Q3 2023 Texas Instruments Inc Earnings Call

Welcome to the Texas Instruments' third 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 NEC.

Next I'll provide insight into third quarter revenue results with some details of what we're seeing with respect to our end markets.

Lastly, Raphael will cover the financial results give an update on capital management as well as share the guidance for our fourth quarter 2023.

Starting with a quick overview of the quarter revenue in the quarter came in about as expected at $4.5 billion flat sequentially and a decrease of 14% year over year.

Analog revenue declined 16% embedded processing grew 8% and our other segment declined 32% from the year ago quarter.

Now I'll provide some insight into our third quarter revenue by market during the quarter automotive growth continued and industrial weakness broadened.

Similar to last quarter I'll focus on our sequential performance as it's more informative at this time.

First the industrial market was down mid single digits with weakness broadening across nearly all sectors.

The automotive market continued to grow and was up mid single digits.

Personal electronics was up about 20% off a low base.

And next communications equipment was down upper teens, and finally enterprise systems grew upper single digits.

Given where the market is now it's a good time to remind everyone of our plan in areas of strategic investments.

First our confidence and the secular growth of semiconductor content per system, especially in industrial and automotive remains high and we're well positioned in these markets.

Second our long term 300 millimeter manufacturing roadmap provides our customers with geopolitical dependable capacity.

To support these build outs and enable future growth. We continue to expect associated capital expenditures to be about $5 billion per year through 2026.

In addition, we made good progress on our inventory replenishment consistent with our long term objectives to support growth and provide high levels of customer service.

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

Dave and good afternoon, everyone third quarter revenue was $4 $5 billion down 14% from a year ago.

Gross profit in the quarter was $2.8 billion or 62% of revenue.

From a year ago gross profit decreased primarily due to lower revenue and to a lesser extent higher manufacturing costs associated with planned capacity expansion and reduced factory loadings.

As a reminder, L fab related charges transition to cost of revenue in the fourth quarter of 2020 two.

Gross profit margin decreased 690 basis points.

Operating expenses in the quarter were $923 million up 7% from a year ago and about as expected.

On a trailing 12 month basis operating expenses were $3 $7 billion or 20% of revenue.

Operating profit was $1.9 billion in the quarter or 42% of revenue and was down 29% from the year ago quarter.

Unknown Executive: Welcome to the Texas Instruments third quarter 2023 earnings conference call.

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

Dave Pahl: I'm Dave Pahl, head of investor relations, and I'm joined by our chief financial officer, Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.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 for 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 recent SEC filings for a more complete description.

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

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

Cash flow from operations was $1.9 billion in the quarter and $6 $5 billion on a trailing 12 month basis copied.

Capital expenditures were $1 $5 billion in the quarter and $4 $9 billion over the last 12 months.

Free cash flow on a trailing 12 month basis was $1 $6 billion.

In the quarter, we paid $1 $1 billion in dividends and repurchased about $50 million of our stock in September we announced we would increase our dividend by 5%, marking our 20th consecutive year of dividend increases.

Dave Pahl: Today, we'll provide the following updates. First, I'll start with a quick overview of the quarter. Next, I'll provide insight into third quarter revenue results with some details of what we're seeing with respect to our end markets.

This action reflects our continued commitment to return free cash flow to our owners over time in total we have returned $5 $6 billion in the past 12 months.

Dave Pahl: Lastly, Rafael will cover the financial results given update on capital management as well as share the guidance for our fourth quarter 2023. Starting with a quick overview of the quarter, revenue in the quarter came in about as expected at $4.5 billion flat sequentially and a decrease of 14% year over year. Analog revenue declined 16% embedded processing grew 8% and our other segment declined 32% from the year ago quarter.

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

Total debt outstanding was $11.3 billion with a weighted average coupon of three 5%.

Inventory at the end of the quarter was $3.9 billion and days were 205 down two days sequentially.

Inventory was up $179 million in the third quarter less than half the increase versus the prior quarter.

Dave Pahl: Now, I'll provide some insight into our third quarter revenue by market. During the quarter, automotive growth continued and industrial weakness broadened. Similar to last quarter, I'll focus on a sequential performance as it's more informative at this time. First, the industrial market was down mid-single digits with weakness broadening across nearly all sectors. The automotive market continued to grow and was up mid-single digits. Personal electronics was up about 20% off a low base. And next, communications equipment was down upper teens. And finally, enterprise systems grew upper single digits.

As we near our desired inventory levels. Therefore, we began to lower factory starts in the third quarter, which results in additional charges to the income statement. This impact is comprehended in our outlook.

For the fourth quarter, we expect Ti revenue in the range of $3 $93 billion to $4.27 billion and earnings per share to be in the range of $1 35 to $1 57, as we continue to operate in a weak environment.

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

You're looking at your models for 'twenty 'twenty four based on current tax law, we would expect our effective tax rate to remain about what it is in 2020 three.

Dave Pahl: Given where the market is now, it's a good time to remind everyone of our plan and areas of strategic investments. First, our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive, remains high and were well positioned in these markets. Second, our long-term 300-millimeter manufacturing roadmap provides our customers with geopolitically dependable capacity. To support these build-outs and enable future growth, we continue to expect associated capital expenditures to be about $5 billion per year through 2026. In addition, we made good progress on our inventory of replenishment, consistent with our long-term objectives to support growth and provide high levels of customer service.

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 many factoring in technology, our broad product portfolio for 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 an 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.

Rafael Lizardi: Raphael will now review profitability, capital management, and our outlook. Raphael, thanks Dave and good afternoon everyone. Third quarter revenue was $4.5 billion, down 14% from a year. General, Gross Profit in the Quarter was $2.8 billion or 62% of revenue. From a year ago, Gross Profit Decrease primarily due to lower revenue and to a lesser extent, higher manufacturing costs associated with planned capacity expansion and reduced factory loadings. As a reminder, L-Fab related charges transitioned to cost of revenue in the fourth quarter of 2022.

Thank you at this time, we'll be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.

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 keys.

Our first question comes from the line of Stacy <unk> with Bernstein Research. Please proceed with your question.

Hey, guys. Thanks for taking my questions. My first one I did want to ask about gross margin. So I mean, depending on what I assume for Opex next where I'm getting something like 250 basis points of compression maybe more I know you talked a little bit about how some of that is the impact of utilization can you give us some feeling or I guess like the magnitude of the different driver utilization.

Rafael Lizardi: Gross Operating expenses in the quarter were $923 million, up 7% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion or 20% of revenue. Operating profit was $1.9 billion in the quarter or 42% of revenue and was down 29% from the year ago quarter. Net income in the third quarter was $1.7 billion or $1.85 per share. Earnings per share included as 5% benefit for items that were not in our original guidance.

So lower revenue depreciation pricing and how we ought to be thinking about that trajectory as we get into next year. Like is there. A is there is there more and more to go I guess is what I'm asking.

Yeah. Thanks, Dave So let me let me try to help you with that of course, we are for the forecast we gave a range on revenue on a rig can it be as not the pieces, but let me let me go through I'm sorry, what.

Rafael Lizardi: Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.9 billion in the quarter and $6.5 billion on a trailing 12-month basis. Capital expenditures were $1.5 billion in the quarter and $4.9 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.6 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $50 million of our stock.

I said for third quarter, which applies.

Uh huh.

<unk> fourth quarter and beyond so.

For third quarter like I said in the prepared remarks.

In third quarter gross profit decreased primarily due to revenues as the first driver then to a lesser extend higher manufacturing cost associated with planned capacity expansion, namely depreciation is the main one there and reduced factory loadings and that's the the Underutilization components.

Dana as I also said in the prepared remarks inventory, which is the other side of the coin.

Rafael Lizardi: In September, we announced we would increase our dividend by 5%. Marking our 20th consecutive year of dividend increases. This action reflects our continued commitment to return free cash flow to our owners over time. In total, we have returned $5.6 billion in the past 12 months.

As we near desired levels of inventory will began lowering factory starting the third quarter. So there was an impact in third quarter due to that on a on the income statement there'll be a bigger impact in in fourth quarter due to that beyond that you know, we're not forecasting but of course that will depend on revenue expectations Welling.

Rafael Lizardi: Our balance sheet remains strong with $8.9 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%. Inventory at the end of the quarter was $3.9 billion and days were 205, down two days sequentially. Inventory was up $179 billion in the third quarter, less than half the increase versus the prior quarter as we near our desired inventory levels. Therefore, we began to lower factory starts in the third quarter, which results in additional charges to the income statement. This impact is comprehended in our outlook.

To into next year.

We have a follow up.

I do think so.

Can you give us a little color on the end market behavior in Q3.

Can you give us some some thoughts at least even qualitatively what to expect by end market into Q4, and particularly for auto it sounds like auto in Q3 was so strong do you still see that strength continuing into.

In Q4 and beyond.

Yes.

I'll take that.

When you look at the guidance.

It would suggest and we believe that we continue to operate in a weak environment in general.

And if there was something significant that was changing from one quarter to the next is our typical practice.

Rafael Lizardi: For the fourth quarter, we expect TI revenue in the range of 3.93 to 4.27 billion dollars and earnings per share to be in the range of $1.35 to $1.57 as we continue to operate in a weak environment. Lastly, we continue to expect our 2023 effective tax rate to be about 13 to 14 percent.

Highlight that and we just don't have anything to specifically call out for at <unk> in the fourth quarter. So thanks, and we'll go to the next caller. Please.

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

Thanks, a lot Dave I also had a question on autos it sounds like it's holding in there. Despite this broadening strike and and I guess the question is.

Rafael Lizardi: As you are looking at your models for 2024, based on current tax law, we would expect our effective tax rate to remain about what it is in 2020- 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, a broad product portfolio, reach of our channels and diverse and long live positions. We will continue to strengthen these advantages through discipline, capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free casual per share growth over the long term.

Are more of your customers on consignment and that business or is that split in auto is about the same as that two third one third versus the rest of the company and I ask because I'm wondering sort of what youre seeing on the on the.

Just decide that you would sell into autos do you see bookings at least weakening that would be more consistent with.

With what we're seeing in terms of this strike and some of the weak macro numbers that we see.

Sure Yeah.

As we mentioned in the prepared remarks. It was up auto was up mid single digits sequentially and it was up 20% when you look year on year. So obviously.

Dave Pahl: With that, let me turn it back to Dave. Thanks, Rafael.

Unknown Executive: Operator, you can now open the lines for questions in order to provide as many of you as possible an 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.

That growth had continued in.

In general I would say that.

A.

Market like.

Automotive and personal electronics will have larger customers those larger customers tend to.

Be biased.

Unknown Executive: At this time, we'll 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.

More consignment so.

We would have that probably more in automotive.

And if I contrast, it to a market perhaps like industrial.

But overall.

As you know we've moved to having closer direct relationships with customers, which would include.

The customers that we have in automotive I think we service pretty close to 1000 or so different to automotive OEM. So there is quite a bit of broad broadness and who we serve there have fallen Tim I.

Stacy Raskin: Our first question comes from the line of Stacy Raskand with Bernstein Research. Please proceed with your question. Hi guys, thanks for taking my question.

Rafael Lizardi: My first question, I did want to ask about gross margins. Depending on what I assume for Optics where I'm getting something like 250 basis points of compression, maybe more. I know you talked a little bit about how some of that is the impact of utilization. Can you give us some feelings for, I guess, the magnitude of the different drivers utilization, lower revenue depreciation pricing? How we ought to be thinking about that trajectory, as we get into the next year, is there more to go, I guess, is what I'm asking. Yeah, so thanks, Stacy. Let me try to help you with that. Of course, we afford a forecast.

Dave Yes, so what would it take to for you to think about cutting capex and I ask because the plan was put into place when revenue was quite a bit higher than where it is today is there kind of a line in the sand for revenue, where you would reconsider the plan I know you've actually increased the plan well revenues continue to be.

But is there some like tree around.

Is there some.

To this point you would consider cutting capex.

Entering any kind of thing.

Yeah, let me comment on that.

Very pleased with our progress on our manufacturing expansion, there will provide geopolitically dependable capacity for to support customer growth.

Rafael Lizardi: We give a range of revenue, an arrangement in the past, not the pieces, but let me, let me go through some of what I said for third quarter, which applies for fourth quarter and beyond. So, for third quarter, like I said on the prepared remarks, in third quarter, gross profit decreased primarily due to revenues as the first driver. Then to a lesser extent, higher manufacturing cost associated with planned capacity expansion, namely depreciation is the main one there and reduce the factory loadings and that's the under utilization component.

For the coming decade, and as you know semiconductor content continues to increase.

And to provide us the ability to grow at that 10% growth rate that we talked about at the last capital management goal in the market require that.

We will continue to to make those investments. So we continue to expect $5 billion of Capex per year in 'twenty three 'twenty four 'twenty five 'twenty six so you should count on that that mean.

Rafael Lizardi: Then, as I also said in the prepared remarks, inventory, which is the other side of the coin, as we near desired levels of inventory will begin lowering factory starting the third quarter, so there was an impact in third quarter due to that on the income statement, there'll be a bigger impact in in fourth quarter due to that. Beyond that, you know, we're not forecasting, but of course that will depend on revenue expectations well into into next year.

Let me also give everyone as a reminder.

This capex numbers our growth, meaning they do not include benefits from the ITC or grains from the chipset.

So we're actively working through the grant application process with the Chip program office, which we believe will be meaningful to our manufacturing operations in Texas, and Utah and will help support.

Semiconductor growth for decades to come and funding from the shift from the chips at Grand was comprehended in our decision making for these investments alright. Thank you Tim will go to the next caller. Please.

Rafael Lizardi: Do you have a follow up? I do thanks. So, you gave us a little color on the end market behavior in Q3. Can you give us some thoughts that we can qualitatively what to expect by end market into Q4 and particularly for auto, it sounds like auto and Q3 was so strong. Do you still see that strength continuing in the Q4 and the UN? Yeah, Stacy, I'll take that. You know, when you look at the guidance, it would suggest, and we believe that we continue to operate in a weak environment in general.

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

Hi, guys. Thanks for asking a question in the third quarter I think it was the first time in a few years that you guys. Just came in at the midpoint of your guidance usually you beat it by two to three 4% something like that so I guess my question is anything strange in the linearity in the quarter either by end market just aggregate bookings any color on that you can provide.

Rafael Lizardi: And if there was something significant that was changing from one quarter to the next, as our typical practice, you know, we highlight that. And we just don't have anything to specifically call out for up or into fourth quarter. So thanks, and we'll go to the next caller, please.

Nothing strange.

Ross I would say that the revenue built as we went through through the quarter.

And I would say just in general it's reflective of a week.

Environment that we're operating in so which is obvious from the guidance that we're giving you a follow on.

Timothy Arcuri: Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question. Thanks a lot. Dave, I also had a question on autos. It sounds like it's holding in there despite this broadening strike. And, and I guess the question is, are more of your customers on consignment in that business, or is this split in autos about the same as that, you know, two third, one third versus the rest of the company?

I did on the end market side of things you said automotive was up about 20% year over year I know oftentimes you go between getting sequential or year over years, but could you give us year over years by the end markets.

Certainly certainly yes, so industrial market was down mid teens, I mentioned automotive was up about 20%.

Timothy Arcuri: And I asked because I'm wondering, sort of what you're seeing on the on the, you know, if you decide that you would sell into autos, do you see bookings at least weakening that would be more consistent with with what we're seeing in, you know, terms of this strike and some of the weak macro numbers that we see. Sure. Yeah. And, you know, as we mentioned in the prepared remarks, it was up auto was up the single digits sequentially, and it was up 20% when you look year and year.

Personal electronics was down about 30% comms equipment was down about 50%.

Enterprise system was down about about 40 or so.

I think consistent with that.

Weaker environment that we talked about so thank you Ross will go to the next caller. Please.

Our next question comes from the line of tore.

Toshi Hari with Goldman Sachs. Please proceed with your question.

Timothy Arcuri: So obviously, you know, that growth had continued. In general, I would say that, you know, a market like automotive and personal electronics will have larger customers, those larger customers tend to be biased to more consignment. So we would have that probably more in automotive than if I contrast it to a market, perhaps like industrial, but overall, as you know, we've moved to having closer direct relationships with customers, which would include the customers that we have an automotive. And I think we service pretty close to 1,000 or so different to automotive OEM. So there is quite a bit of broad, broadness and who we serve there. If I want to. I do, Dave. Yeah.

Hi, guys. Thanks for taking the question.

I was hoping you guys could elaborate a little bit on the pricing environment I.

I think many of us have been picking up evidence of the pricing environment, particularly in Asia intensifying over the past couple of months or a couple of quarters.

You don't really give pricing as a reason for gross margins to be down sequentially and year over year, but what kind of role is pricing playing.

Has your strategy changed at all whether it be on the analog side of the MCU side.

Yes so.

Thanks for that question always helpful too.

To clarify that.

First I'll just start with pricing doesn't move quickly in our markets.

Nor is it a primary reason that customers choose our products. So we're typically agreeing to pricing thats out six months or on an annual basis for the following year.

Timothy Arcuri: So what would it take to for you to think about cutting capex? And I asked because the plan was putting to place one, you know, revenue was quite a bit higher than where it is today. Is there kind of a line in the sand for revenue where you would reconsider the plan? And I know you've actually increased the plan. Well, you know, revenues continue to weaken, but is there some like three around, you know, is there some, if it weakens to this point, you consider cutting capex.

And so we're continuing to move through that our pricing strategy as we mentioned before Hasnt changed.

So we're.

Regularly monitored monitoring what's going on with pricing, we always have a goal to remain competitive and.

And certainly a supply and demand has come into balance or more closer to balance. We've said for some time that we would expect that.

Timothy Arcuri: Just, you know, wondering any comments there things. Yeah, let me comment on that. You know, we're very pleased with the progress on our manufacturing expansion. There will provide geopolitically dependable capacity for to support customer growth for the coming decade. And as you know, semiconductor content continues to increase and to provide us the ability to grow at that 10% growth rate that we talked about at the last capital management call if the market requires that will continue to make those investments.

Pricing to behave like it has over the last couple of decades meeting low single digit decline. So as we move out in time, that's what we're beginning to beginning to see so really no changes other.

And going back to what we've seen over.

Over the last couple of decades.

Yep.

Yes, Thanks, Dave.

So I guess over the past 12 months Opex is up about 10%.

Timothy Arcuri: So we continue to expect $5 billion of capex per year in 23, 24, 25 and 26. So you should count on that. Let me also give everyone as a reminder, this capex numbers are gross, meaning they do not include benefits from the ITC or grants from the chip stack. So we're actually working through the grand application process with the chip program office, which we believe will be meaningful to our manufacturing operations in Texas and Utah and will help support semiconductor growth for decades to come. And funding from the chip from the chip stack grant was comprehended in our decision making for this investment. Great. Thank you, Tim.

Revenue is down about 10, so as we think about calendar 'twenty four I was hoping you could give us a hint as to how to think about opex.

Unknown Executive: We'll go to the next column, please.

And Dave I think you used to give or you had given multiyear guidance on depreciation.

How should we to the extent there are any updates how should we think about 'twenty four 'twenty five depreciation. Thank you yes. Thanks for the question I'll address both the Opex and depreciation so.

On Opex.

<unk>.

<unk> held a steady hand on opex for many years and will continue to do so so as an example to illustrate the point.

2017 to 2021, we ran at about $3 $2 billion of Opex.

And then in 'twenty two it ticked up to $3 4 billion.

And now we're running at about $3 7 billion on a trailing 12 month basis. So you can see the steady hand, and just a bit of an increase over the last few years.

Ross Seymore: Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question. Hi guys, thanks for asking a question. In the third quarter, I think it was the first time in a few years that you guys just came in at the midpoint of your guidance. Usually you beat it by two, three, four percent, something like that. So, I guess my question is, anything strange in the linearity in the quarter, either by end-markage, is that forgetful things? Any color on that you could provide?

As we have had a steady hand with our are higher.

Our new college hire then and as we make investments to continue to strengthen.

The company in the case of R&D.

Broad portfolio in the case with fails MTI Dot com.

Ross Seymore: Nothing strange. Ross, I'd say that revenue built as we went through the quarter. And I'd say just in general, to reflective of a week, a week environment that we're operating in, which is obvious from the guidance that we're giving. You have a follow-on? I did. On the end market side of things, you said automotive was up about 20 percent year over year. I know oftentimes you go between giving sequentials or year over years, but could you give us year over years by the end market, please?

The reach of our channels than on depreciation.

Ross Seymore: Certainly. Yeah. So industrial market was down mid-teens. I mentioned automotive was up about 20 percent. Personal electronics was down about 30 percent. Com's equipment was down about 50 and enterprise system was down about about 40. So, I think consistent with that. The weaker environment that we talked about. So, thank you, Ross.

R R.

Our capex expansions are unchanged, we've talked about that address that wave of previous callers a $5 billion of capex per year for the makes the $23 three years beyond that as we have been talking about.

Unknown Executive: We'll go to the next part, please.

Now when it comes to the depreciation as time has passed we have more clarity on what to expect on depreciation so for fourth quarter, Let me start fourth quarter of 2003.

We expect depreciation to increase on a quarterly basis at about the same rate as what we have been seen throughout 2023. So essentially we're going to end the year just shy of $1 $2 billion. Maybe 11, 11, 911, 11 70 somewhere in that in that range.

For the year.

So an update for 2024, we expect depreciation to be between one five and $1 8 billion and for 2025 to be.

Between 2 billion and $2 5 billion.

Toshiya Hari: Our next question comes from the line of Toshia Harry with Goldman Sachs.

Very helpful. Thank you so much.

And we'll go to the next caller please.

Rafael Lizardi: Please will see which you're a question. Hi, guys. Thanks for taking the question. I was hoping you guys could elaborate a little bit on the pricing environment. I think many of us have been picking up evidence of the pricing environment, particularly in Asia, intensifying over the past couple of months or a couple of quarters. You don't really give pricing as a reason for gross margins to be down to quench the year over year, but what kind of role is pricing playing?

Our next question comes from the line of Ambridge.

<unk> <unk> with BMO capital markets. Please proceed with your question.

Alright. Thank you I had a question on the.

Factory loadings of inventory, so correct me if I'm wrong.

I thought the thinking up until now has been we got to be ready for the upturn.

So we are building inventory for that and you have highlighted that over several quarters look we're not we don't have a target, but you did raise the target in terms of how much inventory you want to carry.

Rafael Lizardi: Have your strategy changed at all, whether it be on the analog side or on CSI? Yeah, so thanks for that question. Always helpful to be able to clarify that. First, I'll just start with pricing doesn't move quickly in our markets. It's, you know, nor is it a primary reason the customers choose our products. So, you know, we're typically agreeing to pricing that's out six months or on an annual basis for the following year.

This change.

I want to make sure I'm reading it right that you are taking an underutilization charge because you've reached a desired level of inventory is that a reflection that your ex.

The expectation for the recovery is changing I E.

So a ramp in revenues than what you, perhaps we're thinking a couple of quarters ago.

Let me start and Dave.

I mean, but we have.

Rafael Lizardi: And so we're continuing to move through that our pricing strategy as we mentioned before hasn't changed. So, you know, we're regularly monitoring, you know, what's going on with pricing. We always have a goal to remain competitive. And certainly, you know, a supply demand has come into balance or more closer to balance, you know, we've said for some time that we would expect that pricing to behave like it has over the last couple of decades, meaning, you know, low single digit decline. So, as we move out in time, that's what we're beginning to see.

Uh huh.

Targets for where we want inventory levels to be and that goes by product and by phase of finished of those products. So for example of the 80000 different products that we have.

More than.

That's the majority of those are catalog, meaning they sell to many many customers. They last for a long long time. So we can have.

So many years.

Inventory at the chip level or finished goods level in many cases at both levels.

And Thats based on our internal process to set those so those are the in.

Toshiya Hari: So, really, no changes other than going back to what we've seen over the last couple of years. Yeah, I do. Thanks, Dave. So I guess over the past 12 months, you know, OPEX is up about 10% revenue is down about 10. So as we think about calendar 24, I was hoping you could, you know, give us a hint as to how to think about OPEX. And Dave, I think you used to give or you had given multi-year guidance on depreciation.

Aggregate, that's added up to four to $4 $5 billion and that's what we've been kind of guiding to them we've been talking about.

But what really matters is what happens at a very specific level on a part by part number.

As we have near dose levels and you see our inventory levels, our inventory levels have increased about $500 million per quarter for two quarters and then this last quarter $179 million. So clearly there is a deceleration in that growth and that's on purpose because as we near dose level than we have slowed down the factory started that goes prime.

Toshiya Hari: How should we, to the extent there are any updates? How should we think about 24 and 25? [inaudible] Let me start, Dave, if you want to chime in, but we have targets for where we want inventory levels to be, and that goes by product and by state of finish of those products. For example, of the 80,000 different products that we have, more than the vast majority of those are catalogs, meaning they sell to many, many customers.

With their fast, but also with the assembly test operations.

And then we.

That slowdown will continue into fourth quarter. So the reverse the other side of <unk>.

Hello, and your factory loadings.

The underutilization charges, so as we.

As we near those levels, we are ready.

To be on the other side of this of this cycle for the upturn and of course, it's not just inventory capacity is really the bigger driver, but you know what we've been doing that now for a number of years and where we're investing but inventory really bridges that gap as an upturn happens until you get your factories are really cranking at higher levels.

Yes, and I'll just add.

And bring back to capital management.

We've been saying for I think over a decade now our objective with inventory.

To maintain high levels of customer service.

Keep our lead times stable keep product availability really high so as we talked about earlier.

Dot com really essentially all of our catalog products are available for immediate shipment.

Lead times are stable.

And.

So we are prepared for for that up next upturn when it when it does come and following.

Yes, a quick one Dave.

Just looking at the year over year in the fourth quarter double digit.

The decline in that.

Look back many years.

Other cycles, where we have had multiple quarters of negative.

But many times, we have seen a double digit kind of fourth quarter.

Just wanted your perspective on what you folks are seeing this cycle versus.

No no cycle is the same but just kind of give us just help investors think about how to think about that double digit four quarters.

It could be potentially longer year over year decline. Thank you.

Sure, Yes, and I think we all know.

Being students of studying the cycles over the years, they're all the same and they are all different.

At the same time and they are unique.

One thing that is unique of course with this with this cycle is how the markets.

Have behaved differently, we've seen bifurcation.

And really.

Lined up very well with when markets recovered so.

<unk> was the first to recover.

And it was very strong early on the other markets.

Followed very shortly after that.

Automotive.

Was last as you remember menu.

Many automotive manufacturers struggled to restart their factories.

And people Werent going to showrooms when we're in the midst of the pandemic. So really as we've seen things begin to rollover.

Personal electronics was first it was then followed by the other markets.

Yet we still have.

Automotive that's hanging in there so I think that's the one.

One thing that's unique.

I think as we've learned and studied the cycles, our product portfolio has changed as well over time.

But the best time to be preparing for the upturn as before it shows up so that's what we've been busy doing and we think we're in a great position to.

Yes.

Toshiya Hari: They last for a long long time, so we can have so many years of inventory at the chip level or a finish goods level in many cases at both levels, and that's based on our internal process to set those. So those are the, any aggregate that's added up to four to four and a half billion dollars, and that's what we've been kind of guiding to and we've been talking about. But what really matters is what happens at the very specific level on a part by part number, so as we have near those levels, and you see our inventory level, inventory levels have increased about 500 million per quarter for two quarters and then this last quarter 179 million.

Support the next upturn and to continue to gain share.

So thank you embraced you will go to next caller. Please.

Our next question comes from the line of Vivek.

Area with Banc of America Securities. Please proceed with your question.

Thanks for taking my question.

Wanted to go back to automotive.

To make sure that I understood what you said.

Do your comments imply that youre seeing are largely seasonal environment in Q4 with no change.

Changes in terms of orders to traditional or EV customers and if that is the case, if I understood. It correctly isn't that surprising given the macro headwinds that sector is facing.

Okay.

The rest of your question was on third quarter or on the fourth quarter.

Toshiya Hari: So clearly this is a dissaleration on that growth and that's on purpose, because as we near those levels, then we have slowed down the factory starts that goes primarily with the past, but also with the assembly test operations. And then we that slow them will continue into fourth quarter, so the reverse the other side of a slowing your factory load is the under utilization charge. So as we, as we near those levels, we are ready to be on the other side of this of this cycle for the upturn, and of course it's not just inventory capacity is really the bigger driver, but you know what we've been doing on that now for a number of years and where we're investing, but inventory really bridges that that gap as an upturn happens until you get your factories really cranking at higher level.

What is being I think when you were asked before you said that if there was anything abnormal that you would've mentioned it so.

Assume that because you didn't mention it but it is normal.

Yeah. So yeah, what I said is if there was something that we needed to explain the outlook or unusual or however, you want to describe it we would do that so.

Im not stopping at that point and intentionally.

And.

We'll finish up the quarter and report out what happens in fourth quarter.

We have a follow up.

Yeah on depreciation what is driving the revision because youre capex doesn't seem to be changing and then kind of part b of that is if I take that year on year Delta Rafael I think it's about 400 500 million or so incremental in 'twenty four.

Toshiya Hari: Yeah, and I'll just add and bring back to you know our capital management that we've been saying, you know, for I think over a decade now, our objective with inventory, you know, is to maintain high levels of customer service, keep our lead time stable, keep product availability really high. So as we talked about earlier, you know, ti.com really essentially all of our catalog products are available for immediate shipment, lead times are stable, and so we are prepared for for that up next up turn when it would it does come.

Current revenue run rate.

Two to three point headwind to gross margin.

I just wanted to make sure that I got those two points right.

Yes, so the 424 I said, one five to $1 $8 billion.

And that is down from what you probably had before $2 billion and for 2025, I said $2 billion to $2. Five so that is down from two five.

Which we had.

<unk> said before and the reason as you point out Capex has not changed so that's another reason is just as time has passed we have more clarity on what to expect for example, depreciation on tools that doesn't start until the tool is not only received but installed and qualified and therefore depreciation starts so that the thing doesn't happen immediately.

Toshiya Hari: Yeah, quick one Dave, just looking at the year over year, we had the fourth quarter double digit your decline and I look back many years, they have been other cycles where we have had multiple quarters of negative, but not that many times we've seen a double digit kind of four five quarter. There's just one of your perspective on what what you folks are seeing this cycle versus, you know, and I know no cycle is the same, but just kind of just help investors think about how to think about that double digit four quarters.

Lisa we have.

Furthermore, as to how that process works with all of the number of tools that we're receiving for the various factories, then we're providing an update on depreciation.

Thank you and a gross margin headwind is that did that have the calculation right. It's a two to three point headwind on gross margins.

Toshiya Hari: It could be potentially longer year over year decline, thank you. Sure, yeah, and I think we all know as being students of studying the cycles over the years, they're all the same and they're all different at the same time and they're unique. The one thing that is unique of course with this with the cycle is how the markets have behaved differently, we've seen bifurcation and really lined up very well with when markets recovered.

Well so.

I'm, giving you the tools to calculate gross margin. So let me remind everybody what that is.

First is <unk>.

Revenue. So if you pick the revenue of that that.

And that you believe is going to happen for the next several years and it works on a quarterly basis, but of course in any quarter.

There are a lot of puts and takes but better to the way it over longer horizons. So you start with revenue then you fall that through at 70% to 75%.

Toshiya Hari: So, you know, PE was the first to recover and was very strong early on, the other markets followed very shortly after that and automotive was last, as you remember, many automotive manufacturers struggled to restart their factories and people weren't going to showrooms when we're in the midst of the pandemic. So, really, as we've seen things begin to roll over, personal electronics was first, it was been followed by the other markets and yet we still have automotive that's hanging in there.

Which by the way that is reflective.

Reflective of the the great not only geopolitical dependable capacity that we're putting in place, but it is all of that new fab capacity is 300 millimeter. So is the <unk>.

Our structural cost advantage not to mention that.

We're getting ITC and grant benefits.

That is installed in the United States. So.

But so then you you'll fall that through at 70% to 75% then you need to account for the added depreciation so.

This year, it's probably going to be close to $1 2 billion and then next year I. Just gave you one five to one eight so you want to pick a point between that then you'll get your your added depreciation for 2024 and then.

Toshiya Hari: So, I think that's the one thing that's that's unique and you know, I think as we've learned and studied the cycles, our product portfolio has changed as well over time. But the best time to be preparing for the upturn is before it shows up. So, that's what we've been busy doing and we think we're in a great position to support the next upturn and to continue to gain. Sure.

At a high level.

That's it.

Ambrish Srivastava: So thank you, Ambrish.

But of course in any given quarter, even in any given year, but especially in any given quarter you have puts and takes and one of them that we're seeing right. Now is the only reason really say.

Unknown Executive: We'll go to the next column, please.

But that right now is a headwind, but that can also be a tailwind when we're on the other side and where we're increasing loadings in that what does that.

But that does is that it then it comes back the other way right. So.

Vivek Arya: Our next question comes from the line of the Vivek area with Bank of America securities. Please proceed with your question. Thanks for taking my question. I wanted to go back to automotive just to make sure that I understood what you said. Do your comments imply that you're seeing a largely seasonal environment in Q4 with no, you know, changes in terms of orders through traditional or EV customers and if that is the case, if I understood it correctly, isn't that surprising, given the macro headbench that sector is facing?

But that's more of a.

Tactical comment that happens in some quarters hopefully that answers your question.

Thank you. Thank you.

Go to the next caller please.

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

Yes. Thank you I Wonder if you could walk us through the.

Calculation.

The underutilization charge.

It seems like with over 200 days of inventory you would see the cost impact of that.

Rafael Lizardi: The lecture question was on third quarter or on fourth quarter. So what is being, I think when you would ask before you said that if there was anything abnormal, you would have mentioned it. So I assume that because you didn't mention it, that it is normal. Yeah, so yeah, what I said is that there was something that we needed to explain the outlook or unusual or however you want to describe it, we would do that.

Six months, but youre pulling it forward can you just talk about how you determine how much to pull forward.

Rafael Lizardi: So, you know, I'm not, I'm stopping at that point intentionally and, you know, we'll finish up the quarter and report out what happens in fourth quarter.

Yes.

So it's an accounting process and it's essentially when you're below what's considered normal utilization.

That percent that youre below that and that is generally determined by wafer in the fab wafer starts and out in the Assembly test operation is your the number of units a year for this in our new.

You divide that by the capacity that you can get the maximum capacity you establish a normal.

Rafael Lizardi: Yeah, follow up. Yeah, on depreciation, what is driving the division because your capex doesn't seem to be changing and then kind of part B of that is, if I take that year on your delta, Raphael, I think it's about 400 500 million or so incremental in 24. So at the current revenue run rate, that's a two to three point headwind to gross margin. I just wanted to make sure that I got those two points right.

Which is where you normally expect to be that that could be $85, 90% to 95% dependent on the situation.

Rafael Lizardi: Yeah, so for 24, I said 1.5 to 1.8 billion dollars, and that is down from what you probably had before 2 billion and for 2025, I said 2 billion to 2.5. So that is down from 2.5, which we had said before. And the reason, you know, as you point out capex is not changing. So that's not the reason. It's just a time has passed. We have more clarity and work to expect.

And whenever you are below that then you take that percent that you are below and then you take those those those fixed costs and go straight to the P&L instead of going into inventory.

So some of those costs I would call them fixed cost day, some of our depreciation, but it's not only the appreciation you have electricity for example is largely fixed.

Above the federal electricity, whether or not it's always running production or not as long as it's plugged in so you take that into account and then.

At the end of the day, you're not you're not creating money. When you do that you just essentially putting on the balance sheet on the P&L and in this case is going directly into the into the P&L as earning quarter charge because.

That portion of the capacity is not producing.

Now one more comment that gives us tremendous operating leverage on the other side of that right because.

Rafael Lizardi: So, for example, you know, depreciation on tools that doesn't start until the tool is not only received, but installed and then qualified and deaf and depreciation start. So that doesn't happen immediately. So we have learned more as to how that process works with all the number of tools that we're receiving for the various factories that we're providing an update on depreciation.

<unk> fixed costs on the way down day, they've heard of it but on the way up their fixed right. So from a cash standpoint on the way up you don't spend anymore and then you get just tremendous cash flow throughs on the on the revenue particular, when its 300 millimeter capacity at very low cost.

The follow on Joe.

Great. Thank you.

Rafael Lizardi: Thank you. And the gross margin headwind is that did I have the calculation right? It's a two to three point headwind on gross margins. Well, so, you know, we've given you the tools to calculate a gross margin. So let me remind everybody what that is. First is revenue. So you pick the revenue that that you believe is going to happen for the next several years. And it's worth a quarterly basis, but of course, in any quarter, there's a lot of puts and takes, but better to do it over longer horizons.

Separately on the comm infrastructure business it seemed quite soft both quarter on quarter year on year, I know that business isn't.

Our focus for you guys, but can you talk about what's driving that weakness.

Yes.

Rafael Lizardi: So you start with revenue, then you fold that through at 70 to 75%, which by the way, that is reflective of the great, not only geopolitical dependable capacity that we're putting in place, but it is. All that new fabric capacity is 300 millimeters. So it has a structural cost advantage, not to mention that we're getting ITC and grant benefits as that is installed in the United States. But so then you you fold that through at 70 to 75%, then you need to account for the added depreciation.

And.

Last year it was about 7% of our revenue chose so.

We can find great opportunities in comms equipment, we continue to invest.

We just don't think it has the secular growth that other markets like industrial automotive half. So we continue to make investments there and as we've.

Talked about that market over the years, it's one that just tends to be choppy, we believe that they are continuing to.

Adjust their inventory levels.

As we work our way through this quarter.

And as I mentioned earlier, it's down 50% so that's.

A pretty pretty significant cigna.

Significant drop so.

Yes, so so again long term, we think it's a great market.

Rafael Lizardi: So, you know, this year is probably going to be close to 1.2 billion. And then next year, I just gave you 1.5 to 1.8. So, you know, if you want to pick a point between that, then you get your your added depreciation for 2024. And then, you know, at a high level, that's it. But of course, in any given quarter, even in any given year, but especially in any given quarter, you have put some takes and one of them that we're seeing right now is the under utilization, but that right now is a headwind, but that can also be a tellwind when we're on the other side and we're we're increasing loadings and that what does that, you know, what that does is that it then it comes back the other way, right? So, but you know, that's more of a, you know, tactical comment that happens in some quarters.

And we're positioned well there but.

It will have these types of types of loose overall.

Okay. Thanks.

Next caller please.

Our next question comes from tore Svanberg with Stifel. Please proceed with your question.

Yes. Thank you David Thank you Rafael.

So you talked about operating in a weak environment.

Could you also give us some color on bookings trends.

Maybe then.

The current run rate versus where you think consumption is just just trying to understand then that goes back to <unk> question about four consecutive quarters of double digit declines so yeah, any color or color on bookings trends really really helpful.

Unknown Executive: Hopefully that answers your question.

Unknown Executive: Thank you.

Yes, so as I mentioned I think it is part of another question on.

Joe Moore: We'll go to the next caller, please. All right, next question comes from the line of Joe Moore with Morgan Stanley.

Revenue order linearity, there was nothing unusual inside of that.

Joe Moore: Please we'll see what your question. Yes, thank you. I wonder if you could walk us through the calculation of the underutilization charge. I think it seems like with the original native inventory, you would see the cost impact of that in six months, but you're pulling it forward. Can you just talk about how you determine how much to pull forward? Yeah, well, so it's an accounting process and it's essentially when you're below what's considered normal utilization, that person that you're below that, and that is generally termed by wafer, and the fab is wafer starts and out in the assembly set operation is your the number of units that you're producing and you you divide that by the capacity that you can get the maximum capacity you establish a normal, which is where you move.

Secondly, we obviously, we're describing the environment as being weak.

And we don't have a system that tells us are we shipping above or below demand.

The strongest signal that we get as orders from customers.

Now as we talked about.

Earlier com.

Like personal electronics was the first market to go into the downturn.

A couple of quarters of growth inside of that market now its up off of a very weak base, but.

We are seeing that as as a trend.

If you compare that to the industrial market, we had seen that let's say, let's call. It about half of the sectors begin to weaken.

Joe Moore: And normally expect to be that I could be 85, 90, 95% dependent on the situation. And whenever you're below that, then you take that percent that you're below and then you take those those those fixed costs and go those straight to the P and L instead of going into inventory. So some of those costs that will come in fixed costs, they some are depreciation, but it's not only depreciation, you have electricity, for example, it's largely fixed, you know, you use about the same electricity, whether a tool is running production or not as long as it's plugged in.

A couple of quarters ago. It was really this quarter that we saw that that weakness.

Is broadening so customers, we believe inside of markets like that inside of markets like comms equipment that we said there are adjusting their inventories.

As such so.

Again that's.

<unk> provides us the opportunity at both strategically with building the capacity and more tactically.

Building, putting in place the inventory to be able to support the next upturn because it will it will certainly come.

Joe Moore: So you take that into account and then, you know, you're at the end of the day, you're not creating money when you do that, you just essentially putting on the balance sheet or the P and L. And in this case, it's going directly into the into the P and L as an in quarter charge because that portion of the capacity is not producing. Now, one more comment that gives us tremendous operating leverage on the other side of that, right, because think about fixed costs on the way down they heard of it, but on the way up their fix.

All of them.

Yes. Thank you very helpful. A follow on for Rafael Russell. Thank you for the depreciation numbers for the next few years.

Joe Moore: Right, so from a cash standpoint on the way up, you don't spend anymore and then you get just tremendous cash off all through on the on the revenue, particularly when it's 300 millimeter capacity, a very low cost.

Do you also have an update us on the timing of the offsets to the depreciation, especially in relation to ICC in the chipset anything new there.

So nothing new frankly, the ITC.

The expectation is similar.

About.

20% to 25% credit on.

On everything that is.

Capex in the U S for Fabs. So what we said back in February that is going to be roughly $4 billion of the $20 billion or saw that for capex of 5 billion tons more so roughly about a $4 billion. So that we're going to get back.

Unknown Executive: The following one, Joe. Great, yeah, thank you.

Unknown Executive: Yeah, separately on the comment for structure, business seem quite soft both core on quarter year on year.

Unknown Executive: I know that business isn't focusing for you guys, but can you talk about what's driving that weakness? Yeah, you know, and it's it's last year was about 7% of our revenue, Joe. So, you know, we can find great opportunities in comes equipment, we continue to invest. We just don't think it has the secular growth that other markets like industrial automotive have. So, you know, we continue to make investments there. And, you know, as we've talked about that market over the years, it's one that just tends to be choppy.

On ITC about one year offset.

We have already accrued $1 $2 billion on the balance sheet.

So you will see that on there.

On our balance sheet on the long term assets.

A portion of them, we will get some time next year, probably by fourth quarter next year is when we expect to get that cash so thats when the casual star outflow in point in as I mentioned in an earlier call on an earlier question. We are actively applying for the green. So that's going to be in addition to.

Unknown Executive: We believe that they're continuing to adjust their inventory levels as we work our way through this quarter. And as I mentioned earlier, you know, it's down 50%. So, that's a pretty, pretty significant, significant drop. So, yeah, so again, long term, we think it's a great market and we're positioned well there, but, you know, it will have these types of types of moves.

To the ITC.

We're not counting on that we don't have any numbers on that because you have to apply to have to wait until the department of Commerce makes a decision, but we are.

Unknown Executive: Okay, thanks.

We're planning on receiving then the funding from from the chips that grant was comprehended in our deficient in and we firmly believe we are.

Unknown Executive: Go to the next color, please.

Very well positioned to.

To receive those funds and we are a great candidate for that and we believe there will be meaningful to our manufacturing operations in Texas, and Utah to support semiconductor growth in the objectives of the.

Tore Svanberg: Our next question comes from Tore Svanberg with Steve will see which question. Yes, thank you, Dave. Thank you, Rafael. So you talked about operating in a weak environment. Could you also give us some color on bookings, trends, maybe even the current run rate versus where you think consumption is? Just try to understand and then it goes back to Ambrish's question about for consecutive quarters of double digit declines. Any color on bookings, trends will be really helpful.

The shift program offers great. Thank you Tori.

Go to the next caller please.

Our next question comes from the line of Harlan sur with Jpmorgan. Please proceed with your question.

Tore Svanberg: Yeah, so as I mentioned, I think it's part of another question on revenue order linearity. There was nothing unusual inside of that. Secondly, we obviously were describing the environment as being weak. And we don't have a system that tells us, you know, are we shipping above or below demand? You know, the strongest signal that we get is orders from customers. Now, you know, as we talked about earlier, a market like personal electronics was the first market to go into the downturn.

Thank you and good afternoon, China headquartered shipments were about 20% of sales through the first half of this year. This geography has experienced the most significant decline I think it was down like 33, 35% year over year in the first half of this year.

Much of your China business is focused on industrial is this geography, continuing to contribute to the weakness here in Q4 and what.

Other geographies are you seeing that.

That is contributing to this problem in a lot of sort of the weak industrial trends.

Yeah. So let me I'll speak to to what we saw in the third quarter and just in general including industrial in China continued to remain weak. So I think if we're having this call a year ago or so.

As China came out of Covid I think most of us would have expected.

There to be more significant rebound, which just hasn't hasn't materialized. So.

Tore Svanberg: We've had a couple of quarters of growth inside of that market. Now, it's off of a very weak base, but we are seeing that as a trend. If you compare that to the industrial market, you know, we had seen that, let's say, you know, let's call it about half of the sectors begin to weaken a couple of quarters ago. It was really this quarter that we saw that that weakness is broadening.

Yes, I think when you look at.

On a regional basis compared with a year ago. The only region that was up was was Japan. So the other regions were down.

And so again just described that weakness is being very broad in nature and following Harlan.

Yes. Thank you.

Embedded business continues to hold up relatively well with trailing 12 months, it's up 8% year over year.

Tore Svanberg: So, you know, customers, we believe inside of markets like that, inside of markets, like com's equipment that we said, they're adjusting their inventories as such. So again, that provides us the opportunity, both strategically with building the capacity and more tactically building, putting in place the inventory to be able to support the next up term because it will certainly come. You'll follow on. Yes, thank you. They're very helpful. Follow on for Raphael.

You've talked about the positive strategy changes embedded last quarter. You also cited some some constraints I assume that.

Those constraints are fully normalize so you anticipate embedded continuing to hold up or do you anticipate segment starting to weaken from here.

Some of the capacity constraints potentially diesel.

Yeah, as we as we talked about before.

We had focused on.

Changing the product strategy that that we had inside of embedded I'd say, we're very pleased with the results that we have so far our first objective was to stabilize that business and we continue to invest in it because we believe it has long term growth potential.

Tore Svanberg: Raphael, thank you for the depreciation numbers for the next few years. Do you also have enough data on the timing of the offsets to the depreciation, especially in relation to ITC and the chipsets and anything new there? So, nothing new, frankly, the ITC, it's the expectation is similar, which is about, you know, 20 to 25% credit on everything that is spent, and all the capital in the U.S, for fabs. So what we said back in February is that that's going to be roughly $4 billion of the $20 billion or so that for capital 5 billion times 4.

<unk> contribution to free cash flow.

No.

We're very pleased with where we're going.

More tactically.

We talked about last quarter.

We saw that business does rely more heavily on.

Foundry suppliers.

We began to see those.

That that capacity begin to free up for us.

And I think that that was different.

Tore Svanberg: So roughly about a $4 billion so that we're going to get back on ITC about one year offset. Of that, we have already accrued $1.2 billion on the balance sheet. So you'll see that on our balance sheet on the long term assets. A portion of that we will get sometime next year, probably by fourth quarter next year, is when we expect to get that cash. So that's when the cash will start flowing, flowing in.

Because we had capacity in place to service analog.

Our own capacity there overall so yes.

Yes. So again, we think that business long term is going to be a great driver for us.

In the future.

So thank you and I think we've got time for one more caller.

And our next question comes from the line of Williams Stein, which was securities. Please proceed with your question.

Tore Svanberg: As I mentioned in an earlier call on an earlier question, we are actively applying for the grain, so that's going to be in addition to the ITC. We're not counting on that, we don't have any numbers on that because you have to apply, you have to wait until the Department of Commerce makes a decision. But we are planning on receiving, then the funding from the Chiefs Act grant was comprehended in our decision.

Thanks for squeezing me in.

Dave can you remind us what's in the other segment, besides calculators and perhaps why that end market was down so much more than the others I know, it's very seasonal from calculators, but there was a big drop year over year.

Yeah, so so besides calculators.

Have our DLP.

Digital light processor products that are in there.

So those products are continuing to make their way through.

Tore Svanberg: And we firmly believe we are a very well positioned to receive those funds. And we're a great candidate for that. And we believe there will be meaningful for manufacturing operations in Texas and Utah to support semiconductor growth and the objectives of the Chiefs Program Office. Great.

Inventory correction overall.

Rafael Lizardi: Thank you, Tori.

Calculators had had a weak weaker back to school.

Unknown Executive: Thank you very much.

Yes.

<unk>.

Yes, perhaps.

That hasnt come up in a while but lead times.

We were dealing with this golden screw issue for a while where they were.

Harlan Sur: Go to the next floor.

Harlan Sur: Please. Our next question comes from the line of Harlan Sur with JP Morgan. Please for see with your question. Yeah, thank you. Good afternoon. I'm China headquartered shipman for about 20% of sales to the first half of this year. This geography has experienced the most significant decline. I think it was down like 33, 35% year-year in the first half of this year. Much of your China business is focused on industrial. Is this geography continuing to contribute to the weakness here in Q4?

Quite a number of parts or quite a big part of the.

Let's say all the available Skus that had very extended lead times with revenue down as much as it is.

I'm guessing that's mostly resolved and lead times are like sort of stocked to four weeks for most things at this point, but if you could.

Level set me on that.

The degree to which they are still extended lead times that would be really helpful. Thank you.

Harlan Sur: And what other geographies are you seeing that is contributing to this broadening out of the weak industrial trends? Yeah, so let me, I'll speak to what we saw in the third quarter and just in general, including industrial and China, continued to remain weak. So I think if we're having this call, you know, a year ago or so, as China came out of COVID, I think most of us would have expected there to be more significant rebound, which just hasn't, hasn't materialized.

Yes, so and I may have mentioned this earlier.

<unk>.

Almost all of our catalog products are available on <unk> dot com for immediate shipment.

Sure.

So so as we approach our.

At the desired level of inventory.

Got product that is positioned both in finished goods as well as in wafer form to be able to restock that.

Of course lead times therefore are.

But I described normal levels and continue to be consistent.

Harlan Sur: So yeah, and I, you know, I think when you look at on a regional basis compared with the year ago, the only region that was up was Japan. So the other regions were down. And so again, just described that weakness as being very broad in nature.

And there's probably no times that we don't with so many different products and so many different customers will have hotspots, but they're very few and far between and our ability to close those is.

Very we've got flexible manufacturing as most of our.

Harlan Sur: And follow on, Carla. Yeah, thank you. So your embedded business continues to hold up relatively well, right? Charlene 12 months is up 8% year-year. You've talked about the positive strategy changes in embedded. Last quarter, you also cited some some constraints. I assume that those constraints have fully normalized. So you anticipate embedded continuing to hold up for it, you anticipate this segment starting to weaken from here with some of the capacity constraints potentially easing.

Production is fungible.

So with that I'll ask Raphael two to wrap up the call for US Alright, 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 value for owners is it.

Our long term growth and free cash flow per share while.

While we strive to achieve our objective we will continue to pursue our three ambitions, we will act like owners.

We will own the company for decades, we will adapt and succeed in a world that's ever changing.

Harlan Sur: Yeah, as we, as we talked about before, you know, we, we had focused on changing the product strategy that that we had inside of embedded. I'd say we're very pleased with the results that we have so far. Our first objective was to stabilize that business. And we continue to invest in it because we believe it has the long-term growth potential and contribution to to free cash flow. So we're very pleased with where we're going.

And we will be a company that we are personally proud to be part of and would want us our neighbor when were successful our employees customers communities and owners all benefit. Thank you and have a good evening.

Yeah.

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

Okay.

Yes.

Sure.

Harlan Sur: I think more tactically, as we talked about last quarter, we saw that business does rely more heavily on foundries suppliers. We began to see those, you know, that capacity begin to free up for us. And I think that that was different because we had capacity in place to service analog our own capacity there overall. So, yeah, so again, we think that business long-term is going to be a great, great driver for us in the future. So thank you.

Yeah.

Unknown Executive: And I think we've got the time for, for one more color.

William Stein: Our next question comes from the live. William Stein, which was securities. Please proceed with your question. Great, thanks for squeezing me in. Dave, can you remind us what's in the other segment besides calculators and perhaps why that end market was down so much more than the others? I know it's very seasonal from calculators, but there was a big drop year over here. Yeah, so besides calculators, we have our DLP or digital light processor.

Okay.

Sure.

William Stein: There are products that are in there, so those products are continuing to make their way through inventory correction overall, and calculators had a week or back to school this season. Yeah, perhaps something that hasn't come up in a while, but lead times, you know, we were dealing with this golden screw issue for a while where there were, you know, quite a number of parts are quite a big part of the, let's say, all the available skews that had very extended lead times with revenue down as much as it is.

Yes.

William Stein: I'm guessing that that's mostly resolved in lead times or like sort of stock to four weeks for most things at this point, but if you could level set me on that, the degree to which they're still extended lead times that would be really helpful. Thank you. Yeah, so, and I may have mentioned this earlier, but, you know, almost all of our catalog products are available on ti.com for immediate shipment. And so, so as we approach our desired level of inventory, we've got a product that is positioned both in finished goods as well as in way performed to be able to to restock that, of course, lead times, therefore are, you know, but I described normal levels and continue to be consistent.

Dave Pahl: And, you know, there's probably no time that we don't with so many different products and so many different customers will have hotspots, but they're very few and far between and our ability to close those is very, we've got, you know, flexible manufacturing is most of our production is fungible.

Rafael Lizardi: So with that, I'll ask Raphael to wrap up the call for us. All right, let me wrap up by reiterating what we have said previously at our core, we're engineers and technologies, the foundation of our company, but ultimately are objective and the best metric to measure progress and generate value for owners is a long term growth and free cashflow per share, but we strive to achieve our objective. We will continue to pursue our three ambitions, we will act like owners who will own the company for decades, we will adapt and succeed in a world that's ever changing.

Unknown Executive: And we will be a company that we're personally proud to be part of and would want us our neighbor when we're successful are employees, customers, communities and owners all benefit. Thank you and have a good evening.

Unknown Executive: This concludes today's conference and you made this connection line at this time. Thank you for your participation. Thank you very much. [inaudible] David[inaudible][inaudible][inaudible] . .

[music].

[music].

[music].

Welcome to the Texas Instruments' third 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.

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 third quarter revenue results with some details of what we're seeing with respect to our end markets.

Lastly, Raphael will cover the financial results give an update on capital management as well as share the guidance for our fourth quarter 2023.

Starting with a quick overview of the quarter revenue in the quarter came in about as expected at $4 $5 billion flat sequentially and a decrease of 14% year over year.

Analog revenue declined 16% embedded processing grew 8% and our other segment declined 32% from the year ago quarter.

Now I'll provide some insight into our third quarter revenue by market.

During the quarter automotive growth continued and industrial weakness broadened.

Similar to last quarter I'll focus on our sequential performance as it's more informative at this time.

First the industrial market was down mid single digits with weakness broadening across nearly all sectors.

The automotive market continued to grow and was up mid single digits.

Personal electronics was up about 20% off a low base.

And next communications equipment was down upper teens, and finally enterprise systems grew upper single digits.

Given where the market is now it's a good time to remind everyone of our plan in areas of strategic investments.

Our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive remains high and we're well positioned in these markets.

Second our long term 300 millimeter manufacturing roadmap provides our customers with geopolitically dependable capacity.

To support these build outs and enable future growth. We continue to expect associated capital expenditures to be about $5 billion per year through 2026.

In addition, we made good progress on our inventory replenishment.

<unk> with our long term objectives to support growth and provide high levels of customer service.

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

Thanks, Dave and good afternoon, everyone.

Third quarter revenue was $4 5 billion.

Down 14% from a year ago.

Gross profit in the quarter was $2 8 billion or 62% of revenue.

From a year ago gross profit decreased primarily due to lower revenue and to a lesser extent higher manufacturing costs associated with planned capacity expansion and reduced factory loadings.

As a reminder, L fab related charges transition to cost of revenue in the fourth quarter of 2022.

Gross profit margin decreased 690 basis points.

Operating expenses in the quarter were $923 million up 7% from a year ago and about as expected.

On a trailing 12 month basis operating expenses were $3 $7 billion or 20% of revenue.

Operating profit was $1 $9 billion in the quarter or 42% of revenue.

Was down 29% from the year ago quarter.

Unknown Executive: Welcome to the Texas Instruments 3rd Quarter 2023 Earnings Conference call.

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

Dave Pahl: I'm Dave Pahl, Head of Investor Relations, and I'm joined by our Chief Financial Officer, Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.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.

Earnings per share included Thats five cent benefit for items that were not in our original guidance.

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

Cash flow from operations was $1 $9 billion in the quarter and $6 $5 billion on a trailing 12 month basis.

Dave Pahl: This call will include four 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 four 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'll provide the following updates. First, I'll start with a quick overview of the quarter. Next, I'll provide insight into third quarter revenue results with some details of what we're seeing with respect to our end markets. Lastly, Rafael will cover the financial results given update on capital management, as well as share the guidance for our fourth quarter 2023.

Capital expenditures were $1 5 billion in the quarter and $4 $9 billion over the last 12 months.

Free cash flow on a trailing 12 month basis was $1 6 billion.

In the quarter, we paid $1 $1 billion in dividends and repurchased about $50 million of our stock in September we announced we would increase our dividend by 5%, marking our 20 <unk> consecutive year of dividend increases.

This action reflects our continued commitment to return free cash flow to our owners over time in total we have returned $5 $6 billion in the past 12 months.

Our balance sheet remains strong with $8 $9 billion of cash and short term investments at the end of the third quarter.

Dave Pahl: Starting with a quick overview of the quarter, revenue in the quarter came in about as expected at $4.5 billion flat sequentially and a decrease of 14% year over year. Analog revenue declined 16% embedded processing grew 8% and our other segment declined 32% from the year ago quarter. Now I'll provide some insight into our third quarter revenue by market. During the quarter, automotive growth continued and industrial weakness broadened. Similar to last quarter, I'll focus on a sequential performance as it's more informative at this time.

Total debt outstanding was 11 $3 billion with a weighted average coupon of three 5%.

Inventory at the end of the quarter was $3 $9 billion and days were 205 down two days sequentially.

Inventory was up $179 million in the third quarter less than half the increase versus the prior quarter.

As we near our desired inventory levels.

Dave Pahl: First, the industrial market was down mid-single digits with weakness broadening across nearly all sectors. The automotive market continued to grow and was up mid-single digits. Personal electronics was up about 20% off a low base. And next, communications equipment was down upper teens. And finally, enterprise systems grew upper single digits.

Therefore, we began to lower factory starts in the third quarter, which results in additional charges to the income statement. This impact is comprehended in our outlook.

For the fourth quarter, we expect Ti revenue in the range of $3 $93 billion to $4.27 billion and earnings per share to be in the range of $1 35 to $1 57.

As we continue to operate in a weak environment.

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

As you are looking at your models for 2024 based on current tax law, we would expect our effective tax rate to remain about what it is in 2023.

Dave Pahl: Given where the market is now, it's a good time to remind everyone of our plan and areas of strategic investments. First, our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive, remains high and were well positioned in these markets. Second, our long-term 300-millimeter manufacturing roadmap provides our customers with geopolitically dependable capacity. To support these build-outs and enable future growth, we continue to expect associated capital expenditures to be about $5 billion per year through 2026. In addition, we make good progress on our inventory replenishment consistent with our long-term objectives to support growth and provide high levels of customer service.

In closing, we will stay focused in the areas that add value in the long term.

Continuing to invest in our competitive advantages, which are manufacturing and technology, our broad product portfolio for 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.

Thanks, Raphael operator, you can now open the lines for questions in order to provide as many of you as possible an 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.

Rafael Lizardi: Raphael will now review profitability, capital management, and our outlook. Thanks Dave and good afternoon everyone. Third quarter revenue was $4.5 billion, down 14% from a year ago. Gross profit in the quarter was $2.8 billion or 62% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and to a lesser extent, higher manufacturing costs associated with planned capacity expansion and reduced factory loadings. As a reminder, L Fab related charges transitioned to cost of revenue in the fourth quarter of 2022.

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

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 keys.

Our first question comes from the line of Stacy <unk> with Bernstein Research. Please proceed with your question.

Hey, guys. Thanks for taking my questions. My first one I did want to ask about gross margin. So I mean, depending on what I assume for Opex next where I'm getting something like 250 basis points of compression maybe more than you.

Rafael Lizardi: Gross profit margin decreased 690 basis points. Operating expenses in the quarter were $923 million, up 7% from a year ago and a bottom expected. On a trailing 12 month basis, operating expenses were $3.7 billion or 20% of revenue. Operating profit was $1.9 billion in the quarter or 42% of revenue and was down 29% from the year ago quarter. Net income in the third quarter was $1.7 billion or $1.85 per share. Earnings per share included as five cent benefit for items that were not in our original guidance.

A little bit about how some of that is the impact of utilization can you give us some feeling for I guess like the magnitude of the different drivers utilization lower revenue depreciation pricing and how we ought to be thinking about that trajectory as we get into next year. Like is is there. A is there is there more and more to go I guess is what I'm asking.

Yes. So thanks, Stacy let me let me try to help you with that of course, we.

Forecast, we gave a.

The range on revenue in a range and EPS not the pieces, but let me let me go through.

Rafael Lizardi: Let me now comment on our capital management results starting with our catch generation. Catch flow from operations was $1.9 billion in the quarter and $6.5 billion on a trailing 12 month basis. Capital expenditures were $1.5 billion in the quarter and $4.9 billion over the last 12 months. Free cash flow on a trailing 12 month basis was $1.6 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $50 million of our stock.

So what I said for third quarter, which applies.

Uh huh.

For fourth quarter and beyond.

For third quarter like I said in the press.

Remarks.

In third quarter gross profit decreased primarily due to revenues as the first driver then to a lesser extent higher manufacturing cost associated with planned capacity expansion, namely depreciation is the main one there and reduced factory loadings and that's the.

The underutilization components.

Dana as I also said in the prepared remarks inventory, which is the other side of the coin.

Rafael Lizardi: In September, we announced we would increase our dividend by 5%, marking our 20th consecutive year of dividend increases. This action reflects our continued commitment to return free cash flow to our owners over time. In total, we have returned $5.6 billion in the past 12 months. Our balance sheet remains strong with $8.9 billion of cash and short term investments at the end of the third quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%.

As we near desired levels of inventory will began lowering factory starting in the third quarter. So there was an impact in third quarter due to that.

The income statement there'll be a bigger impact in the fourth quarter due to that beyond that we're not forecasting but of course that will depend on revenue expectations well into into next year.

We have a follow up.

I do think so.

You gave us a little color on the end market behavior in Q3.

Can you give us some some thoughts on re even qualitatively what to expect by end market into Q4, and particularly for auto it sounds like auto in Q3 was so strong do you still see that strength continuing into Q.

Rafael Lizardi: Inventory, at the end of the quarter was $3.9 billion and days were 205, down two days sequentially. Inventory was up $179 million in the third quarter, less than half the increase versus the prior quarter, as we near our desired inventory levels. Therefore, we began to lower factory starts in the third quarter, which results in additional charges to the income statement.

In Q4, and the year end.

Yes.

I'll take that.

When you look at the guidance.

It would suggest then we believe that we continue to operate in.

Weak environment.

In general.

And if there was something significant that was was changing from one quarter to the next is our typical practice.

Rafael Lizardi: This impact is comprehended in our outlook.

Rafael Lizardi: For the fourth quarter, we expect TI revenue in the range of $3.93 to $4.27 billion and earnings per share to be in the range of $1.35 to $1.57 as we continue to operate in a weak environment. Lastly, we continue to expect our 2023 effective tax rate to be about 13 to 14%. Susan. As you are looking at your models for 2024, based on current tax law, we would expect our effective tax rate to remain about what it is in 2023.

We highlight that and we just don't have anything to specifically call out for at four in the fourth quarter. So thanks, and we'll go to the next caller. Please.

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

Thanks, a lot Dave I also had a question on autos it sounds like it's holding in there. Despite this broadening strike and I guess the question is.

Are more of your customers on consignment and that business or is it split in auto is about the same as that two third one third versus the rest of the company and I ask because I'm wondering sort of what youre seeing on the on the <unk>.

Rafael Lizardi: 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, a broad product portfolio, reach of our channels and diverse and long live positions. We will continue to strengthen these advantages through discipline, capital allocation, and by focusing on the best opportunities, which we believe will enable us to continue to deliver free casual per share growth over the long term.

<unk> side that you would sell into autos do you see bookings at least weakening that would be more consistent.

With what we're seeing in terms of this strike and some of the weak macro numbers that we see.

Sure Yeah and.

As we mentioned in the prepared remarks. It was up auto was up mid single digits sequentially and it was up 20% when you look year on year. So obviously.

Dave Pahl: With that, let me turn it back to Dave. Thanks, Rafael.

Unknown Executive: Operator, you can now open the lines for questions. In order to provide as many of you as possible an 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.

That growth had continued in.

In general I would say that.

A.

Market like.

Automotive and personal electronics will have larger customers those larger customers tend to.

Be biased.

Unknown Executive: At this time, we'll 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.

More consignment so.

We would have that probably more in automotive.

If I contrast that to a market perhaps like industrial.

But overall.

As you know we've moved to having closer direct relationships with customers, which would include.

The customers that we have in automotive I think we service pretty close to 1000 or so different to automotive OEM. So.

Stacy Raskin: Our first question comes from the line of Stacey Raskin with Bernstein Research. Please proceed with your question. Hi, guys. Thanks for taking my question. My first question, I did want to ask about gross margins. Depending on what I assume for Optics where I'm getting something like 250 basis points of compression, maybe more. I know you talked a little bit about how some of that is the impact of utilization. Can you give us some feeling for, I guess, the magnitude of the different drivers utilization, lower revenue depreciation pricing?

There is quite a bit of broad broadness, and who we serve there.

Tim.

Dave Yes so.

Would it take to for you to think about cutting capex.

I asked because the plan was put into place when revenue was quite a bit higher than where it is today is there kind of a line in the sand for revenue, where you would reconsider the plan I know you've actually increased the plan well revenues continued to weaken but is there some like tree around it.

Stacy Raskin: How we ought to be thinking about that trajectory as we get into the next year? Is there more to go, I guess, as Raskin? Yeah, so thanks, Stacey. Let me try to help you with that. Of course, we afford a forecast. We give a range of revenue, a range of NPS, not the pieces. Let me go through some of what I said for third quarter, which applies for fourth quarter and beyond.

Is there some if it weakens to this point you would consider cutting capex just wondering any kind of thing.

Yes, let me comment on that.

Very pleased with our progress on our manufacturing expansion, there will provide geopolitically dependable capacity for to support customer growth.

For the coming decade.

As you know semiconductor content continues to increase.

And to provide us the ability to grow at that 10% growth rate that we talked about at the last capital management goal if the market requires that.

Stacy Raskin: So for third quarter, like I said in the prepare remarks, in third quarter, gross profit decreased primarily due to revenues as the first driver. Then to a lesser extent, higher manufacturing costs associated with planned capacity expansion, namely depreciation is the main one there, and reduced factory loadings. That's the underutilization component. Then, as I also said in the prepare remarks, inventory, which is the other side of the coin, as we near desired levels of inventory, will begin lowering factory starting the third quarter. So there was an impact in third quarter due to that on the income statement. There'll be a bigger impact in fourth quarter due to that.

We will continue to to make those investments. So we continue to expect $5 billion of Capex per year in 'twenty three 'twenty four 'twenty five 'twenty six so you should count on that that mean.

Let me also give everyone as a reminder.

This capex numbers our growth, meaning they do not include benefits from the ITC or grains from the chipset.

So we're actively working through the grant application process with the Chip program office, which we believe will be meaningful to our manufacturing operations in Texas, and Utah and will help support.

Rafael Lizardi: Beyond that, we're not forecasting, but of course, that will depend on revenue expectations well into next year.

Semiconductor growth for decades to come and funding from the chip from the chips at Grand was comprehended in our decision making for these investments.

Stacy Raskin: Do you have a follow-up? I do, thanks. So you gave us a little color on the end market behavior in Q3. Can you give us some thoughts on, at least you can qualitatively, what to expect by end market in Q4? In particular, for auto, it sounds like auto in Q3 was still strong. You still see that strength continuing in Q4 in the U.M. Yeah, Stacy, I'll take that. You know, when you look at the guidance, it would suggest and we believe that we continue to operate in a week environment in general.

Thank you Tim and we will go to the next caller. Please.

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

With your question.

Hi, guys. Thanks for asking the question in the third quarter I think it was the first time in a few years that you guys. Just came in at the midpoint of your guidance usually you beat it by two to three 4% something like that so I guess my question is anything strange in the linearity in the quarter either by end market just aggregate bookings any color on that you could provide.

Stacy Raskin: And if there was something significant that was changing from one quarter to the next as our typical practice, you know, we highlight that. Yeah, and we just don't have anything to to specifically call out for up or into fourth quarter.

Nothing strange.

Ross I would say that the revenue built as we went through through the quarter.

And I would say just in general it's reflective of a week.

Unknown Executive: So thanks and we'll go to the next caller, please.

A weak environment that we're operating in so which is obvious from the guidance that we're giving you a following.

Timothy Arcuri: Our next question comes from the line of Tim and the Timothy Arcuri with UBS. Please proceed with your question. Thanks a lot. Dave, I also had a question on autos. It sounds like it's holding in there despite this broadening strike and and I guess the question is, are more of your customers on consignment in that business or is this split in autos about the same as that, you know, two third one third versus the rest of the company.

I did on the end market side of things you said automotive was up about 20% year over year I know oftentimes you go between getting sequential or year over years, but could you give us year over year by the end markets.

Certainly, yes, so industrial market was down mid teens, I mentioned automotive was up about 20%.

Timothy Arcuri: And I asked because I'm wondering. Sort of what you're seeing on the on the, you know, Difty side that you would sell into autos do you see bookings at least weekening that would be more consistent with with what we're seeing in terms of this strike and some of the week macro numbers that we see. Sure, yeah. And, you know, as we mentioned in the prepared mark remarks, it was up auto was up the single digits sequentially.

Personal electronics was down about 30% comms equipment was down about 50 and enterprise system was down about about 40. So.

I think consistent with that.

Weaker environment that we talked about so thank you Ross will go to the next caller. Please.

Our next question comes from the line of.

Toshi Hari with Goldman Sachs. Please proceed with your question.

Timothy Arcuri: And it was up 20% when you look year and year. So obviously, you know, that growth had continued in general, I would say that, you know, a market like automotive and personal electronics will have larger customers. There's those larger customers tend to be biased to more consignment. So we would have that probably more in automotive than if I contrast it to a market perhaps like industrial. But overall is, you know, we've moved to having closer direct relationships with customers, which would include the customers that we have an automotive and I think we service pretty close to a thousand or so different automotive OEM. So there is quite a bit of broad broadness and and who we serve there.

Hi, guys. Thanks for taking the question I.

I was hoping you guys could elaborate a little bit on the pricing environment I.

I think many of US had been picking up evidence of the pricing environment, particularly in Asia intensifying over the past couple of months or a couple of quarters.

You don't really give pricing as a reason for gross margins to be down sequentially and year over year, but what kind of role is pricing playing.

Has your strategy changed at all whether it be on the analog side of the MCU side.

Yes so.

Thanks for that question I always helpful too to be able to clarify that.

First I'll just start with pricing doesn't move quickly in our markets.

Nor is it a primary reason that customers choose our products. So we're typically agreeing to pricing thats out six months or on an annual basis for the following year.

Timothy Arcuri: You have a fountain. I do, Dave, yeah. So what would it take to for you to think about cutting capex and I asked because the plan was put into place when, you know, revenue was quite a bit higher than where it is today. Is there kind of a line in the sand for revenue where you would reconsider the plan. I know you've actually increased the plan. Well, you know, revenues continue to weaken, but is there some like tree around. You know, is there some if it weakens to this point you consider cutting capex just, you know, wondering any comments there things.

And so we're continuing to move through that our pricing strategy as we mentioned before Hasnt changed.

No.

Regularly monitored monitoring what's going on with pricing, we always have a goal to remain competitive and.

And certainly a supply and demand has come into balance or more closer to balance. We've said for some time that we would expect that.

Rafael Lizardi: Yeah, let me comment on that. You know, we're very pleased with the progress on our manufacturing expansion. There will provide geopolitically dependable capacity for to support customer growth for the coming decade. And as you know, semiconductor content continues to increase and to provide us the ability to grow at that 10% growth rate that we talked about at the last capital management call if the market requires that will continue to to make those investments.

Pricing to behave like it has over the last couple of decades meeting low single digit decline. So as we move out in time, that's what we're beginning to beginning to see so really no changes other.

And then going back to what we've seen over.

Over the last couple of decades.

Yes.

Yes, Thanks, Dave.

So I guess over the past 12 months Opex is up about 10%.

Rafael Lizardi: So we continue to expect $5 billion of capex per year in 23 24 25 and 26. So you should count on that. Let me let me also give everyone as a reminder, this capex numbers are gross, meaning they do not include benefits from the ITC or grains from the chip stack. So we're actually working through the grain application process with the chip program office, which we believe will be meaningful to our manufacturing operations in Texas and Utah and will help support. So having a doctor grows for decades to come and funding from the chip from the chip stack grains was comprehended in our decision making for this investment.

Revenue is down about 10, so as we think about calendar 'twenty four I was hoping you could give us a hint as to how to think about opex.

Timothy Arcuri: Great. Thank you, Tim.

Unknown Executive: We'll go to the next column, please.

And Dave I think you used to give or you had given multiyear guidance on depreciation.

How should we to the extent there are any updates how should we think about 24% 25% depreciation. Thank you. Yes. Thanks for the question I'll address both the Opex and depreciation so.

On Opex.

<unk>.

We've held a steady hand on opex for many years and will continue to do so so as an example to illustrate the point from 2017 through 2020. One we ran at about $3 $2 billion of Opex.

And then in 'twenty two it ticked up to three 4 billion.

And now we're running at about $3 7 billion on a trailing 12 month basis. So you can see the steady hand, and just a bit of an increase over the last few years.

Ross Seymore: Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question. Hi guys, thanks for asking me a question. In the third quarter, I think it was the first time in a few years that you guys just came in at the midpoint of your guys. And usually you beat it by two, three, four percent, something like that. So, I guess my question is, anything strange in the linearity in the quarter, either by N. Mark did just aggregate both things any color on that you could provide?

As we have had a steady hand with our.

Our higher.

Our new college hire then and as we make investments to continue to strengthen.

The company in the case of R&D.

<unk> portfolio in the case with fails MTI Dot com.

Ross Seymore: Nothing strange, Ross, I'd say that revenue built as we went through the quarter. And I'd say just in general to reflective of a week, you know, a week environment that we're operating in. So, which is obvious from the guidance that we're giving you have following.

The reach of our channels than on depreciation.

R.

Our capex expansions are unchanged, we've talked about that address that wave of previous callers a $5 billion.

Of Capex per year for the next the $23 three years beyond that as we have been talking a lot.

Now when it comes to depreciation as time has passed we have more clarity on what to expect on depreciation so for fourth quarter, Let me start fourth quarter of 2003.

Ross Seymore: I did. On the end, market side of things you said automotive was up about 20% year over year. I know oftentimes you go between giving sequentials or year over years. But could you give us year over years by the end market, please? Certainly, certainly. Yeah. So industrial market was down mid teens. I mentioned automotive was up about 20%. Personal electronics was down about 30%. Com's equipment was down about 50. And enterprise system was down about about 40. So, I think consistent with that weaker environment that we talked about.

Unknown Executive: So, thank you, Ross, and we'll go to the next part, please.

We expect depreciation to increase on a quarterly basis at about the same rate as what we have been seeing throughout 2023. So essentially we're going to end the year just shy of $1 $2 billion. Maybe 11, 11, 90, 11, 11 70 somewhere in that in that range for the for the year.

As an update for 2024, we expect depreciation to be between one five and $1 8 billion and $4 25 to be.

Between 2 billion and $2 5 billion.

Toshiya Hari: Our next question comes from the line of Toshia Harry with Goldman Sachs. Please we'll see with your question. Hi guys, thanks for taking the question. I was hoping you guys could elaborate a little bit on the pricing environment. I think many of us have been picking up evidence of the pricing environment, particularly in Asia intensifying over the past couple of months or couple of quarters. You don't really give pricing as a reason for gross margins to be down to quench the year over year.

Very helpful. Thank you so much.

And we will go to the next caller please.

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

Hi, Thank you I have a question on <unk>.

Factory loadings in inventory so.

Correct me if I'm wrong.

Thinking up until now has been we gotta be ready for the upturn.

And so we are building inventory for that and you have highlighted that over several quarters look we're not we don't have a target, but you did raise the target in terms of how much inventory you want to carry so.

Toshiya Hari: But what kind of role is pricing playing, you know, has your strategy changed at all, whether it be on the analog side around CSI? Yeah. So, thanks, thanks for that question. Always helpful to to be able to clarify that. You know, in first I'll just start with pricing doesn't move quickly in our markets. It's, you know, nor is it a primary reason that customers choose our product. So, you know, we're typically agreeing to pricing that's out to six months or on an annual basis for the following year.

<unk>, which.

I want to make sure I'm reading it right that you are taking underutilization charge, because you've reached a desired level of inventory is definitely inflection that's your.

Expectation for the recovery is changing I E you're expecting.

Still a ramp in revenues than what you, perhaps we're thinking a couple of quarters ago.

Let me start and Dave if you want to chime in but we have.

Toshiya Hari: And so we're continuing to move through that our pricing strategy as we mentioned before hasn't changed. So, you know, we're regularly monitoring, you know, what's going on with pricing. We always have a goal to remain competitive and certainly, you know, a supply demand has come into balance or more closer to balance. You know, we've said for some time that we would expect that pricing to behave like it has over the last couple of decades, meaning, you know, low single digit decline. So as we move out in time, that's what we're beginning to beginning to see.

Targets for where we want inventory levels to be and that goes by product and by faith of finish of those products. So for example of the 80000 different products that we have.

More than.

Vast majority of those are catalog, meaning they sell to many many customers. They last for a long long time. So we can have.

So many years.

Inventory at the chip level or finished goods level in many cases at both levels.

And Thats based on our internal process to set those so those are the in.

Rafael Lizardi: So really, no changes other than going back to what we've seen over the last couple of years. Yeah, I do, thanks Dave. So I guess over the past 12 months, you know, OPEX is up about 10% revenue is down about 10%. So as we think about calendar 24, I was hoping you could, you know, give us a hint as to how to think about OPEX. And Dave, I think you used to give or you had given multi-year guidance on depreciation. How should we, to the extent there are any updates, how should we think about 24 and 25?

Aggregate, that's added up to four to $4 $5 billion and that's what we've been kind of guiding to them we've been talking about.

But what really matters is what happens at a very specific level on a part by part number.

As we have near dose levels, and you'll see our inventory levels inventory levels have increased about $500 million per quarter for two quarters and then this last quarter $179 million. So clearly there is a deceleration in that growth and that's on purpose because as we near those levels and we have slowed down the factory started that goes <unk>.

Rafael Lizardi: [inaudible] Let me start, Dave, if you want to chime in. But we have targets for where we want inventory levels to be. And that goes by product and by state of finish of those products. For example, of the 80,000 different products that we have. More than the vast majority of those are catalogs, meaning they sell to many, many customers. They last for a long, long time. So we can have so many years of inventory at the chip level or a managed goods level in many cases at both levels.

With their fast, but also with the assembly test operations.

And then we.

Slow them will continue into fourth quarter. So they reversed the other side of <unk>.

Slowing your factory loadings.

The underutilization charges, so as we as we near those levels we are ready.

To be on the other side of this of this cycle for the upturn and of course, it's not just inventory capacity is really the bigger driver, but you know what we've been doing that now for a number of years and where we're investing but in inventory really bridges that gap as an upturn happens until you get your factories are really cranking at higher levels.

Yes, and I'll just add.

And bring back to capital management.

We've been saying for I think over a decade now our objective with inventory.

To maintain high levels of customer service.

Keep our lead times stable keep product availability really high so as we talked about earlier.

Dot com really essentially all of our catalog products are available for immediate shipment.

Lead times are stable.

And.

So we are prepared for that up next upturn when it when it does come and follow on <unk>.

Yes, a quick one Dave.

Just looking at the year over year in the fourth quarter of double digit.

The decline in that look back many years.

There have been other cycles, where we have had multiple quarters of negative but not that many times, we have seen a double digit kind of fourth quarter.

Just wanted your perspective on.

What what you folks are seeing this cycle versus.

No no cycle is the same but just kind of give us just help investors think about how to think about that double digit four quarters.

And it could be potentially longer year over year decline. Thank you.

Sure, Yes, and I think we all know.

Being students of studying.

<unk> over the years.

They're all the same and they're all different.

At the same time and they are unique.

The one thing that is unique of course with this with this cycle is how the markets.

Have behaved differently, we've seen bifurcation.

And really.

Lined up very well with when markets recovered so.

<unk> was the first to recover.

And was very strong early on the other markets.

Followed very shortly after that.

Automotive was was last.

Remember.

The automotive manufacturers struggled to restart their factories.

And people Werent going to showrooms when we're in the midst of the pandemic. So really as we've seen things begin to rollover.

Personal electronics was first it was then followed by the other markets.

Yet we still have.

Automotive that's hanging in there so I think that's the one thing that that's unique.

I think as we've learned and studied the cycles, our product portfolio has changed as well over time.

But the best time to be preparing for the upturn as before it shows up so.

That's what we've been busy doing and we think we're in a great position to.

To.

Support the next upturn and to continue to gain share so.

So thank you embraced we will 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.

Rafael Lizardi: And that's based on our internal process to set those. So those are the any aggregate that's added up to four to four and a half billion dollars. And that's what we've been kind of guiding to him. We've been talking about. But what really matters is what happens at the very specific level on a part by part number. So as we have near those levels, and you see our inventory level, inventory levels have increased about 500 million per quarter for two quarters and then this last quarter 179 million.

Thanks for taking my question.

Wanted to go back to automotive just to make sure that I understood. What you said.

Do your comments imply that you are seeing are largely seasonal environment in Q4 with no.

Changes in terms of orders through traditional or EV customers and if that is the case, if I understood. It correctly isn't that surprising given the macro headwinds that sector is facing.

The rest of your question was on third quarter or on the fourth quarter.

Rafael Lizardi: So clearly this is a dissaleration on that growth and that's on purpose because as we near those levels, then we have slowed down the factory starts that goes primarily with the path, but also with the assembly test operations. And then we that slow them will continue into fourth quarter. So the reverse the other side of a slowing your factory load is the under utilization charge. So as we as we near those levels, we are ready to be on the other side of this of this cycle for the up to, and of course it's not just inventory capacity is really the bigger driver.

What is being I think when you were asked before you said that if there was anything abnormal that you would've mentioned, so I assume that because you didn't mention it but it is normal.

Yeah. So what I said is if there was something that we needed to explain the outlook or unusual or however, you want to describe it we would do that so.

I'm not stopping at that point and intentionally and.

We'll finish up the quarter and report out what happens in fourth quarter.

We have a follow up.

Rafael Lizardi: But you know what we've been doing on that now for a number of years and where we're investing, but inventory really bridges that gap as an upturn happens until you get your factories really cranking at higher level. Yeah, and I'll just add and bring back to our capital management that we've been saying, you know, for I think over a decade now are objective with inventory is to maintain high levels of customer service.

Yeah on depreciation what is driving the division because youre capex doesn't seem to be changing and then kind of part b of that is if I take that year on year Delta Rafael I think it's about 400 500 million or so incremental in 'twenty four so at the current revenue run rate.

Two to three point headwind to gross margin.

I just wanted to make sure that I got those two points right.

Yes, so the 424 I said, one five to $1 $8 billion.

Rafael Lizardi: Keep our lead time stable, keep product availability really high. So as we talked about earlier, you know, ti.com, really, essentially all of our catalog products are available for immediate shipment, lead times are stable. And so we are prepared for for that up next up turn when it would it does come.

And that is down from what you've probably had before $2 billion and for 2025, I said $2 billion to $2. Five so that is down from two five.

Which we had.

Said before and the reason as you point out Capex has not changed so that's another reason just as time has passed we have more clarity on what to expect for example, depreciation on tools that doesn't start until the tool is not only received but installed and qualified and that's when the depreciation starts so that nothing because it happened in <unk>.

Ambrish Srivastava: Yeah, follow on Ambrish. Yeah, quick one day. Just looking at the year over year, we had the fourth quarter double digit year decline, and I look back many years, they have been other cycles where we have had multiple quarters of negative. But not that many times we have seen a double digit kind of four five quarter. It's just one of your perspective on what what you folks are seeing this cycle versus, you know, and I know no cycle is the same, but just kind of just help invest your think about how to think about that double digit four quarters.

Lisa.

Learn more as to how that process works with all the number of tools that we're receiving for the various factories, then we're providing an update on depreciation.

Thank you and a gross margin headwind is that did that have the calculation right. It's a two to three point headwind on gross margins.

Ambrish Srivastava: It could be potentially longer year over year decline. Thank you.

Well. So we are giving you the tools to calculate gross margin. So let me remind everybody what that is.

Dave Pahl: Sure, yeah, and I think we all know as being students of studying the cycles over the years, they're all the same and they're all different at the same time and they're unique. The one thing that is unique, of course, with this with this cycle is how the markets have behaved differently, we've seen bifurcation and really lined up very well with when markets recovered. So, you know, PE was the first to recover and was very strong early on.

First is.

Revenue. So if you take the revenue that that.

That you believe is going to happen for the next several years and it's worked on a quarterly basis, but of course in any quarter. There are a lot of puts and takes but better to the way it over longer horizons. So you start with revenue then you fall that through at 70% to 75%.

Dave Pahl: The other markets followed very shortly after that and automotive was last, as you remember, many automotive manufacturers struggled to restart their factories and people weren't going to showrooms when we were in the midst of the pandemic. So, really, as we've seen things begin to roll over, personal electronics was first. It was been followed by the other markets and yet we still have automotive that hanging in there. So, I think that's the one thing that's that's unique. And, you know, I think as we've learned and studied the cycles, our product portfolio has changed as well over time.

By the way that is reflective.

Reflective of the the great not only geopolitical dependable capacity that we're putting in place, but it is all of that new fab capacity is 300 millimeter. So is the <unk>.

Our structural cost advantage not to mention that where we're getting ITC and grant benefits.

<unk> is installed in the United States. So.

But so then you you'll fall that through at 75% then you need to account for the added depreciation so.

This year is probably going to be.

Close to $1 2 billion and then next year I. Just gave you one five to one eight so you want to pick a point between that then you'll get your added depreciation for 2024 and then.

At a high level thats it.

Dave Pahl: But the best time to be preparing for the upturn is before it shows up. So, that's what we've been busy doing and we think we're in a great position to support the next upturn and to continue to gain change.

Of course in any given quarter, even in any given year, but especially in any given quarter you have puts and takes and one of them that we're seeing right now is the under utilization, but that right now is a headwind but that can also be a tailwind when we're on the other side and where are we.

We're increasing loadings and what does that.

Unknown Executive: Sure. So thank you, Ambrish.

Unknown Executive: We'll go to the next column, please.

But that does is that it then it comes back the other way right. So.

Vivek Arya: Our next question comes from the line of the Vivek area with Bank of America securities. Please proceed with your question. Thanks for taking my question. I wanted to go back to automotive just to make sure that I understood what you said. Do your comments imply that you're seeing a largely seasonal environment in Q4 with no changes in terms of orders to traditional or EV customers? And if that is the case, if I understood it correctly, isn't that surprising, given the macro headbench that sector is facing?

But that's more of a.

Tactical comment that happens in some quarters hopefully that answers. Your question, yes. Thank you. Thank you.

We'll go to the next caller please.

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

Yes. Thank you I Wonder if you could walk us through the <unk>.

Population.

The Underutilization charge, Inc.

It seems like with over 200 days of inventory you would see the cost impact of that.

Vivek Arya: The lecture question was on third quarter or on fourth quarter? So what is being, I think when you would ask before you said that if there was anything abnormal, you would have mentioned it. So I assume that because you didn't mention it, that it is normal. Yeah, so yeah, what I said is that there was something that we needed to explain the outlook or, unusual or however you want to describe it, we would do that. So I'm not I'm stopping at that point intentionally and you know, we'll finish up the quarter and report out to what happens in fourth quarter.

Months, but youre pulling it forward can you just talk about how you determine how much to pull forward.

Yes.

So it's an accounting process then it's essentially when you are below what is considered normal utilization.

That percent that you are below that and that is generally determined by wafer in the fab wafer starts and out in the Assembly test operation is your the number of units a year for this in our new yield.

You divide that by the capacity that you can get the maximum capacity you establish a normal.

Rafael Lizardi: Yeah, follow up. Yeah, on depreciation, what is driving the revision because your capex doesn't seem to be changing and then kind of part B of that is if I take that year on your delta, Rafael, I think it's about 400 500 million or so incremental in 24. So at the current revenue run rate, that's a two to three point headwind to gross margin. I just wanted to make sure that I got those two points right.

Which is where you normally expect to be that that could be $85, 90% to 95% depending on the situation.

And whenever you are below that then you take that percent that you are below and then you take those.

Those fixed costs and go straight to the P&L instead of going into inventory.

So some of those costs that we call them fixed cost some of that our depreciation, but it's not only the appreciation you have electricity for example is largely fixed.

Rafael Lizardi: Yeah, so for 24, I said 1.5 to 1.8 billion dollars. And that is down from what you probably had before 2 billion. And for 2025, I said 2 billion to 2.5. So that is down from 2.5, which we had said before. And the reason, you know, as you put out capex is not changing. So that's not the reason. It's just a time has passed. We have more clarity and work to expect.

Above this thermal electricity, whether that's always running production or not as long as it's plugged in so you take that into account and then.

At the end of the day, you're not you're not creating money. When you do that you just essentially putting on the balance sheet on the P&L and in this case is going directly into the into the P&L as earning quarter charge because.

That portion of the capacity is not producing.

Now one more comment that gives us tremendous operating leverage on the other side of that right because.

Rafael Lizardi: So for example, you know, depreciation on tools. That doesn't start until the tool is not only received but installed and then qualified and that's when the depreciation starts. So that doesn't doesn't happen immediately. So we have learned more as to how that process works with all the number of tools that we're receiving for the various factories and. And we're providing an update on depreciation.

Think about fixed costs on the way down day, they've heard of it but on the way up their fixed based so from a cash standpoint on the way up you don't spend anymore and then you get just tremendous cash flow throughs on the on the revenue.

Particularly when its 300 millimeter capacity at very low cost.

The follow on Joe.

Great Yes. Thank you.

Rafael Lizardi: Thank you. And the growth margin headwind is that did I have the calculation right? It's a two to three point headwind on gross margins. Well, so, you know, we've given you the tools to calculate a growth margin. So let me remind everybody what that is. First is revenue. So you pick the revenue that that you believe is going to happen for the next several years. And it's worse or quarterly basis, but of course in any quarter, there's a lot of puts and takes but better to do it over longer horizons.

Yeah separately on the comm infrastructure business seemed quite soft both quarter on quarter year on year, I know that business isn't.

Our focus for you guys, but can you talk about what's driving that weakness.

Yes.

Rafael Lizardi: So you start with revenue, then you fold that through at 70 to 75%, which by the way, that is reflective of the the great not only geopolitical dependable capacity that we're putting in place, but it is all that new fact capacity is 300 millimeters. So is the as a structural cost advantage, not to mention that we're getting ITC and grant benefits as that is installed in the United States. But so then you you fold that through at 70 to 75%.

And.

Last year was about 7% of our revenue Joe So.

We can find great opportunities in comms equipment, we continue to invest.

We just don't think it has the secular growth that other markets like industrial automotive half. So we continue to make investments there and as we've talked about that market over the years. It's one that just tends to be choppy. We believe that they are continuing to.

Adjust their inventory levels.

As we work our way through this quarter.

And as I mentioned earlier, it's down 50%, so that's a pretty pretty significant.

Significant drop so.

Rafael Lizardi: Then you need to account for the added depreciation. So, you know, this year is probably going to be close to 1.2 billion. And then next year, you just give you 1.5 to 1.8. So, you know, if you want to pick a point between that, then you get your your added depreciation for 2024. And then, you know, at a high level, that's it. But of course in any given quarter, even in any given year, but especially in a given quarter, you have puts and takes and one of them that we're seeing right now is the under utilization, but that right now is a headwind, but that can also be a tellwind when we're on the other side.

Yes, so so again long term, we think it's a great market.

And we're positioned well there but.

It will have these types of types of moves overall.

Thanks, Joe.

Next caller please.

Our next question comes from tore Svanberg with Stifel. Please proceed with your question.

Yes. Thank you David Thank you Rafael.

You talked about operating in a weak environment.

You also give us some color on bookings trends.

Rafael Lizardi: And we're we're increasing loadings and that what does that, you know, what that does is that it then it comes back the other way, right? So, but you know, that's more of a, you know, tactical comment that happens in in some quarters.

Maybe then.

Current run rate versus where you think consumption is just just trying to understand then that goes back to <unk> question about four consecutive quarters of double digit declines.

And any color or color on bookings trends really really helpful.

Unknown Executive: Hopefully that answers your question. Thank you.

Yes, so as I mentioned I think it is part of another question on <unk>.

Unknown Executive: We'll go to the next caller, please.

Joe Moore: All right, next question comes from the line of Joe Moore with Morgan Stanley. Please, we'll see what your question. Yes, thank you. I wonder if you could walk us through the calculation on the underutilization charge. I think it seems like with over 200 days of inventory, you would see the cost impact of that in six months, but you're pulling it forward. Can you just talk about how you determine how much to pull forward?

Revenue order linearity there is nothing unusual inside of that.

Secondly, we obviously were describing the environment as being weak.

And we don't have a system that tells us are we shipping above or below demand.

The strongest signal that we get as orders from customers.

Now as we talked about.

Earlier com.

Joe Moore: Yeah, well, so it's an accounting process, and it's essentially when you're below what's considered normal utilization, that person that you're below that norm, and that is generally termed by wafer. The fab is wafer starts and out in the assembly test operation is your, the number of units that you're producing and you, you divide that by the capacity that you can get the maximum capacity, you establish a normal, which is where you move.

Like personal electronics was the first market to go into the downturn. We've had a couple of quarters of growth inside of that market now its up off of a very weak base, but.

We are seeing that as as a trend.

If you compare that to the industrial market, we had seen that.

Say, let's call it about half of the sectors begin to weaken.

Joe Moore: And normally expect to be that I could be 85, 90, 95% dependent on the situation. And whenever you're below that, then you take that percent that you're below, and then you take those, those, those fixed costs and go, those straight to the P and L instead of going into inventory. So some of those costs that we call them fixed costs, they, some of their depreciation, but it's not only depreciation, you have electricity, for example, it's largely fixed.

A couple of quarters ago. It was really this quarter that we saw that that weakness.

As broadening so customers, we believe inside of markets like that inside of markets like comms equipment that we said there are adjusting their inventories.

As such so.

Again that's.

<unk> provides us the opportunity at both strategically with building the capacity and more tactically.

Joe Moore: You know, you use about the same amount of electricity, whether a tool is running production or not, as long as it's plugged in. So you take that into account and then, you know, you're at the end of the day, you're not, you're not creating money when you do that, you just essentially putting on the balance sheet or the P and L. And in this case, it's going directly into the, into the P and L as an encoder charge because that portion of the capacity is not producing.

Building, putting in place the inventory to be able to support the next upturn because it will it will certainly come.

All of them.

Yes. Thank you very helpful. A follow on for Rafael Russell. Thank you for the depreciation numbers for the next few years.

Do you almost had an update us on the timing of the offsets to the depreciation, especially in relation to ICC in the chipset anything new there.

Joe Moore: Now, one more comment, that gives us tremendous operating leverage on the other side of that, right? Because think about fixed costs on the way down, they heard of it. But on the way up, they're fixed, right? So from a cash standpoint, on the way up, you don't spend anymore. And then you get just tremendous cash off all through on the, on the revenue. Particular when it's 300 millimeter capacity, a very low cost.

So nothing new frankly, the ITC.

Joe Moore: The following one, Joe.

The expectation is similar.

About.

About.

20% to 25% credit on.

On everything that is.

Spend on Capex in the U S for Fabs. So what we said back in February thats going to be roughly $4 billion of the $20 billion or saw that.

Unknown Executive: Great. Yeah, thank you. So, yeah, separately on the comment for structure, business seems quite soft both core on quarter, you're on year. I know that business isn't focusing for you guys, but can you talk about what's driving that weakness? Yeah, you know, and it's, it's last year was about 7% of our revenue, Joe. So, you know, we can find great opportunities in comms equipment. We continue to invest. We just don't think it has the secular growth that other markets like industrial automotive have.

Capex of 5 billion tons more so roughly about a $4 billion, so that we're going to get back.

On ITC about one year offset.

We have already accrued $1 $2 billion on the balance sheet.

So youll see that on there.

On our balance sheet on the long term assets.

A portion of them, we will get some time next year, probably by fourth quarter next year is when we expect to get that cash. So thats, one that casual star outflow in flowing in.

Unknown Executive: So, you know, we continue to make investments there. And, you know, as we've talked about that market over the years, it's one that just tends to be choppy. We believe that they're continuing to adjust their inventory levels, as we work our way through this quarter. And as I mentioned earlier, you know, it's down 50%.

I mentioned in an earlier call on an earlier question. We are actively applying for the green. So that's going to be in addition.

Unknown Executive: So, that's a pretty, pretty significant, significant drop. So, yeah, so again, long term, we think it's a great market. And we're positioned well there.

To the ITC.

We're not counting on that and we don't have any numbers on that because you have to apply to have to wait until the department of Commerce makes a decision, but we are.

We're planning on receiving then the funding from from the <unk> Grant was comprehended in our deficient in and we firmly believe we are.

Very well positioned to.

To receive those funds and we are great candidates for that and we believe there will be meaningful to our manufacturing operations in Texas, and Utah to support semiconductor growth in the objectives of the of.

Unknown Executive: But, you know, it will have these types of types of moves.

Unknown Executive: Rob.

Unknown Executive: Okay, thanks.

Tore Svanberg: Go to the next caller, please.

Rafael Lizardi: Our next question comes from Tore Svanberg with Diffle. Please proceed with your question. Yes, thank you, Dave. Thank you, Rafael. So you talked about operating in a weak environment. Could you also give us some color on bookings, trends, you know, maybe even, you know, the current run rate versus where you think consumption is just trying to understand and, you know, it goes back to Ambrish's question about, you know, four consecutive quarters of double digit decline.

The shift program office, great. Thank you Tory.

Go to the next caller please.

Our next question comes from the line of Harlan sur with Jpmorgan. Please proceed with your question.

Thank you and good afternoon, China headquarter of shipments or about 20% of sales for the first half of this year.

He has experienced the most significant decline I think it was down like 33, 35% year over year in the first half of this year.

Rafael Lizardi: So yeah, any color on bookings, trends will be really helpful. Yeah, so, you know, as I mentioned, I think it is part of another question on revenue order linearity. There was nothing unusual inside of that. You know, secondly, we, you know, obviously we're describing the environment as being weak. And we don't have a system that tells us, you know, are we shipping above or below demand, you know, the strongest signal that we get is orders from customers.

Much of your China business is focused on industrial is this geography, continuing to contribute to the weakness here in Q4.

Other geographies are you seeing that.

<unk> is contributing to this broad rollout of sort of the weak industrial trends.

Yeah. So let me I'll speak to to what we saw in the third quarter and just in general.

Including industrial in China.

<unk> to remain weak so I think if we're having this call a year ago or so.

Rafael Lizardi: Now, you know, as we talked about earlier, a market like personal electronics was the first market to go into the downturn. We've had a couple of quarters of growth inside of that market. Now, it's off of a very weak base. But we are seeing that as a trend. If you compare that to the industrial market, you know, we had seen that, let's say, you know, let's call it about half of the sectors, begin to weaken a couple of quarters ago.

As China came out of Covid I think most of us would have expected.

To be more significant rebound, which just hasn't hasn't materialized. So.

Yes, I think when you look at.

On a regional basis compared with a year ago. The only region that was up was it was Japan. So the other regions were down.

So again, just described that weakness is being very broad in nature.

A follow on Harlan.

Yes. Thank you.

Rafael Lizardi: It was really this quarter that we saw that that weakness is broadening. So, you know, customers, we believe inside of markets like that, inside of markets like Tom's equipment that we said, they're adjusting their inventories as such. So, again, that provides us the opportunity both strategically with building the capacity and more tactically building, putting in place the inventory to be able to support the next upterm because it will certainly come.

Yeah embedded business continues to hold up relatively well with trailing 12 months, it's up 8% year over year.

You've talked about the positive strategy changes embedded last quarter. You also cited some some constraints I assume that.

Those constraints are fully normalized so you anticipate embedded continuing to hold Gulfport and we anticipate this segment to weaken from here.

Some of the capacity constraints potentially useful.

Yes, as we as we talked about before.

We had focused on.

Rafael Lizardi: You'll follow on? Yes. Thank you. They're very helpful. Follow on for Raphael. Raphael, thank you for the depreciation numbers for the next few years. Do you all have enough data on the timing of the offsets to the depreciation, especially in the relation to ITC and the chipsets and anything new there? So, nothing new, frankly, the ITC, it's the expectation is similar, which is about, you know, 20 to 25 percent credit on everything that is spent over a decade in the US for fabs.

Changing the product strategy that that we had inside of embedded I'd say, we're very pleased with the results.

We have so far.

Our first objective was to stabilize that business and we continue to invest in it because we believe it has long term growth potential.

And contribution to free cash flow.

So.

We're very pleased with where we're going I think more tactically as.

As we talked about last quarter.

We saw that business does rely more heavily on.

Rafael Lizardi: So, what we said back in February is that that's going to be roughly $4 billion of the $20 billion or so for Capac, the five billion times four. So, roughly about a $4 billion so that we're going to get back on ITC about one year offset. Of that, we have already accrued $1.2 billion on the balance sheet. So, you'll see that on our balance sheet on their long-term assets. A portion of that we will get sometime next year, probably like fourth quarter next year, is when we expect to get that cash.

Foundry suppliers.

We began to see those.

That that capacity begin to free up for us.

And I think that that was different.

Because we had capacity in place to service analog.

Our own capacity there overall so yes.

Yes. So again, we think that business long term is going to be a great driver for us in.

In the future.

So thank you and I think we've got time for one more caller.

Our next question comes from the line of William Stein, which was Securities. Please proceed with your question.

Rafael Lizardi: So, that's when the casual start flowing, flowing in. As I mentioned in an earlier call on an earlier question, we are actively applying for the grain. So, that's going to be in addition to the ITC. We're not counting on that. We don't have any numbers on that because you have to apply. You have to wait until the Department of Commerce makes a decision. But we are planning on receiving. Then the funding from the Chiefs Act grant was comprehended in our decision.

Great. Thanks for squeezing me in.

Dave can you remind us what's in the other segment, besides calculators and perhaps why that end market was down so much more than the others I know, it's very seasonal from calculators, but there was a big drop year over year.

Yeah, so so besides calculators.

Have our DLP.

Digital light processor products that are in there.

So those products are continuing to make their way through.

Rafael Lizardi: And we firmly believe we are a very well-positioned to receive those funds. And we're great-candidate for that. And we believe there will be meaningful to our manufacturer operations in Texas and Utah to support semiconductor growth and the objectives of the Chiefs Program Office.

Inventory correction overall.

Unknown Executive: Great.

Calculators had had a weak weaker back to school.

Harlan Sur: Thank you, Tori.

Yes.

Cohen.

Yes, perhaps.

That hasnt come up in a while but the lead times.

We were dealing with this golden screw issue for a while where there were.

Harlan Sur: Please. Our next question comes from the line of Harlan Sur with JP Morgan. Please will see what your question is. Yeah, thank you. Good afternoon. I'm China Headquarter of Shipman's for about 20% of sales to the first half of this year. This geography has experienced the most significant decline. I think it was down like 33, 35% year-rear in the first half of this year. Much of your China business is focused on industrial.

A number of parts or quite a big part of the.

Let's say all the available Skus that had very extended lead times with revenue down as much as it is.

I'm guessing that's mostly resolved and lead times are like sort of stocked to four weeks for most things at this point, but if you could.

Level set me on that.

The degree to which they are still extended lead times that would be really helpful. Thank you.

Harlan Sur: Is this geography continuing to contribute to the weakness here in Q4, and what other geographies are you seeing that is contributing to this broadening out of the weak industrial trends? Yeah, so let me, I'll speak to what we saw, you know, in the third quarter and just in general, including industrial and China, continued to remain weak. So I think if we're having this call, you know, a year ago or so as China came out of COVID, I think most of us would have expected there to be more significant rebound, which just hasn't, hasn't materialized.

Sure, Yes, so and I may have mentioned this earlier, but.

No.

Most all of our catalog products are.

<unk> on <unk> dot com for immediate shipment and.

So so as we approach our <unk>.

Xyrid level of inventory.

We've got product that is positioned both in finished goods as well as in wafer form too.

Be able to restock that of course lead times therefore are.

But I described normal levels and continue to be.

<unk>.

Harlan Sur: So, yeah, and I, you know, I think when you look at on a regional basis, compared with the year ago, the only region that was up was Japan. So the other regions were down. And so again, just described that weakness as being very broad in nature.

And there's probably no times that we don't with so many different products and so many different customers will have hotspots, but they're very few and far.

<unk> and our ability to close those as well.

Very we've got flexible manufacturing as most of our <unk>.

Rafael Lizardi: You'll follow on, Carla? Yeah, thank you. So your embedded business continues to hold up relatively, well, right, 12 months, it's up 8% year-rear. You've talked about the positive strategy changes in embedded. Last quarter, you also cited some constraints. I assume that those constraints have fully normalized. So you anticipate embedded continuing to hold up for it, you anticipate segments trying to weaken from here with some of the capacity constraints potentially using. Yeah, as we, as we talked about before, you know, we had focused on changing the product strategy that we had inside of embedded.

Production is fungible.

So with that I'll ask Raphael two to wrap up the call for US Alright, 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 value for owners is a long term growth of free cash flow per share.

We strive to achieve our objective we will continue to pursue our three ambitions, we will act like owners who will.

We'll 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 part of and would want us our neighbor when were successful our employees customers communities and owners all benefit. Thank you and have a good evening.

Rafael Lizardi: I'd say we're very pleased with the results that we have so far. Our first objective was to stabilize that business and we continue to invest in it because we believe it has the long-term growth potential and contribution to free cash flow. So we're very pleased with where we're going. I think more tactically, as we talked about last quarter, we saw that business does rely more heavily on foundry suppliers. We began to see those, you know, that capacity began to free up for us.

And this concludes.

Today's conference and you may disconnect your lines at this time. Thank you for your participation.

Rafael Lizardi: And I think that that was different because we had capacity in place to service analog our own capacity there overall. So, yeah, so again, we think that business long-term is going to be a great driver for us in the future.

Unknown Executive: So thank you.

Unknown Executive: And I think we've got time for one more car.

William Stein: And our next question comes from the live. William Stein, which was securities? Please proceed with your question. Great, thanks for squeezing me in. Dave, can you remind us what's in the other segment besides calculators and perhaps why that end market was down so much more than the others? I know it's very seasonal from calculators, but there was a big drop year over here. Yeah, so besides calculators, we have our DLP or digital light processor.

William Stein: There are products that are in there, so those products are continuing to make their way through inventory correction overall. And calculators had a week or back to school this season. Yeah, perhaps something that hasn't come up in a while, but lead times, you know, we were dealing with this golden screw issue for a while where there were, you know, quite a number of parts are quite a big part of the, let's say all the available skews that had very extended lead times with revenue down as much as it is.

William Stein: I'm guessing that that's mostly resolved and lead times are like sort of stock to four weeks for most things at this point, but if you could level set me on that, the degree to which they're still extended lead times that would be really helpful. Thank you. Yeah, so and I may have mentioned this earlier, but, you know, almost all of our catalog products are available on ti.com for immediate shipment and so, so as we approach our desired level of inventory.

William Stein: We've got a product that is positioned both in finish goods as well as in way for form to be able to to restock that of course lead times, therefore are, you know, but I described normal levels and continue to be consistent. And, you know, there's probably no time that we don't with so many different products and so many different customers will have hotspot, but they're very few and far between and our ability to close those is very, we've got, you know, flexible manufacturing is most of our production is fungible.

Dave Pahl: So with that, I'll ask Raphael to wrap up the call for us. All right, let me wrap up by reiterating what we have said previously at our core, we're engineers and technologies, the foundation of our company, but ultimately are objective and the best metric to measure progress and generate value for owners is a long term growth of free cashflow per share, but we strive to achieve our objective will continue to pursue our three ambitions.

Dave Pahl: We will act like owners will own the company for decades, we will adapt and succeed in a world that's ever changing and we will be a company that we're personally proud to be part of and would want us our neighbor when we're successful are employees, customers, communities and owners all benefit. Thank you and have a good evening.