Q1 2023 Texas Instruments Inc Earnings Call

April 25, 2023

Welcome to the Texas instruments first quarter 2023 earnings Conference call I'm, Dave Pahl head of Investor Relations and I'm joined by our Chief Financial Officer Raphael was already.

For any of you who missed the release you can find it on our website at Ti Dot Com Slash IR.

This call is being broadcast live over the web and can be accessed through our website and.

In addition, today's call is being recorded and will be available via replay on our website.

This call will include forward looking statements that involve risks and uncertainties that could cause ti's results to differ materially from management's current expectations.

We encourage you to review the notice regarding forward looking statements contained in the earnings release published today as well as Ti's. Most recent SEC filings for a more complete description.

Today, we will provide the following updates first I'll start with a quick overview of the quarter.

Next I'll provide some insight into first quarter's revenue results with some details of what we're seeing with respect to our end markets Lastly, Raphael will cover the financial results and our guidance for the second quarter of 2023.

Starting with a quick overview of the first quarter.

Revenue in the quarter came in about as expected at $4 $4 billion, a decrease of 6% sequentially and 11% year over year.

Analog revenue declined 14% embedded processing grew 6% and our other segment declined 16% from the year ago quarter.

As expected our results reflect weaker demand in all end markets with the exception of automotive.

As mentioned last quarter, a component of the weaker demand was inventory reductions by our customers, which we expect to continue in the second quarter.

Now I'll provide some insight into our first quarter revenue by market similar to last quarter I'll focus on sequential performance as it's more informative at this time.

First the industrial market was about flat.

The automotive market was up mid single digits personal electronics declined about 30% as we continued to see broad based weakness.

Next communications equipment was down mid teens, and finally enterprise systems was down about 30%.

Raphael will now review profitability capital management, and our outlook Raphael.

Thanks, Dave and good afternoon, everyone as Dave mentioned first quarter revenue was $4 $4 billion down 11% from a year ago.

Gross profit in the quarter was $2 9 billion or 65% of revenue.

From a year ago gross profit margin decreased 480 basis points.

Operating expenses in the quarter were $929 million up 14% from a year ago and about as expected.

On a trailing 12 month basis operating expenses were $3 $5 billion or 18% of revenue.

Operating profit was $1 $9 billion in the quarter or 44% of revenue and was down 25% from a year ago quarter.

Net income in the first quarter was $1 7 billion or $1 85 per share.

Earnings per share included a three cent benefit for items that were not in our original guide.

Let me now comment on our capital management results, starting with our cash generation.

Cash flow from operations was $1 $2 billion in the quarter and $7 $7 billion on a trailing 12 month basis.

Capital expenditures were $982 million in the quarter and $3 3 billion over the last 12 months.

Free cash flow on a trailing 12 month basis was $4 4 billion.

In the quarter, we paid $1 1 billion in dividends and repurchased about $100 million of our stock.

In total we have returned $7 $5 billion in the past 12 months.

Our balance sheet remained strong with $9 5 billion of cash and short term investments at the end of the first quarter.

In the quarter, we issued $1 $4 billion of debt.

Total debt outstanding was $10 2 billion with a weighted average coupon of three 2%.

Inventory dollars were up $531 million from the prior quarter to $3 $3 billion and days were 195 up 38 days sequentially.

For the second quarter, we expect that revenue in the range of $4. One seven to 4.53 billion and earnings per share to be in the range of $1 62 to $1 88.

Lastly, we continue to expect our 'twenty to 'twenty, three effective tax rate to be about 13% to 14%.

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, our broad product portfolio reach of our channels and diverse and long lived positions.

We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term with that let me turn it back to Dave.

Thanks, 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.

At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.

Our first question.

Comes from the line of Stacy you'll have gone with Burns Diet Bernstein Research. Please proceed with your question.

Hi, guys. Thanks for taking my questions.

My first one I just wanted to dig into Capex and depreciation. So you did capex of 92 in the quarter I guess first can you just clarify that's the gross number without any of the tax credits.

And I guess, assuming that's true.

Both the Capex and the depreciation number in the quarter running well below the run rate there or that the annualized number that you had given at the capital manage their capex should've been about 5 billion for the year depreciation maybe one and a half.

So am I right in assuming that implies a fairly substantial ramp into the back half and the end of the year for both of those metrics Capex and depreciation.

So thanks for the questions Steve It's a good question there. So it gives us a chance to clarify those so first on Capex. We're pleased with the progress that we've made.

Both in 2022 but also year to date, our first quarter of this year everything is in line with expectations.

We shared on the call a couple of months ago, We expect Capex to average $5 billion per year for next four years. That's just an average so some years will be lower especially at the beginning and other years will be will be higher but our expectation continues to be $5 billion per year, those numbers that $5 billion gross and 900.

82, the one close to $1 billion that you just quoted for the 400 is also grows.

We are continuing to occur.

Crew for the chips that benefit I can I can tell you about that.

And a follow up question if.

If you like but the Capex numbers.

Have been and will continue to be growth numbers on the second part of your question on depreciation so.

So we told you that.

The capital management call that depreciation will increase to about $2 5 billion on around 2025.

We expect this year to be below that linear trend, okay and thats just.

The Capex is coming in as expected, but it is a function of other things essentially when you place the.

The equipment and services than when he started started depreciation the assumptions that we had on that versus.

Exactly how it's playing out.

Sure.

I do think I'm going to let somebody else ask about the chips Act accrual I'm going to ask you about inventories.

Okay.

Youre at almost 200 days of inventory and I think the top end of your target was 190 and you said you would be comfortable above that so we're kind of there are you done building inventory now.

I guess, if that's the case what happens to fab loadings I guess as we go into the NDA I'm, assuming you're running pretty full right. Now does this fab loadings need to come down, especially given the revenue trajectory and given inventories are sitting pretty close to 200 days.

So let me start with reminding everybody our objective for inventory and you can go back to our capital management call I believe it's slide seven.

You look at the objective there is to maintain high levels of customer service minimize obsolescence, we have a range. There it's just meant to be.

Informative.

132, greater than 200, I, just wanted to clarify that versus the number that you mentioned.

Great.

The more important thing is.

I refer you to slide 13 in that deck and anybody who hasnt seen that you can downloaded from our website you go to slide 13.

That shows you how we think about planning for the long term so through semiconductor the ups and downs on the semiconductor cycle and that informs how we manage inventory also important that we are investing in capex.

We're thinking through the cycles over the long term, but certainly inventory is one of those things that that we take that trend into account in the near term, we expect to have an upward bias on inventory as we prepare for long term growth.

Thank you Stacy and we'll go to the next caller. Please.

Okay.

Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Alright. Thank you for the question. The first one is specific to industrial and automotive.

I heard you Dave I think you said industrial was flattish in Q1, I think it was down 10% in the last quarter. So it seems like it's starting to flatten out.

Just wanted to check if that's the right conclusion, I think autos was up mid single in both Q4, and I said I talked to you said in Q1 as well. So that also seems to be in the right direction. So the specific question is as we look into Q2, how should we think about industrial and auto can they stay or at least kind of flattish or do you think that they are.

Also exposed to the macro weakness.

So.

First.

Confirm that.

You heard correctly.

Just real market was about flat.

In the first quarter and automotive was up mid single digits.

And as you know.

Our practice.

<unk>.

When we think about guidance by end market.

We only provide color if there is something that we need to highlight to explain what's going on and you've seen us do that multiple times, whether its end markets or regions or something specific thats going on so as you said at the midpoint of our guidance revenue was flat and.

So when we look strategically at both of those markets, we're very confident that they will continue to.

<unk>.

Add semiconductor content per unit and the great growers for us. So you have a follow on Vivek.

Yes, Dave I actually wanted to stay on the same question because there is a perception that industrial and auto demand is kind of this last shoe to drop.

Semiconductors, and when I look at what your competitors are seeing in analog and microcontroller market.

They are noticing level.

Level of stability and strength and that's what I wanted to confirm with Ti that are you seeing the same thing as you go into Q2.

Because yes consumer as the enterprises that is unknown, but specifically auto and industrial do you think they are now trending in the right direction.

Q2, or do you think that you.

You had in front of some weakness and inventory adjustment in those markets also.

Yeah and again.

We're not trying to provide guidance by by specific markets. The overall outlook is roughly.

Roughly flat.

Into into second quarter.

If we have something specific to call out we would.

And I think our approach to building closer relationships with customers.

What we're doing in our channels our product portfolio continues to strengthen the capacity that we add.

Are all things that continue to put us in a great position to <unk>.

Service customers and service them well over time, but.

Yes, so we're just not going to go into specifics of.

Each market in the second quarter. So thanks for those questions and we'll go on to the next caller. Please.

Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Thanks, a lot Dave I guess I wanted to ask sort of where you think you are in the cycle because you have less disk.

Exposure than many of your peers. So so in theory, you should be farther along the inventory correction and youre more connected in real time to demand. So when you sort of look at your customer inventory levels, where do you think we are do you think that we're sort of in the late innings of the correction for you because you are a bit more.

Demand in real time.

Yes.

Tim as you know this is the first time that our markets.

Not only for us, but the industry has.

Behaved differently as we've gone into this cycle so far.

You look at personal electronics.

We began seeing weakness in personal electronics back second quarter, a year ago right. So we're now into our our fourth quarter of.

Weaker demand the.

Other markets with the exception of automotive began weakening the quarter before last so.

We're a couple of quarters in on that so.

And of course automotive has has remained strong through through last quarter. So you put all that together.

I think it depends on which market you're looking at if you're in <unk>, obviously closer to.

To the bottom than you are to the top so I think our practice.

Trying to predict where the bottom or the top is.

Really draw is a draw your attention back to.

Slide slide 13 that we talked about that longer term trend is what were what were planning on and what we do.

Believe we can can look at to inform our decisions.

Following.

Dave Yes so.

I know that the FAA data can be noisy and you always say to look at things on kind of a TTM basis.

And if you sort of roll it back it looks like your share has gone down in analog roughly 200 basis points versus where it peaked in the early parts of Covid. So as you sort of forensically go back and try to figure out what's happened do you think that's entirely based on based on supply so an odd.

Other words, if you didn't have the the.

Shortages that you did you think that you wouldn't have lost that share I'm just kind of wondering as you look back at the numbers how you.

Forensic we tried to explain that.

Share loss relative to the industry data.

Yes.

As we've talked about that's something we think you have to look at over time, if you go back.

The prior year as with the pandemic started you remember we made some decisions to continue to run our factories and build long lived.

Inventory.

And those decisions served us very well.

So as we went through each quarter as customers.

Expedited across the board, we could respond to that.

And ship them product.

And in the short term that probably helped us with.

With the numbers when you compare it against what the industry was doing.

So as we go into the following year of course those are our tougher compares.

But we have a lot of practices that I think are different than many of our peers.

As an example through that period.

Move to more closer direct relationships with customers.

We believe that thats, giving us much better insight.

Can see their demand more clearly we can see what they need both short term and long term much better.

I also I would say that.

As we were moving through a period, where most of our customers are reducing their inventory to align with their needs. We haven't employee things like long term sales agreements are noncancelable non reschedule contracts.

Customers aren't taking product that they don't need so that isn't share gains that's just.

I think for US we want to be as easy to do business with as we can.

Those I think all of those practices are setting us up well to.

To continue to gain share.

So thank you Tim and we'll go to the next caller. Please.

Our next question comes from the line of Ambridge through at Massawa with BMO capital markets. Please proceed with your question.

Hi, Thank you very much.

Wanted to make sure I got the.

Depreciation answer right.

It has implications for gross margin.

It's David.

As Andre it should be assumed.

First quarter run rate because of the move.

That is a very positive indication.

And you said it will be lower than the linear how much lower I think we've all modeling.

Building and a half is kind of the number that we had what's the right way to think about that please.

So we're not breaking out specifics on that but if you weren't going to do it linearly you will get to the one four and change and then 500 plus.

On top of that every year until you get to about two 5% and 20 to 25, so it's going to run lower than that.

Yes, this year and we will give you an update.

The next capital management on subsequent years.

Got it got it just to just a clarification I know the follow up.

So if you look at gross margin last year versus this year. The two factors at least I just want to make sure I'm doing it right.

Flow through.

And the fall through that you talked about and then the offsets would be and fab is now going from.

Restructuring into Cogs, and then apples to apples I add the higher depreciation is that the right thing.

The rate three parts, yes.

Yes.

There are three parts and of course this is over the long term any one quarter things that you know there are many moving pieces. For example mix always plays a factor you've got more auto and industrial that that's different than personal electronics right.

But at a high level over a long enough period, yes. Those are those are the trends. The factors you should take into account when modeling this.

Got it. Thank you. Thank you.

I'll go to the next caller please.

Yeah.

Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for letting me ask a question I wanted to follow up and breaches talk about gross margin, but on a sequential basis.

The gross margin held in better than I expected. It did go down sequentially, but not even as much as it would have if you just took the el fab expense out of Opex and put it into Cogs. So were there any unique offsets to that and probably more importantly, any unique offsets we need to consider as we think going forward and I know <unk>.

Fail, you don't guide to gross margin specifically.

Yes no.

I would tell you it.

It was similar to the <unk> question.

High level think of the model. We've given you is 70% to 75% fall through but that in any one quarter. Even if it is on a year on year basis, but especially sequentially.

Relatively small changes in revenue, that's not going to work very precisely right. So.

But over a long enough time that works well.

We just talked about you add the depreciation and then in this particular quarter you have to adjust for.

For the costs that were in restructuring.

Therefore, Lehigh that now goes.

Due primarily to cost of revenue now.

Now there are other factors are going to play for example, and I mentioned it to embrace a second ago, but mix is the factor. So you get a quarter, where a lot more industrial automotive and less personal electronics that plays into it and the final one.

Depreciation.

Dustin necessarily immediately flow through the P&L because it needs to be matched to inventory. So that generally flows through inventory first and then so that sometimes delays the impact of the true impact of the appreciation to the gross margin, but clearly depreciation as I mentioned earlier it is increasingly common.

A long enough time multiple quarter, certainly years, you need to factor it as we have talked about it right the fall through and the increase in depreciation.

Yeah follow up Ross.

Yes, I do I'll, just pivot to round out that chipset question from earlier Rafael could you give us an update on what the cumulative accruals are for that and probably equally importantly, when does that likely flow through the income statement.

Yes, so stepping back tips that has an investment tax credit ITC and a grant there are two components that have the potential to benefit us if you go to our capital management.

Document, we've talked about those and we said we are.

<unk> on the benefits from the ITC and we're accruing those benefits.

On the grants were not because of the grants are highly discretionary it's up to the department of Commerce.

Those were not counting on those but we are applying.

Two to those brands and we are in the process of submitting those applications.

And we're asking for everything we can get there, but right now counting on nothing.

Let me just focus on the ITC, which is the one that we are booking on the on the balance sheet. This last quarter, we accrued another $200 million benefit. So that's on top of the roughly $400 million last year. So now we have a total benefit that we have accrued a 600 million that number will continue increasing for the rest of the year and thats by west.

25% of qualifying assets in the United States.

We will continue to increase that number over a year and then what happens is.

We benefit in a couple ways, one the P&L that accrual.

It comes out of the PP&E property plant equipment basis. So now you have a lower basis to depreciate. So depreciation is going to be lower going forward, we're already getting a small benefit of that this year, but it's in a couple of million dollars, but that will grow overtime.

That equipment goes into is placed in service and now they appreciate that a lower rate more importantly, the cash benefit associated with that we get the following year. So anything that we accrued this year and into 'twenty two and is placed in service in 2023, we will get that cash at the end of 2024.

That's that's what we're planning on.

Think that answer your question fairly well.

Thank you Ross will go to the next caller please.

Our next question comes from the line of Chris Danley with Citi. Please proceed with your question.

Hey, Thanks, guys.

Just some color on the inventory correction, you're seeing out there. So do you think that we're through the worst of it maybe talk about where it's I guess lower or where it's higher do you think that this is getting better at this point are you getting worst or can we not sell.

Yes, I think Chris is.

One of the previous questions.

Somewhat similar right I think you have to look at it by market.

Certainly in personal electronics.

Being in the fourth quarter of the weakness.

Indicate you're probably closer to the bottom there is no guarantee of that but.

Youll probably closer than than in other markets right. So.

Yes.

Just isn't something that we try to predict and.

What we do use to kind of guide, how we think about things and where we make investments is that that gray line on the chart that we've talked about.

Really what's important is being ready for.

For the longer term growth and Thats, where our focus is power.

Yes can you just talk about.

The linearity of bookings during the quarter and how your backlog.

It looks now versus I guess three months ago, and what does that imply for the second half of the year.

Yes, so our linearity was.

Stronger.

In the last month of the quarter.

And in backlog I would say as you know we've got.

<unk> flowing through Ti dot com, we've got sales.

Are on consignment, where we get direct feeds and we don't actually carry a backlog.

So.

So we just don't put a lot of emphasis on.

On the backlog overall, I think compared to many of our peers, but we've got really good visibility because of our close relationships with customers. The fact that we're carrying where owning and controlling that inventory more directly.

And so actually we've got we believe that gives us really great visibility on on demand.

So thank you Chris.

You bet.

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

Great. Thank you guys.

I know you were pretty early to signal some of the headwinds that came in China from from Covid Lockdowns.

What are you seeing now as the economies re emerge or are you starting to see that.

Potential strength going into the rest of the year.

Yes, Joe.

I would say that.

Continue to believe the best way to look at our revenue and the changes in revenue as more the.

More easily understood by looking at end markets.

But.

There wasn't any.

A significant change that we saw inside of China. This this last quarter.

A follow on.

Sure and then the down 30% in.

In personal electronics and enterprise both.

Does that reflect any kind of share shift.

I know that.

You do have people multi sourcing more in areas like that and phones, and Pcs and servers and whatnot.

Are you seeing that as any kind of a headwind or do you think thats just what the market was.

Down in the first quarter.

Yes.

As we've talked about before sure it doesn't move quickly.

We're in a position.

As we are building inventory.

To support higher demand if it was to materialize so.

Again, we think thats, mostly reflective of what's going on in the market.

I think thats consistent with what you see.

From customers.

Other other data that you can see thats out there.

Thank you Joe.

And.

I believe we've got time for one more one more caller. Please.

Yes.

Our next question comes from C. J Muse with Evercore ISI. Please proceed with your question.

Yes, good afternoon, and thank you for taking the question I just wanted to clarify and confirm some of the statements from earlier. So your gross margins came in a little better than what we thought for March and so just curious are you still on track to that $1 5 billion depreciation for the year and were there any changes in kind of the timing.

Installation of equipment or are you still seeing kind of the tight supply there.

Yes.

<unk>.

Let me address that.

First capex, we're very pleased with our Capex.

<unk> has come in.

We did about a $1 billion in the quarter.

A couple of months ago that we expect about $5 billion per year for the next four years. That's an average so some years will be less some years will be more sort of 1 billion per quarter. That's obviously, a $4 billion run rate for the for the year, So somewhere between four and five for this year would be.

About right on the Capex and Thats coming in just as expected.

Depreciation.

We what we've talked about a couple of months ago.

Call was we expect it to increase to $2 5 billion at some point in the future in 2025 on our about 2025.

But this year, we expect that.

That.

That trend to be below linear so instead of $500 million increase per year from from the starting point of 22, it will be less than that in 2023, I think I'm British has a specific.

A number on that we're not disclosing that at this point.

I would just tell you look at we just did 265 for the quarter. So you can you can do your own math.

That was $2 49 in the previous quarter. So you can you can think of that and come up with a decent.

It's an approximation of where that May end up and we'll give you more details obviously in subsequent quarters, we have a follow up.

Yes. Please a.

A longer term question.

One of the overriding themes for the last couple of quarters.

Semi equipment side is the vast spending biologic lagging edge domestic China.

With an obvious focus kind of on the 90 nanometer plus.

But actually I shouldn't discount the 28 nanometer plus part of the world. So as you think about regionalization as you think about perhaps.

A rising kind of competitor and the China landscape looking out over the next five plus years, how are you thinking about.

The pros and cons and how you will compete in that environment.

Thank you.

Yeah C. J. Thanks, Thanks for that question I would say that.

When you look at.

Our products and markets, we've got four competitive advantages that.

We continue to invest and I think that make us.

Stronger and different than our competitors and we've talked about them before right. The first is the manufacturing and technology owning and controlling those assets.

We think will be of growing importance in where they are in the world also we believe will be a benefit to us as well.

As the broad.

<unk> product portfolio, so competitors that we have.

The world.

Especially in China, usually only compete with us in a very very narrow slice of our product portfolio that said we've competed with those companies in some cases for.

A couple of decades now.

So competition there isn't new.

And.

So there are good competitors, we can learn from them, we're not dismissive of them and we close that we very closely track and I believe the number somewhere around 75 different competitors around the world.

That will compete with.

The third competitive advantages.

The reach of our market channels, and especially when you look at some of the smaller competitors in China.

Don't have the reach they don't have the breadth of portfolio that attracts customers.

For engagement and that just gives us better insight.

And then the last is diversity and longevity, so theres not one market or technology that we're dependent on.

Two to provide market share lift now will be dependent on all of them.

Sometimes in the short term that may.

Favre, one competitor versus another but longer term because we compete broadly in all the markets. We think that that will translate into long term and sticky sticky share gains so.

Overall, we are pleased.

Excited about where we are from a position standpoint, whether we're looking at our traditional competitors here in the U S for Europe .

And as well as those.

In China, so well. Thank you very much I'll turn it over to Raphael to wrap this up thanks, Dave Let me wrap up by reiterating what we have said previously our core where engineers and technology is the foundation of our company, but ultimately our objective and the best metric to measure progress and generate long term value for our owners is the growth of free cash.

Per share.

While we strive to achieve our objective we will continue to pursue our three ambitions, who 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 one as our neighbor when we're successful employees customers communities and owners.

All benefit thank you and have a good evening.

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

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Thank you.

Welcome to the Texas instruments first quarter 2023 earnings Conference call I'm, Dave Pahl head of Investor Relations and I'm joined by our Chief Financial Officer Raphael was already.

For any of you who missed the release you can find it on our website at Ti Dot Com Slash IR.

This call is being broadcast live over the web and can be accessed through our website.

In addition, today's call is being recorded and will be available via replay on our website.

This call will include forward looking statements that involve risks and uncertainties that could cause ti's results to differ materially from management's current expectations.

We encourage you to review the notice regarding forward looking statements.

<unk> in the earnings release published today as well as Ti's. Most recent SEC filings for a more complete description.

Today, we will provide the following updates first I'll start with a quick overview of the quarter.

Starting with a quick overview of the first quarter.

Revenue in the quarter came in about as expected at $4 4 billion.

A decrease of 6% sequentially and 11% year over year.

Analog revenue declined 14% embedded processing grew 6% and our other segment declined 16% from the year ago quarter.

As expected our results reflect weaker demand in all end markets with the exception of automotive.

As mentioned last quarter, a component of the weaker demand was inventory reductions by our customers, which we expect to continue in the second quarter.

Now I'll provide some insight into our first quarter revenue by market similar to last quarter I will focus on sequential performance as it is more informative at this time.

First the industrial market was about flat the automotive.

<unk> market was up mid single digits.

Electronics declined about 30% as we continued to see broad based weakness.

Next communications equipment was down mid teens, and finally enterprise systems was down about 30%.

Rafael will now review profitability capital management, and our outlook Raphael.

Thanks, Dave and good afternoon, everyone as Dave mentioned first quarter revenue was $4 4 billion down 11% from a year ago.

Gross profit in the quarter was $2 9 billion or 65% of revenue.

From a year ago gross profit margin decreased 480 basis points.

Operating expenses in the quarter were $929 million.

Up 14% from a year ago and about as expected.

On a trailing 12 month basis operating expenses were $3 5 billion or 18% of revenue.

Operating profit was $1 9 billion in the quarter or 44% of revenue and was down 25% from a year ago quarter.

Net income in the first quarter was $1 7 billion.

A $1 85 per share earned.

Earnings per share included a <unk> <unk> benefit for items that were not in our original guide.

Let me now comment on our capital management results, starting with our cash generation.

Cash flow from operations was $1 2 billion in the quarter and $7 $7 billion on a trailing 12 month basis.

Capital expenditures were $982 million in the quarter and $3 3 billion over the last 12 months.

Free cash flow on a trailing 12 month basis was $4 4 billion.

In the quarter, we paid $1 1 billion in dividends and repurchased about $100 million of our stock in.

In total we have returned $7 $5 billion in the past 12 months.

Our balance sheet remains strong with $9 5 billion of cash and short term investments at the end of the first quarter.

In the quarter, we issued $1 4 billion of debt.

Total debt outstanding was $10 2 billion.

Weighted average coupon of three 2%.

Inventory dollars were up $531 million from the prior quarter to $3 3 billion.

And days were 195 up 38 days sequentially.

For the second quarter, we expect Ti revenue in the range of $4, one 7% to 453 billion.

And earnings per share to be in the range of $1 62 to $1 88.

Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%.

We'll 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.

At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question.

Comes from the line of Stacy <unk> with Bernstein Bernstein Research. Please proceed with your question Hi.

Hi, guys. Thanks for taking my questions.

My first one I just wanted to dig into Capex and depreciation so.

Capex of 92 in the quarter I just first can you just clarify that's the gross number without any of the tax credits and I guess, assuming that's true.

Both the Capex and the depreciation number in the quarter running well below the run rate there or the annualized number that you had given at the capital manage their capex should have been about 5 billion for the year depreciation maybe one five.

So am I right in assuming that implies a fairly substantial ramp into the back half at the end of the year for both of those metrics Capex and depreciation.

So thanks for the questions Steve It's a good question there. So it gives us a chance to clarify those so first on Capex. We're pleased with the progress that we've made.

Both in 2022, but also year to date, our first quarter of this year everything is in line with expectations as we shared on the call. A couple of months ago, We expect capex to average $5 billion per year for next four years. That's just an average so some years will be lower especially at the beginning and other years will be will be higher but.

Our expectation continues to be $5 billion per year. Those numbers that 5 billion is gross and 982. The one close to $1 billion that you just quoted for the 400 Thats also grows.

We are continuing to.

Crew for the chips that benefit.

Can tell you about that and a follow up question. If you like but the capex numbers have been and will continue to be growth numbers.

On the second part of your question on depreciation.

So we told you that.

Our capital management call that depreciation will increase to about $2 5 billion on around 2025.

We expect this year to be below that linear trend, okay and thats just the.

The Capex is coming in as expected, but it's a function of other things essentially when you place the.

The equipment and service than when he started started depreciation the assumptions that we had on that versus how it exactly.

Exactly how it's playing out.

Sure.

I do think so I'm going to let somebody else ask about the chips Act accrual I'm going to ask you about inventories.

Okay.

Youre at almost 200 days of inventory and I think the top end of your target was 192, you said you'd be comfortable above that so we're kind of there are you done building inventory now.

I guess and if thats the case, what happens to fab loadings I guess as we go into the NDA Im assuming youre running pretty full right now to those fab loadings need to come down, especially given the revenue trajectory and given inventories are sitting pretty close to 200 days.

So let me start with reminding everybody our objective for inventory and you can go back to our capital management call I believe it's slide seven.

If you look at the objective there is to maintain high levels of customer service minimize obsolescence, we have a range. There it's just meant to be.

Informative.

132, greater than 200, I, just want to clarify that versus the number that you.

You mentioned the importance there.

The more important thing is.

I refer you to slide 13 in that deck and anybody who hasnt seen that you can download it from our website go to slide 13.

That shows you how we think about planning for the long term so through semiconductor in the ups and downs of the semiconductor cycle and that informs how we manage inventory also important that we are investing in capex.

We're thinking through the cycles over the long term, but certainly inventory is one of those things that.

We take that trends into account in the near term, we expect to have an upward bias on inventory as we prepare for long term growth.

Thank you Stacy and we'll go to the next caller. Please.

Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Alright. Thank you for the question. The first one is specific to industrial and automotive.

Dave I think you said industrial was flattish in Q1, I think it was down 10% in the last quarter. So it seems like it's starting to flatten out but I just wanted to check if that's the right conclusion I think autos was up mid single in both Q4, and I said I talked to you said in Q1 as well so that also seems to be the right.

Got it so the specific question is as we look into Q2, how should we think about industrial and auto can they stay at least kind of flattish or do you think that they.

They are also exposed to the macro weakness.

Yes so.

First <unk>.

Confirm that that you heard correctly industrial market was about flat.

In the first quarter and automotive was up mid single digits.

As you know.

Our practice.

That.

When we think about guidance by end market, we only provide color. If there is something that we need to highlight to explain whats going on and you've seen us do that multiple times, whether its end markets or regions or something specific thats going on so as you said at the midpoint of our guidance.

Revenue was flat and.

So when we look strategically at both of those markets.

We're very confident that that.

They will continue to.

Sure.

Semiconductor content per unit and be a great grower for us. So you have a follow on vivek.

Yes, Dave I actually wanted to stay on the same question because there is a perception that industrial and auto demand is kind of this last shoe to drop in semiconductors and when I look at what your competitors are.

Seeing in analog and microcontroller market.

Noticing.

A level of stability and strength and that's what I wanted to confirm with Ti that are you seeing the same thing as you go into Q2.

Because yes consumer is the great enterprise that is unknown, but specifically auto and industrial do you think they are now trending in the right direction.

Q2, or do you think that.

You had in front of some weakness and inventory adjustment in those markets also.

Yeah and again.

We're not trying to provide guidance by by specific markets. The overall outlook is roughly.

Roughly flat.

Into into second quarter.

If we have something specific to call out we would.

And I think our approach to building closer relationships with customers.

What we're doing in our channels our product portfolio continues to strengthen the capacity that we add.

Are all things that continue to put us in a great position to.

Service customers and service them well over time, but.

Yes, so we're just not going to go into specifics of.

Each market in the second quarter. So thanks for those questions and we'll go on to the next caller. Please.

Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Thanks, a lot Dave I guess I wanted to ask sort of where you think you are in the cycle because you have less disease.

Demand in real time.

Yes.

Tim as you know this is the first time that our markets.

Not only for us, but the industry has.

Behaved differently as we've gone into this cycle so far.

You look at personal electronics.

We began seeing weakness in personal electronics back second quarter, a year ago. So we're now into our our fourth quarter of.

Weaker demand the.

The other markets with the exception of automotive began weakening the quarter before last so.

We're a couple of quarters in on that so.

And of course automotive has has remained strong through through last quarter. So you put all that together.

I think it depends on which market you're looking at if you're in <unk>, obviously closer to.

To the bottom than you are to the top so I think with our practice.

Don't try to predict where the bottom or the top is.

Really draw is a draw your attention back to.

Slide slide 13 that we talked about that longer term trend is what were what were planning on and what we do.

Believe we can can look at to inform our decisions.

A follow on.

Dave Yes so.

I know that the FAA data can be noisy and you always say to look at things on a TTM basis.

Other words, if you didn't have the.

Shortages that you did you think that you wouldn't have lost that share I'm just kind of wondering as you look back at the numbers how you.

Forensic we tried to explain that.

Share loss relative to the industry data. Thanks.

Yes.

As we've talked about that's something we think you have to look at over time, if you go back.

The prior year as was the pandemic started you remember we made some decisions to continue to run our factories and build long lived.

Inventory.

And those decisions served us very well.

So as we went through each quarter as customers.

Expedite it across the board, we could respond to that.

And shifts in product.

And in the short term that probably helped us with.

With the numbers when you compare it against what the industry was doing.

So as we go into the following year parcels or are tougher compares.

But we have a lot of practices that I think are different than many of our peers.

As an example through that period.

Move to more closer direct relationships with customers.

We believe that thats, giving us much better insight.

We can see their demand more clearly we can see what they need both short term and long term much better.

Sure.

Also I would say that.

Sure.

As we're moving through a period, where most of our customers are reducing their inventory to align with their needs.

We have an employee things like long term sales agreements are noncancelable non reschedule contracts.

So customers aren't taking product that they don't need so that is it share gains.

I think for US we want to be as easy to do business with as we can.

And those I think all of those practices are setting us up well to continue to gain share.

So thank you Tim and we'll go to the next caller. Please.

Our next question comes from the line of Ambridge.

Massawa with BMO capital markets. Please proceed with your question.

Hi, Thank you very much.

Just wanted to make sure I got the.

Depreciation answer right, obviously, it has implications for gross margin.

It's David.

Run rate it should be assumed.

First quarter run rate because.

That is a very positive indication.

And you said it will be lower than the linearity, how much lower I think we've all modeling.

1 billion and a half is kind of a number that we had what's the right way to think about that please.

So we're not breaking out specifics on that but if you weren't going to do it linearly you will get to the one four unchanged and then 500 plus.

On top of that every year until you get to about two 5% in 2025, so it's going to run lower than that.

Yes, this year and we'll give you an update.

The next capital management on.

On subsequent years.

Got it got it just just just for clarification that not a follow up.

So if you look at gross margin last year versus this year. The two factors at least I just want to make sure I'm doing it right.

The flow through.

And the fall through that you talked about and then the.

Offsetting would be helpful.

<unk> is now going from there.

Restructuring into Cogs, and then apples to apples I add the higher depreciation is that the right thing.

Thinking about the right three parts yes.

Yes.

The write through parts and of course this is over the long term any one quarter things that you know there are many moving pieces. For example mix always plays a factor as you add more auto and industrial that that's different than personal electronics right.

But at a high level over a long enough period, yes. Those are those are the trends. The factors you should take into account when modeling.

Got it. Thank you. Thank you.

I'll go to the next caller please.

Okay.

Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for letting me ask a question I wanted to follow up on breaches talk about gross margin, but on a sequential basis.

The gross margin held in better than I expected. It did go down sequentially, but not even as much as it would have if you just took the el fab expense out of Opex and put it into Cogs. So were there any unique offsets to that and probably more importantly in a unique offsets we need to consider as we think going forward and I know <unk>.

Fairly you don't guide to gross margin specifically.

Yes.

I would tell you it.

It was similar to the <unk> question.

High level think of the model. We've given you is 70% to 75% fall through but that in any one quarter. Even if he is on a year on year basis, but especially sequentially.

Relatively small changes in revenue, that's not going to work very precisely right. So.

But over a long enough time that works well.

We just talked about you add the depreciation and then in this particular quarter you have to adjust for.

For the costs that were in restructuring.

Therefore, Lehigh that now go.

Due primarily to cost of revenue now.

Now there are other factors are going to play for example, and I mentioned it to embrace a second ago, but mix is the factor. So you get a quarter, we have a lot more industrial automotive unless personal electronics that plays into it and the final one.

Depreciation.

It doesn't necessarily immediately flow through the P&L because it needs to be matched to inventory. So generally flows through inventory first and then so that sometimes delays the impact of the true impact of the appreciation to the gross margin, but clearly depreciation as I mentioned already it is increasingly common.

A long enough time multiple quarter, certainly years, you need to factor it as we have talked about it right they fall through and the increase in depreciation.

You have follow up Ross.

Yes, I do and I'll, just pivot to round out that chip that question from earlier Rafael could you give us an update on what the cumulative accruals are for that and probably equally importantly, when does that likely flow through the income statement.

Yes, so stepping back Tim stack has an investment tax credit ITC and a grant there are two components that have the potential to benefit us if you go to our capital management.

Document we've talked about those and we said we are planning on the benefits from the ITC and we're accruing those benefits.

On the grants were not because of the grants are highly discretionary it's up to the department of Commerce.

So on those we're not counting on those but we're applying to.

To those grants that were in the process of submitting those applications and and we're asking for everything we can get there, but right now counting on nothing.

Now let me just focus on the ITC, which is the one that we are booking on the on the balance sheet. This last quarter, we accrued another 200 million benefit. So that's on top of the roughly $400 million last year. So now we have a total benefit that we have accrued a 600 million that number will continue to increase in for the rest of the year.

25% of qualifying assets in the United States.

We will continue to increase that number over a year and then what happens is.

We benefit in a couple ways one the P&L that accrual comes out of the PP&E property plant equipment basis. So now you have a lower basis to depreciate. So theyre depreciation is going to be lower going forward, we're already getting a small benefit of that this year, but it's in a couple of million dollars, but that will.

Grow overtime.

That's that's what we're planning on.

Think that answer your question fairly well.

Thank you Ross will go to the next caller please.

Our next question comes from the line of Chris Danley with Citi. Please proceed with your question.

Hey, Thanks, guys.

Just some color on the inventory correction, you're seeing out there. So do you think that we're through the worst of it maybe talk about where it's I guess lower or where it's higher do you think that thats getting better at this point or getting worse or can we not tell.

Yes, I think Chris is.

One of the previous questions.

Somewhat similar right I think you have to look at it by market.

Certainly in personal electronics.

Being in the fourth quarter of the weakness.

Would indicate you're probably closer to the bottom there is no guarantee of that but.

Youll probably closer than than in other.

That's right so.

Yes.

It just isn't something that we tried to predict.

<unk>.

What we do use to kind of guide.

How we think about things and where we make investments is that that gray line on the chart that we've talked about that.

Really what's important is being ready for.

For the longer term growth and Thats, where our focus is power.

Can you just talk about the.

The linearity of bookings during the quarter and how your backlog.

It looks now versus I guess three months ago, and what does that imply for the second half of the year.

Yes, so our linearity was.

Stronger.

In the last month of the quarter.

And in backlog I would say as you know we've got.

<unk> flowing through Ti dot com, we've got sales.

Are on consignment, where we get direct feeds and we don't actually carry a backlog.

So.

So we just don't put a lot of emphasis on.

And so actually we've got we believe that gives us really great visibility on on demand.

So thank you Chris.

You bet.

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

Great. Thank you guys.

I know you were pretty early to signal some of the headwinds that came in China from Covid Lockdowns.

What are you seeing now as the economies re emerge are you starting to see that.

Potential strength going into the rest of the year.

Yes, Joe.

I would say that we.

Continue to believe the best way to look at our revenue and the changes in revenue as more the.

More easily understood by looking at end markets.

But.

There wasn't any.

A significant change that we saw inside of China. This this last quarter.

A follow on.

Sure and then the down 30% in.

In personal electronics and enterprise both.

Does that reflect any kind of share shift.

I know that.

You do have people multi sourcing more in areas like that and phones, and Pcs and servers and whatnot.

Are you seeing that as any kind of a headwind or do you think thats just what the market.

Down in the first quarter.

Yes.

Thanks.

As we've talked about before share doesn't move quickly.

We're in a position.

As we are building inventory.

Two to support higher demand if it was to materialize so.

Again, we think thats, mostly reflective of what's going on in the market.

I think thats consistent with what you see.

From customers.

Other other data that you can see thats out there.

Great. Thank you Joe.

And.

We've got time for one more one more caller please.

Our next question comes from C. J Muse with Evercore ISI. Please proceed with your question.

5 billion depreciation for the year and were there any changes in kind of the timing of installation of equipment or are you still seeing kind of a tight supply there.

Yes.

Let me address that.

First capex, we're very pleased with our Capex.

Has come in.

We did about a $1 billion in the quarter.

Talked a couple of months ago that we expect about $5 billion per year for the next four years. That's an average so some years will be less some years will be more sort of 1 billion per quarter. That's obviously, a 4 billion run rate for the year, so somewhere between four 5% this year would be.

About right on the Capex and Thats coming in just as expected.

Depreciation.

We what we've talked about a couple of months ago.

Call was we expect it to increase to $2 5 billion at some point in the future in 2025 on our about 2025.

But this year, we expect that.

<unk>.

That trend to be below linear so instead of $500 million increase per year from from the starting point of 'twenty two it will be less than that in 2023, I think embraces the specific.

A number of them that we're not disclosing that at this point.

I would just tell you look at.

<unk> 65 for the quarter. So you can you can do your own math.

Our 249% previous quarter. So you can you can think of that and come up with our discipline.

This is an approximation of where that May end up and we'll give you more details obviously in subsequent quarters, we have a follow up.

Yes. Please.

A longer term question.

One of the overriding themes for the last couple of quarters.

Semi equipment side is the vast spending biologic lagging edge domestic China.

With an obvious focus kind of on the 90 nanometer plus.

But actually I shouldn't discount the 28 nanometer plus part of the world. So as you think about regionalization as you think about perhaps.

A rising kind of competitor and the China landscape looking out over the next five plus years, how are you thinking about that.

Pros and cons and how you will compete in that environment.

<unk>.

Yeah C. J. Thanks, Thanks for that question I'd say that.

When you look at.

Our products and markets, we've got four competitive advantages.

We continue to invest and I think that make us.

Stronger and different than our competitors and we've talked about them before right. The first is the manufacturing and technology owning and controlling those assets.

We think will be of growing importance in where they are in the world also we believe will be a benefit to us as well.

As the broad.

<unk> product portfolio, so competitors that we have.

The world.

Especially in China, usually only compete with us in a very very narrow slice of our product portfolio that said we've competed with those companies in some cases for.

Couple of decades now.

So competition there isn't new.

And.

So there are good competitors, we can learn from them, we're not dismissive of them and we closely we very closely track and I believe the number somewhere around 75 different competitors around the world.

That will compete with.

The third competitive advantages.

The reach of our market channels, and especially when you look at some of the smaller competitors in China.

Don't have the reach they don't have the breadth of portfolio that attracts customers.

For engagement and that just gives us better insight.

And then the last is diversity and longevity, so theres not one market or technology that we're dependent on.

Two to provide market share lift now will be dependent on all of them.

Sometimes in the short term that may.

Favre, one competitor versus another but longer term because we compete broadly in all the markets. We think that that will translate into long term and sticky sticky share gains so.

Overall, we are pleased.

Excited about where we are from a position standpoint, whether we're looking at our traditional competitors here in the U S for Europe .

And as well as those.

In China, so well. Thank you very much I'll turn it over to Raphael to wrap this up thanks, Dave 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 progress and generate long term value for our owners is the growth of free cash.

Per share.

While we strive to achieve our objective we will continue to pursue our three ambitions, who will act like owners, who will own the company for decades, we will adapt and succeed in a world of ever changing and we will be a company that we're personally proud to be a part of and would one as our neighbor when we're successful employees customers communities and owners.

Paul benefit thank you and have a good evening.

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

Q1 2023 Texas Instruments Inc Earnings Call

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