Q2 2023 Texas Instruments Inc Earnings Call
Okay.
Welcome to the Texas instruments second 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 I R.
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 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 insight into second quarter revenue results with some details of what we're seeing with respect to our end markets.
And lastly, Raphael will cover the financial results and our guidance for the third quarter of 2023.
Starting with a quick overview of the quarter revenue in the quarter came in about as expected at $4 5 billion, an increase of 3% sequentially and a decrease of 13% year over year.
Analog revenue declined 18% embedded processing grew 9% and our other segment declined 10% from the year ago quarter.
Now I'll provide some insight into our second quarter revenue by market during the quarter, we experienced continued weakness across all markets except automotive.
Similar to last quarter I'll focus on sequential performance as it is more informative at this time.
First the industrial market was about flat next the automotive market was up low single digits.
Personal electronics was up low single digits after several quarters of sequential declines.
And next communications equipment was down mid teens, and finally enterprise systems was down mid single digits.
Raphael will now review profitability capital management, and our outlook Raphael.
Thanks, Dave and good afternoon, everyone.
As Dave mentioned second quarter revenue was $4 $5 billion down 13% from a year ago.
Gross profit in the quarter was $2 $9 billion or 64% of revenue from a year ago gross profit decreased primarily due to lower revenue increased capital expenditures and the transition of L fab related charges to cost of revenue.
Gross profit margin decreased 540 basis points.
Operating expenses in the quarter were $938 million up 12% from a year ago and about as expected.
On a trailing 12 month basis operating expenses were $3 $6 billion or 19% of revenue.
Operating profit was $2 billion in the quarter or 44% of revenue and was down 28% from the year ago quarter.
Net income in the second quarter was $1 $7 billion or $1 87 per share.
Let me now comment on our capital management results, starting with our cash generation.
Cash flow from operations was $1 $4 billion in the quarter and $7 $4 billion on a trailing 12 month basis capital expenditures were $1 $4 billion in the quarter and $4 $2 billion over the last 12 months free.
Free cash flow on a trailing 12 month basis was $3 $2 billion in the quarter, we paid $1 $1 billion in dividends and repurchased about $80 million of our own stock in total we have returned $6 $5 billion in the past 12 months.
Our balance sheet remains strong with $9 $6 billion of cash and short term investments at the end of the second quarter.
In the quarter, we repaid $500 million of debt and issued $1 $6 billion of that.
Total debt outstanding was 11 $3 billion with a weighted average coupon of three 5% inventory dollars were up $441 million from the prior quarter to $3 $7 billion and days were 207 up 12 days sequentially.
For the third quarter, we expect the AD revenue in the range of $4 three six to $4 $74 billion and earnings per share to be in the range of $1 68 to $1 92.
Lastly, we continue to expect our 2023 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, where 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 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 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 he 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 Heath.
Okay.
And our first question comes from the line of ARIA.
ARIA with Banc of America Securities. Please proceed with your question.
Thanks for taking my question I had a high level question, which is when I compare the ice sales growth tied down almost 13, 14%.
Yet down double digits.
Bush's theaters at significantly below and when I look at your trailing 12 month free cash flow of about 17%.
If my model is right that is the lowest since 2010, but what point with DSA it that something needs to change in the strategy to help close the gap on the growth side and to have a free cash flow margin get back to the trend line. So I understand that obviously, you're not optimizing the model for just one year.
But now we have seen this consistent decline in free cash flow per share because your preferred metric. So at what point should we start to see.
See our free cash will get back to historical trends.
Yes so.
Thanks, Vivek, let me start and David if you want to China chime in but.
Big picture step back.
Well, we told you during capital management and the investment that we're making are long term in nature as we alluded to in your question and we are going to enable.
Revenue growth for the company for the next 10 to 15 years. Okay. So that's that's how we're thinking about it.
And that's why we're making this investment.
On Capex in particular about $5 billion per year for the next four years and we are committed to those investments we're excited to making those investments regardless of a.
Of the short term fluctuations of.
Of revenue and of course, lower revenue means lower operating cash, which now with the with the Capex. That's why you see on the free cash flow is not unexpected, yes, and maybe I'll just add that.
Vivek as you know and have followed us for some time one of our competitive advantages is manufacturing and technology. So these capex investments really are strengthening that advantage over time.
It's fairly obvious that that.
Those investments will allow us to produce products.
At <unk>.
Significantly lower cost.
To service demand.
Controlling those assets in todays world is increasingly important so customers can see the investments that we're making.
Not only with that the other systems that we've got to make it easier to do business with us combined with the inventory, we're putting in place to support their growth.
And customer reactions are extremely positive to that so.
We believe these will be great investments for all of US long term follow on.
Thank you.
Yes, maybe.
Asked the same question in a different day right and with respect I mean do you have the same strategy towards three years ago also but we saw sales.
Grow worse than peers last year and is that again growing worse than peers. This year. So it's not a one quarter or two quarter phenomenon I think it would have been under growing your peer group.
Almost two years now and Capex is growing while sales are declining so that's why I'm questioning whether that strategy is still.
Right.
The results are actually justifying the strategy.
Yeah, I'll start and Raphael if you want to add again, we've talked about is.
Sure It doesn't move quickly inside of our markets.
I think that depending on the peer you're comparing to.
Oftentimes the.
Market exposure can explain a good portion of it.
There is other factors like how much distribution is someone using as you know we've transitioned from <unk>.
Mostly using distribution to mostly.
<unk> revenue come direct so there is inventory that needed to be burned out of the channel as we made that transition.
There's multiple factors I think going forward.
Our confidence in being able to continue to gain share is extremely high customer reaction to the capacity that they know they need to have wanting to know that they've got capacity runway not from some months manufacturing supplier or directly from someone that makes it makes their products.
<unk>.
Is really resonates with the customers.
Okay. Thank you we'll go to the next caller please.
Our next question comes from the line of Toshi Hari with Goldman Sachs. Please proceed with your question.
Hi, guys. Thank you for taking the question My first one is on your Q3 guidance.
We're guiding revenue up 1% sequentially.
David you called out automotive is the one end market that continues to be healthy, but anything to point out or any any standout. So as you think about the sequential trajectory from Q2 to Q3 or is it a continuation of what you saw in Q2.
Yes.
Just point out that.
This last.
Quarter.
We saw weakness across the board in our markets with the exception of automotive like you've.
You've called out and just point out that that continued asynchronous behavior.
We had to.
We can back in.
In second quarter.
A year ago.
The other markets followed but obviously.
The exception of that with automotive continued to be strong and its up over over 20% year on year, So definitely very strong growth there.
And as we look into third quarter.
We're not expecting to see any significant change.
End markets compared to this last quarter follow on.
Thanks.
Inventory on your balance sheet was up I think 13% sequentially days grew to <unk> seven.
I know on your capital management call you you revised up the upper range of your target to more than 200.
I also appreciate Dave the transition from <unk> to direct but at what point.
Or do you think you need to.
Cut production or cut utilization rates and start to manage down inventory are you still comfortable with with where things are today.
Yes, thanks for the question.
Yes, we are comfortable where we are.
Minder, our objective for inventories to maintain high levels of customer service and minimize obsolescence.
I want you to slide 13 at our capital management call that shows.
The semiconductor cycle over many years over about 30, some years and.
What.
That informs us on what could happen in the future and we were planning for the long term growth through those cycles not in any one quarter or even any one year.
And of course inventory levels always depend on demand expectations and for the time being in the near term, we will likely have an upward bias.
Okay. So just to clarify youre still running your fabs full at this point.
Utilization of this last quarter was lower than the previous quarter that was largely a function of adding capacity.
Okay. Thank you.
Thank you for this year and next caller please.
Next question comes from the line of Stacy Raskin with Bernstein Research. Please proceed with your question.
Hi, guys. Thanks for taking my questions for my first one just just to follow up on that you said inventories have an upward bias. So that means inventory dollars and days do you expect to increase again in Q3.
Well the days.
<unk> on revenue of course.
But on the $1 has an upward bias.
Very likely that the dollars will go up in Q3 of course.
And you know theres right, but inventory is on the balance sheet at one point in time, but it is meant to support the future.
Growth.
Days is about a couple of quarters worth of inventory in various stages of finished how many quarters, because theyre going to keep going up for though.
That's going to depend on our revenue expectations are being.
Beyond now and then the decisions that we make on the factory and we forecast one quarter at a time just know that.
I think in its long term in nature as I talked.
Mentioned to the previous call and we're managing through the cycles right. So not.
What's going to happen in one quarter or even two quarters. What we think is going to happen over the over a longer than that on inventory and capacity. We are adding capacity that's going to support us for for many years right. So he is going to give us.
Plenty of headroom, one more comment on inventory just for those who maybe have not listened to us.
Very often.
But.
Our inventory has very low obsolescence.
The bulk of it is for catalog bars that the inventory itself.
The year is in fact up to 10 years on the shelf, but the product lifecycle.
Very long with our customers than we have in many cases tens or dozens of customers that buy the product. So the risk of obsolescence is very well understood. Okay.
Okay. Thank you Stacy we will go to the next caller. Please.
Right.
Yes. Thank you.
Our next question comes from the line of Chris Danley with Citigroup. Please proceed with your question.
Hey, Thanks, guys and by the way thanks for having a nice concise conference call. It's unique in semi is much appreciated.
My first question is just on <unk>.
Lead times and shortages.
Given all the capacity you're adding in the inventory can we pretty much say that ti lead times or the lowest at least among peers in the shortages are all gone and we pretty much I guess quote unquote back to normal.
Are there any metrics that you could share with us sort of now versus three or six months ago on the improvement there.
Yes, Chris what I would how I would frame it.
Today is we've got the vast majority of our products are available on <unk> dot com for immediate shipment and <unk>.
As Raphael talked about.
Whenever the upturn does come.
We'll have product available as well as capacity behind that to be able to.
Port that demand.
Now if a customer wants to give us an order at lead time.
Lead times over over the cycle hasn't changed that much.
So they can place that order or if they need inside of that they can.
For the vast majority of the products have it available now.
Now we do have hotspots will probably always have a.
<unk>, where we have demand and supply imbalance.
But those hotspots are closing in closing pretty quickly.
As Rafael talked about we're bringing on capacity every quarter. So that just gives us more flexibility to be able to meet customer demand. When it does vary beyond what we've got on hand.
Sure.
Yes earlier in the call.
A bunch of the calls you keep talking about your advantages in manufacturing and given you have more internal manufacturing and more 300 millimeter than the competitors.
Our U R.
I guess are you guys getting a little more aggressive on price are you able to price below the competition is this something that has happened recently some of your competitors have I guess quote unquote complained about ti getting more aggressive in price recently.
What is your response to that.
Yes, yes.
For the question, Chris in our pricing strategy.
It Hasnt changed and of course, we regularly monitor.
The pricing of all of our products.
We may maintain the goal to continue to gain share over time, but there's nothing unusual going on with pricing today.
And I'll point out the fact that we opened up our fab one we had.
75% of the tools needed inside of that factory.
There was a hand ringing back then if you remember that we were going to do something on natural and what we talked about was putting in place that capacity to support growth and thats.
What it did.
Thank you Chris.
Yeah.
Our next question comes from the line of Harlan sur with Jpmorgan. Please proceed with your question.
Yes. Thank you good afternoon up until the March quarter, the team had seen three consecutive quarters of increasing cancellations.
And pushed out some of the typical sort of customer behavior in a weak demand environment.
The team continued to see cancellations and pushout activity expanded in the June quarter or have you guys are.
Have you or are you seeing signs of stabilization.
Yes.
The way I would describe that as the cancellations remain at elevated levels.
And we believe that customers are continuing to work down inventories to.
To get that more in line with demand.
So on.
Yes, thanks for that so your embedded business continues to hold up very well right I think trailing 12 months.
It's up 9% year over year versus your analog business, which is down seven I know part of it is due to the strategy of the refocusing of the MCU businesses over the past few years.
Our general purpose catalog focus right, but it also seems to be reflecting this.
The broader trend in the industry, if I look at the FAA data.
You and your other MCU competitors, where industry MCU trends year over year are holding up much much better versus your analog I just wanted to get the team's perspective on why the large delta in performance analog versus embedded.
Yes, yes, thanks for that question Harlan and how you framed it I would say.
At a top level.
The changes that we have made to our product portfolio the design in.
That and the customer response to those products as we've.
Put them out in the marketplace continues to be very strong.
Our confidence.
That that business will grow and gain market share over the long term is extremely high based on that and as we've talked about before we're putting in place to be able to support that growth for embedded internally.
And that is a position that we haven't been in quite some time.
Near term I would say.
Besides things.
Stabilizing we've experienced greater supply constraints over the last two years is embedded has previously had to rely on.
On foundries to supply that demand.
So those constraints are alleviated and I think that thats.
Yes.
Just something that you see across across the industry.
So thank you Harlan we will go to the next caller.
Our next question comes from the line of Blayne Curtis with Barclays. Please proceed with your question.
Thanks for taking my question I just wanted to go back to the decision I understand the inventory is not going to be obsolete.
Obsolete, but it's eventually going to kind of steal from your future ability to scale gross margin. So I mean at the current run rate Youre kind of building out like a $23 billion run rate and it's going to only increase next year. So what's the harm and pulling it back a bit I am just trying to understand and from here.
Pulling back Utilizations are not building so much inventory.
In the Big scheme of things our goal here is to support our revenue growth is not frankly to optimize short term fluctuations in gross margins just are not irrelevant of course, but it's just the focus is.
On supporting revenue growth.
In the short term midterm and long term inventory supports short term to mid term.
Fluctuations that we that we can.
Ah mitigate we're having plenty of inventory and the incremental cost of inventory is really low as I as we talked about on the obsolescence side also on the on the variable cost nature of what goes into inventory. So those are just things that we keep in mind, when and trying to make those decisions.
And then I just want.
Yes, I just wanted to ask on gross margins I mean, I know you don't give perfect color, but it seems like it's down at least 150 basis points sequentially.
Maybe consumers are mixed but I'm just kind of curious is it just depreciation layering in or is there any other puts and takes on gross margin.
So I assume youre talking about third quarter, so yeah, our guidance and as you pointed out we only give topline and EPS, but our guidance is the best estimate that we have.
And our gross margins.
Yeah.
Or I'm, sorry, or that guidance embeds.
The revenue is flat in that particular case and it embeds.
The result in depreciation and other related costs from added capacity over time on a year on year basis. I know you asked sequentially. It was just a reminder, on a year on year basis.
Keep in mind that last year, we had the.
Lehigh acquisition fab cost in restructuring and now it is in <unk> and cost of revenue as of December of last year's when money moves.
So, yes, so year on year.
Change in revenue the increase in our moving of the costs from the.
Restructuring into most of that into cost of revenue.
And depreciation as well as depreciation so thank you Blake and we will go to go to the next caller. Please.
Our next question comes from the line of Joshua <unk> with TD Cowen. Please proceed with your question.
Hey, guys. Thanks for taking my question I guess I wanted to follow up on the previous one.
I'd ask you about the we understand that depreciation flow through rate that is what it is but can you maybe talk through some of the near to medium term milestones when that 300 millimeter increased output could start to benefit gross margin and sort of help offset that depreciation headwinds. Thank you.
Yes.
Just.
But I would tell you is depreciation the way we depreciate equipment is over five years buildings is much longer usually they averaged about 30 years or so.
But considered AD that equipment last a lot longer than five years right. We have factories today that that are running on 50 years plus some of that has had upgraded equipment, but but broadly speaking that equipment last for decades not there.
Another five years, where we depreciate it.
It's probably an unfair comparison to try to put the 300 benefit next to the depreciation and expect.
And offsetting that in the short term I would suggest you think of it from.
From a cash standpoint, we're investing that capex is cash forget about the depreciation is capex is where we're investing that's going to enable.
Growth by adding that internal capacity, which as David alluded to earlier that is geopolitically dependable capacity.
We're putting as many as four fabs in Sherman to in Richardson to in.
In Lehigh in Utah and then.
Assembly test facilities in Asia, primarily.
Malaysia and in <unk>.
<unk> for example, so.
So that's going to put us in a really great position to grow the top line for a long time and then what happens there is that that yields a lot of operating cash.
For a company then we can either redeploy or return to the owners of the company after those investments.
To follow on Josh.
Yes sure. Thank you.
You guys. The language is similar to last quarter regarding the end market commentary, but did anything change yet.
Better or worse intra quarter and in particular.
Personal electronics grew you've talked in the past about it sort of being a four quarter cycle is it safe to say that that's sort of bottom now thank you.
Yeah, again, I think that.
Overall, we had continued to see that asynchronous behavior as.
As we started.
Back a year ago.
So that has that has continued.
P/e.
It started we started to see weakness in in Q2.
So we've completed now.
It actually grew for the second so we've got several quarters of decline.
It was up.
Slightly sequentially.
And again, we're not expecting much change in our end markets as we as we look forward. So okay. Thank you and let's go to our last caller. Please.
Our next caller comes from the line of Chris Caso Wolfe Research. Please proceed with your question.
Yes. Thank you good evening.
I guess just following up on the last few questions.
Perhaps you could differentiate a little bit about where you think your customers are still burning through inventory as compared to end demand.
Noted the P segment started to see weakness earlier, we've heard from some others that it's no longer an inventory issue it's more of a.
Demand issue, perhaps you could talk to that for.
Some of your other end markets.
Where we could see incremental weakness of customers still need to bring down inventory further.
Yes, Chris I think if you look across the end markets broadly.
You could say that all of them.
Showed weakness.
Reflective of customers, reducing inventories with the exception of automotive.
And even inside of that of course, if you look at industrial it's not all the sectors arent identical.
You had strength in aerospace grid infrastructure.
Other sectors like that so NPS the same way not all of the.
Not all of the sectors were as weak or strong as others. So.
But broadly you could say it was.
Across each of those markets follow on.
I do thanks, and maybe as a follow on I'll hit on the segment that Hasnt been strong auto and when this downturn began.
I believe your commentary was that what it was.
Had remained stable than you thought that eventually it would come to auto just because it always has in the past.
So far it hasn't I think it surprised a lot of us the resilience on that.
Has your view changed about.
The resilience of the auto market do you still expect that that has to correct at some point.
And if not why do you think it's different.
Yes so.
It wouldn't surprise us if it if it corrected.
Don't think anyone can declare.
Certainty on those types of things in the future.
But.
I think that customers will build inventory.
I've got 37 years of experience in the industry now.
And Thats the way the markets have behaved in the past so that's generally a good guide in the future but.
I think you cant you cant pound the table and make make absolutes, but certainly wouldn't be surprised if that were the case, so with that we'll hand it over to Raphael to wrap this up thanks, David Let me wrap up by emphasizing what we have said previously at our core we're engineers and technology is the foundation of our company but.
Our objective in the best metric to measure our progress and generate value for owners is a long term growth of free cash flow per share, while we strive to achieve our objectives. 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 is ever changing and we will be a company that we are personally proud to be a part of and would one is our neighbor when were successful our employees customers communities and owners all benefit. Thank you and have a good evening.
And this concludes today's conference you may disconnect your lines at this time. Thank you.
You for your participation.
Yeah.
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