect to our customers and markets.
And lastly, Raphael will cover the financial results and our guidance for second quarter, including the impact from COVID-19 restrictions in China.
Starting with a quick overview of first quarter.
Revenue in the quarter was $4 9 billion, an increase of 2% sequentially and 14% year over year, driven by growth in industrial and automotive as well as enterprise systems.
Analog revenue grew 16% embedded processing grew 2% and our other segment grew 27% from the year ago quarter.
Now, let me comment on the environment in the first quarter to provide some context on what we saw with our customers and markets.
Overall, the quarter came in about as we expected across product segments and markets and geographies.
The market environment in the first quarter was similar to what we've observed for the last several quarters.
Customers continued to be selective and they're expedite requests focusing on products that completed a matched set rather than expediting products across the board.
This behavior was not specific to any product family end market or geography.
Moving on I will provide some insight into our first quarter revenue by end market from the year ago quarter.
First the industrial and automotive markets were each up about 20% and both were driven by broad based growth across sectors.
Personal electronics was down mid single digits off of a strong compare.
And next communications equipment was up about 10% and finally enterprise systems was up about 35% off of a weak compare.
And the growth was primarily from data centers and enterprise computing.
Rafael will now review profitability capital management, and our outlook Raphael.
Thanks, Dave and good afternoon, everyone.
Dave mentioned first quarter revenue was $4 9 billion up.
Up 14% from a year ago.
Gross profit in the quarter was $3 4 billion or 70% of revenue.
From a year ago gross profit margin increased 500 basis points as.
As a reminder, we had about $50 million of additional utility expenses in cost of revenue related to the winter storm in the year ago quarter.
Operating expenses in the quarter were $830 million about flat from a year ago and about as expected.
On a trailing 12 month basis operating expenses were $3 2 billion or 17% of revenue.
Restructuring charges were $66 million in the first quarter and are associated with the <unk> purchase we closed in October of last year.
Operating profit was $2 6 billion in the quarter or 52% of revenue.
Operating profit was up 32% from the year ago quarter.
Net income in the first quarter was $2 2 billion or $2 35 per share, which included a <unk> <unk> benefit that was not in our prior outlook.
Let me now comment on our capital management results, starting with our cash generation.
Cash flow from operations was $2 1 billion in the quarter.
Capital expenditures were $443 million in the quarter and $2 $6 billion over the last 12 months.
Free cash flow on a trailing 12 month basis was $6 5 billion.
In the quarter, we paid $1 1 billion in dividends and repurchased $589 million of our stock.
In total we have returned $5 billion in the past 12 months over.
Over the same period, our dividends represented 62% of free cash flow.
Our balance sheet remains strong with $9 $8 billion of cash and short term investments at the end of the first quarter.
Total debt outstanding was $7 8 billion with a weighted average coupon of two 6%.
Inventory dollars were up $150 million from the prior quarter to $2 $1 billion and days were 127 million up 11 days sequentially, but still below desired levels.
For the second quarter, we expect Ti revenue in the range of four 2% to $4 8 billion and earnings per share to be in the range of $1 84.
To $2 26.
This outlook comprehend and impact due to reduced demand from COVID-19 restrictions in China, which are affecting our customers' manufacturing operations.
We continue to expect our annual operating tax rate for 2022 to be about 14% and our effective tax rate to be about a point lower.
In closing, we will stay focused in the areas that add value in the long term, we continue to invest in our competitive advantages, which are manufacturing and technology.
<unk> product portfolio.
Each of our channels and diverse and long lived positions.
We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term with that let me turn it back to Dave. Thanks, Raphael Operator, you can now open up the lines for questions in order to provide as many.
Of you as possible the opportunity to ask your questions. Please limit yourself to a single question.
After our response, we'll provide you an opportunity for an additional follow up operator.
Thank you.
I'd like to ask a question. Please single by pressing star one on your telephone keypad.
If youre using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if you'd like to ask a question.
Our first question from Stacy <unk> with Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my questions.
First of all I was wondering if you had any feeling for the size of the gap in revenue that's getting impacted by the COVID-19 issues in China do you have any view for like like what demand would be if you.
And like our the customers like getting out of line at all or is the overall demand and order environment like kind of where it was you just can't.
But any color you can give on on the size of that gap would be helpful.
Yes Stacy.
Comment on that.
Assessment in early April indicated that revenue would continue to incrementally grow again in the second quarter.
However, as it became clear that we are experiencing lower demand, particularly due to COVID-19 restrictions in China.
And just to be clear.
Customers' behavior.
Isn't changing.
As it related to backlog or cancellation in fact, we continue to.
Expedites.
For deliveries however.
However.
We did see that our customers' manufacturing operations.
Were being impacted.
So as a result.
The approach that we took we just took a top down assessment and just reduce the midpoint.
Second quarter.
By 10% and so.
Roughly $5 billion at the midpoint to the $4 5 billion that you see in the second thing. We did was we slightly widened the range just to comprehend the higher.
On certainty that that we're seeing overall you have follow ups.
I do think and Thats helpful.
I'm just wondering if the fact that you guys have mostly internal manufacturing and you're trying to go most direct does that imply I mean do you have to ship more direct to your customers in China do you think that these kinds of issues would impact you more than the broader industry or do you think this is something that everybody is going to have to be dealing with that to the same degree.
Steve here.
This is primarily due to issues with our.
Operations at our customers.
Our factories and it is not related to those ship in.
The direct or through distribution or anything of that sort.
Thank you Stacy and we'll go to the next caller. Please.
Absolutely we'll take our next question from Vivek Arya with Bank of America Securities. Please go ahead.
Thank you for taking my question. The first one also related to China do you think this is.
It's something you can recover as this demand destruction or is there something you can recover.
And then along those lines, how would you characterize demand, excluding China customers, where there were no other.
All of these kind of restrictions in place.
Yeah Vivek.
The approach that we took.
It was really just a tops down 10.
10% assessment of what the impact would be so I wouldn't.
Look at that as any precision.
In choosing that number.
The reason why we widened widened the guidance I think trying to get into predictions of of what could happen as the quarter unfolds.
Time will tell and we'll see how that.
Unfolds, and we'll report that when the when the quarters over so.
It's really the approach that we took at trying to assess what was going on follow up.
Yes, Thanks, Dave.
Are you managing your fab utilization in your inventory.
Inventory it seems like Youre, implying gross margins down.
The 100 basis point sequentially. So just curious how you are managing fab utilization, because I thought I heard Rafael let's say that U S steel.
Hello, your target inventory level. So do you continue to.
Plan and build more inventory during the quarter.
Yes, so a couple of things of that question, let me try to address.
Most of them, we our factories.
Running at high levels of utilization as they have been over the last couple of years really.
Continuing in fact, we'll continue adding incremental capacity.
As we have said, we would and the next step beyond incremental will be ones RFS two stars.
Production in the second half of the year and then <unk> in the first quarter of next year of 2023, while at the same that we're breaking ground.
Later this year for the Sherman factor, so we're going to continue running our production high.
We are going to build inventory inventory did build.
$150 million in this last quarter, we just reported but.
But were still below desired levels. So our intent is to is to continue building that inventory that is.
Our objective is to maintain high levels of customer service, then roughly our target of 130 to 190 days, but we want to be at the high end of that and we would not be uncomfortable even above the high end of that of that range.
Okay. Thank you Vivek and we'll go to the next caller. Please.
Thank you, we'll hear next from Ross Seymore with Deutsche Bank.
Hi, guys. Thanks for let me ask a question I guess, if the China side is weak and I guess, 10% is as good a number.
As anyone can come up with but to the extent theres shortages occur.
Across the industry and demand elsewhere. It doesn't sound like it's changed from part of your preamble, Dave why wouldn't disallow a little bit of the Fungibility of your standard product shipments to just increase to those customers and shortages to make up for the shortfall that you're otherwise going to see in China.
So yes, that's a fair question and that's already embedded in our in our process to the extent that that is.
Doable.
Our processes allow for for that redirecting.
Inventory, but keep in mind, when you're talking about 100000 different bars.
Different customers 80000 different parts, so it never quite fits in a perfect situation, where where they exited in one place can go to the other plays neatly right.
And then the only thing I would tell you just like Dave stressed a couple of times. This is a tops down SD.
<unk> assessment on on that adjustment.
Not meant to imply precision.
And maybe I'll just add to that too.
Ross.
Behavior that we've talked about now for a couple of quarters that we've been seeing as customers.
Being more focused on mass sets in.
Can be symptomatic.
Growing customer inventory that's out of mix. So even though we might have some parts that are available in one region customers may not need them and the others. So you have got multiple dynamics at work there you have a follow on.
I do.
Since kind of weak collectively you would be giving you guys. Some grief over the last couple of years for not really buying back any stock. Despite youre, 100% cash return goals. This.
This quarter, you did and it seems like you've got pretty darn close back to that 100% return what changed.
So Ross you've known us for a long time.
How do we think about.
Cash return, but just.
For everybody else.
We've talked about those are in capital management every quarter our objective when it comes to cash returning to return all free cash flow to the owners of the company, we do that through dividends and repurchases and we've been really consistent in how we do that and we have a really good track record. So we have done that and are committed to continuing to do that.
Okay. Thank you Ross will go to the next caller please.
Thank you, we'll hear next from Cristina <unk> with Citi.
Hey, Thanks, guys.
So given all of these.
Covid issues in China, and the shutdowns, but then.
No change in the rest of or do you expect the shortage situation at Ti and in semi is to get better or worse from this or do you think it will be no change.
Yeah.
Yes, I'll take a first shot and Raphael if you want to add.
We're not trying to predict.
The cycle or call.
Even the out quarters of what's going on.
I think what we will continue to do and how just how we approach them as independent of psychosis, just staying focused on.
Building the company stronger for the long term and that includes things like adding handy.
Manufacturing capacity that we have investing in R&D investing in new capabilities. So those are the things that we can control.
And that's what we'll stay focused on.
Follow on Chris.
Yes, so if we take the COVID-19 issues in China outside.
Now.
Any sort of end market commentary, you would make anything a little better or worse than your expectations either during the quarter going forward.
Yes.
<unk> came in I'd say about what we expected we were just slightly above that.
End of our range.
Overall.
The quarter was <unk>.
Driven by the industrial and automotive markets, we did see.
<unk>.
Strong growth in enterprise systems, as we had had talked about that was primarily from data center and enterprise computing.
Now Thats, a small part of our revenue.
You saw it grow strongly last quarter.
As you look over.
The coming years that probably will continue to be a strong grower.
But it's just not a very large portion of our revenue so.
We continue to be pleased with the growth that we're seeing in industrial and automotive.
That.
When you zoom out for a second.
That is where the strategic focus has been.
For the company.
And so we're pleased to see that turn into growth longer term.
Thank you, Chris and we'll go to the next caller. Please.
Thank you we'll hear next from Joe Moore with Morgan Stanley .
Great. Thank you I Wonder if you can address first in terms of <unk>.
Seeing strong expedite activity.
<unk>.
The constraints that you guys are still seeing coming from your internal fab capacity from foundry backend can you just kind of give us an idea of where the bottlenecks are.
So I'll start out first I want to.
Maybe just what your premise is a little bit.
We are still seeing some exercise, but as David mentioned, a couple of times customers continue to be selective in how they are expedited. So there are continued to focus on the match set okay. So it's not just expedited.
Across the board.
Second specifically on what you said.
Second the second part of your question.
While we are seeing is primarily based on.
How how our customers manufacturing operation is.
Are being affected in China.
And we're able to meet many of those expedite requests as well. So I think your question more Joe is where we do have constraints, what's driving those.
And.
That's not specific to any product or.
Any particular area can it can move from one quarter to the other it may be <unk>.
<unk> technology, it could be a packaging technology.
Other things that May drive it that our teams work with customers on.
To meet those needs you have a follow on.
Yes, I also was curious about.
Rising to the extent that your competition has kind of passed along foundry price increases in his raise prices have you guys reacted to that end.
Can you give us any sense for what your pricing is down on a like for like basis.
Yes, so a couple of things first.
On the input cost side of things.
Part of our one of our competitive advantages is manufacturing and technology.
We own the vast majority of our manufacturing in fact on the front end over 80% and our goal is to grow that to 90% over the coming years, so that puts us in a really good situation.
To not be beholden by.
So the mercy of what those foundries are sub cons.
Due in terms of pricing right. So we have much better way to handle those input costs. So thats on the input cost side of things on the on the pricing in general.
Our pricing with our customers our process on that has not changed.
Our process is to price to market.
As prices have moved up over the last two or three quarters and Thats certainly did happening in first quarter, we have moved our prices as well and growth in first quarter did benefit from from the pricing tailwind.
Okay. Thank you Joe will go to the next caller please.
Thank you we'll take our next question from Timothy Arcuri with UBS.
Thanks, a lot I just wanted to push on this 10% that you.
About the.
The haircut for June .
The lockdowns seem like they're already getting a little bit better they are seeming to kind of loosened up a little bit. So I guess the question is does the 10% assume that the situation persists through the month of June or if it gets better between now and June .
About 10% proved to be Conservative and then I had a follow up as well.
Yes.
And I know, maybe its unsatisfying, but I'll just.
Repeat what we said before this is a top level.
<unk> does not meant to imply precision.
In fact, just like we said earlier, we even widen the range to the <unk>.
Reflect that are higher and start with diesel.
Time will tell and we'll report 90 days from now we will see we will see where things land.
Got it and maybe as my second yeah, Yeah. Thanks, David So I guess my second question is this is a question that Ross asked before but if customers are so tight.
And if the Lockdowns are certainly going to be transitory I would think.
It seems like customers will just take the product that they would put it into inventory. So obviously during the past three weeks you opted to take this big cut the guidance, but is that because they're pushing out shipments.
Or is it because they just can't accept shipment of your product I mean, it seems like it has to be the latter versus then pushing out shipments are not pulling from consignment because.
Everything is tight and the whole the whole change trying to build inventory.
Sure Yes.
Tim I think we've.
We've talked about now for a couple of quarters that we've observed behavior were.
Customers' behavior really shifted to focusing on those match sets and as we've talked about that can.
It can be.
Symptomatic of.
Of growing customer inventory, that's just not a mix right. So.
And.
With that we've got tens of thousands of products that are immediately available on Ti dot com. So.
They can get more <unk>.
Productivity I wanted it if they are indiscriminate of the types of products that they need but <unk>.
Increasingly they are there.
They're trying to find those match sets to complete those.
Those bills, whether that's our product in some cases a lot of times it's.
Our peers products in the industry and sometimes it's maybe not even a semiconductor product.
That they need to complete.
There are system to get it out to get it out the door. So.
Yes, so just to say just because you have.
Have a product sitting their customers just indiscriminately arent arent taking product.
Let me just add to that and Tim if I understood. Your question correctly, you're asking tactically of whether the customers.
Where is the bottleneck for our customers in China, and not being able to to run their operations.
Operations were seeing cases, where factories are shut down and they just will not accept they cannot assert deliveries in other cases, the freight forwarders will not take.
Our parts from our distribution centers to ship them due to the factories in China, particularly in the Shanghai area. Because those are shut down so tactically that is what's keeping the primary reason why.
While we took this adjustment because thats keeping our parts from being delivered to reduce staff or other other reasons that are going on at reducing that demand.
Okay. Thank you Tim will go to the next caller please.
And so we will take our next question from William Stein with true Securities.
Great. Thanks, and the last question is very similar to mine and I just wanted to ask it maybe a little bit more of a detailed fashion.
Yeah.
When.
We talk about these disruptions in China.
Maybe you can just provide a bit more detail.
Are you not shipping to the region as a whole or are you taking this on a customer by customer basis.
In terms of what Youre choosing to.
In terms of what you're able to ship and then the follow up is related to that we've heard at least one large automotive OEM talk about having opened up there.
Facility recently and ramping with a vengeance and I Wonder if you see this.
<unk> customers more broadly or is that an exception. Thank you.
Yes, so ill give you might take it is case by case.
At least.
Report dozens if not hundreds of factories that are shut down but there are other hundreds that are operating at a different levels right. Some.
Some cities are affected more than others, obviously, Shanghai, we've all read in the news whats going on there and factories in that area are affected more and but there are restrictions beyond Shanghai, but it is case by case their factories operating at zero like completion down there are others operate at 20%, 50% and so forth.
Yes <unk>.
Perhaps you can talk about changes in delivery patterns by channel in particular I'd be curious if you saw any slowdown in orders yet.
At <unk> Dot Com, which I think is.
It's somewhat of a different channels from your typical direct business. Thank you.
Yeah, I would say that in the quarter.
As we described the environment in first quarter.
We would describe it as similar to what we've seen over the last couple of quarters.
And just.
Just order rates.
Sure.
Cancellation order rates remained strong cancellations reschedule and those things.
That customer behavior is consistent those things are low and consistent with what we've seen over the last couple of quarters.
Across those different channels.
Yes, the other thing I would add is as we have seen in other cases during the pandemic, but.
Being able to ship direct.
Have the direct relationship with customers is a huge advantage, especially when you're faced with challenges.
Not having an intermediary that kind of frankly most of the time gets in the way.
And it is not optimal for your relationship with the customer but also the.
The tactical operational delivery of our products so.
Whether it's tier dot com or non datacom legacy shipments going direct is a huge benefit of being able to do that now close to 70% of our revenues.
Okay. Thank you we'll go to the next caller please.
Thank you we'll take our next question from Blayne Curtis with Barclays.
Hey, Thanks for fitting me in I wanted to ask you on the Capex plans that you are pretty clear about your plans with the capital allocation today I guess the spend in March is a little bit kind of flat at that kind of base level for <unk>. I guess, you were talking about adding capacity in the second half and maybe refresh us if youre still going to spend kind of three 5 billion and.
If the capacity is still coming in line with second half.
Yes, so a couple a couple of angles on your question first.
No changes to our plans that is our long term plans.
In terms of Capex, So our $2 5 billion per year for the next four years that is intact. We're very excited about those I'm very excited about those we are RFS II will ramp production in the second half of this year Lehigh.
Ill qualify and ramp production in the first quarter of next year and in just a matter of weeks or a month or so we're going to break ground.
And chairman so that's all that's all.
We're excited and that is not changing maybe the first part of your question on the Capex.
It's short term just keep in mind that the fourth quarter Capex have the Lehigh numbers there so that.
That's why that number was was hired and now youre seeing that number come down in first quarter. That's just you had about 800, because the $900 million worth of Capex, but our plans.
$1 billion run rate.
Per year for 'twenty, two 'twenty three 'twenty four 'twenty five of course that has an average but that is still that is in place and we're very excited about that.
Matt brings.
You have a follow up.
Yes, well I guess 400 times four is not three and a half hours I guess the question, but I guess youre still thinking of that forecast and it should go up.
Yes.
They're just an average of $3 5 million for an average so it's not going to be every year $5 billion will likely run below very likely run below two and a half in 2022, which of course means will run higher in the next three years, that's just a math on that right.
And then I guess just for the guide I want to make sure I understand the mechanics, it sounds like utilization stays high and the mix has been commented industrial and auto that all favorable on gross margin you did hit 70%.
I think a lot of companies have signaled that maybe gross margins would tail off through the rest of the year is kind of pricing comes down and kind of curious your perspective.
I'm kind of gross margins at this level being sustainable for the rest of the year.
Yes, our focus is not on managing gross margins. Our focus has been and will continue to be on growing free cash flow per share for the long term. So gross margin will be what it will be but we will continue to make our investments on capex.
To support our revenue plans and.
And.
And generate long term growth of free cash flow.
Okay. Thank you Blayne and we've got time for one more caller. Please.
Thank you we'll take our next question from Amber Srivastava with BMO.
Hi, Thank you.
Sales, Dave I had a question on <unk>.
Just wanted to make sure I understood. This.
From a top down.
I got that perspective.
And David I thought I heard you mentioned the cancellations.
Not changed.
I shouldn't cancellation change if.
You are taking your numbers down.
10% should that lead to cancellation changing versus what they have been the last couple of quarters.
Yeah. So.
Got it.
Just to explain that customers that.
Where their operations are being impacted they would just like that product.
And so they're not canceling those orders.
They still like to be in line and get that product as soon as they can take it.
Or is that.
That's what they're communicating to us.
From that so that's why we're not that's not showing up as a cancellation.
Our.
Seeing the demand being impacted at this point.
That metric is usually for one quarter or.
I should know this answer.
That metric is used for the quarter that you provide us orders for more than.
Is it for longer than a quarter.
Yes, the cancellations as we look at them or the cancellations that we would receive in a quarter it could of course be.
For demand that might be outside of either in the current quarter or even a longer period of time.
If a cancellation comes in right the customer could say they want to cancel an order for next week and also for.
Six months out as well, so, but if they canceled it.
We can record it as cancellation in the quarter that we received a cancellation so got it.
Okay.
With that we'll go ahead and wrap up.
Okay. So let me wrap up by reiterating what we have said previously at our core we're engineers and technology is the foundation of our company, but ultimately our objective and the best metric to measure our progress and generate long term value for owners is the growth of free cash flow per share.
We strive to achieve our objective 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 is ever changing and we will be a company that we're personally proud to be a part of and would want as our neighbor when 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 do thank you all for your participation and you may now disconnect.
Okay.
Yeah.
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