Q4 2023 Texas Instruments Inc Earnings Call
Welcome to the Texas instruments fourth quarter 2023 earnings release Conference call I'm, Dave Pahl head of Investor Relations and I'm joined by our Chief Financial Officer Raphael was already.
Welcome to the Texas Instruments Fourth Quarter 2023 Earnings Release Conference.
I'm Dave Pahl, Head of Investor Relations and I'm joined by our Chief Financial Officer Rafael
For any of you who missed the release, you can find it on our website at ti.com.
For any of you who missed the release you can find it on our website at Ti Dot Com Slash my our.
This call is being broadcast live over the web and can be accessed through our web
This call is being broadcast live over the web.
Can be accessed through our website.
In addition, today's call is being recorded and will be available via replay on our website.
In addition, today's call is being recorded and will be available via replay.
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.
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 states.
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.
Contained in the earnings release published today.
as well as TI's most recent SEC file
and more complaints.
I'd like to provide some information that's important for your calendars.
I'd like to provide some information that's important for your calendar.
Next week on Thursday, February 1st at 10 a.m. Central.
Next week on Thursday February 1st at 10 Am Central time.
will have our Capital Management
Have our capital management call.
Similar to what we've done in the past, Rafael and I will summarize our progress and provide some insight into our business and our approach to capital allocation as we proceed.
Similar to what we've done in the past <unk> and I will summarize our progress and provide some insight into our business and our approach to capital allocation as we prepare for the opportunity ahead.
Moving on today, we will provide the following updates.
Moving on, today we'll provide the following
First I'll start with a quick overview of the quarter.
First, I'll start with a quick overview of the
Next, I'll provide insight into fourth quarter revenue results.
Next I'll provide insight into fourth quarter revenue results with some details of what we're seeing with respect to our end markets.
with some details of what we're seeing with respect to our end
I'll then provide an annual summary of revenue breakout by end market and lastly, Raphael will cover the financial results and our guidance for the first quarter of 2024.
I'll then provide an annual summary of Revenue Breakout
And lastly, Rafael will cover the financial results.
Rafael: and our guidance for the first quarter.
Rafael: Starting with a quick overview.
Starting with a quick overview of the quarter.
Rafael: Revenue was $4.1 billion, a decrease of 10% sequentially and 13% from the same quarter a year
Revenue was $4 1 billion, a decrease of 10% sequentially and 13% from the same quarter a year ago.
Rafael: analog revenue declined 12% year-over-year and embedded processing declined 10%.
Analog revenue declined 12% year over year and embedded processing declined 10% or.
Rafael: our other segment declined 25% from the
Our other segment declined 25% from the year ago quarter.
Rafael: Now I'll provide some insight into our fourth quarter revenue by end market.
Now I'll provide some insight into our fourth quarter revenue by end market.
Rafael: Our results?
Our results reflect increasing weakness in industrial and a sequential decline in automotive as customers work to reduce our inventory levels.
Speaker Change: Thank you for joining us.
Speaker Change: and many more.
Similar to last quarter I'll focus on sequential performance as it's more informative at this time.
Speaker Change: Similar to last quarter, I'll focus on sequential performance as it's more informative.
Speaker Change: First, the industrial market was down mid-teens as we saw that increasing
First the industrial market was down mid teens as we saw that increasing weakness.
Speaker Change: The automotive market was down mid single digits after three and a half years of very strong
The automotive market was down mid single digits after three and a half years of very strong growth.
Personal electronics was about flat.
Speaker Change: personal electronics was about flat
Speaker Change: and next communications equipment was down low single
Next communications equipment was down low single digits.
Speaker Change: and lastly, Enterprise Systems Group.
And lastly, enterprise systems grew low single digits.
Speaker Change: In addition, as we do at the end of each calendar year, I'll describe our revenue by NMR.
In addition, as we do at the end of each calendar year I'll describe our revenue by end market.
As a percentage of revenue for 2023 industrial was 40% automotive was 34% personal electronics 15 communications equipment five enterprise systems for and other was 2%.
Speaker Change: As a percentage of revenue for 2023, industrial was 40%.
Speaker Change: Tore Svanberg, David Pahl, Rafael Lizardi, Dave Pahl, Rafael Lizardi, Dave Pahl,
Speaker Change: Personal Electronics 15, Communications Equipment 5, Enterprise Systems 4, and other.
And 'twenty twenty-three industrial and automotive combined made up 74% of Ti's revenue up about nine percentage points from 2022 and up from 42% in 2013.
Speaker Change: In 2023, industrial and automotive combined made up 74% of TI's revenue.
Speaker Change: up about nine percentage points from 2022 and up from 42% in 2021.
Speaker Change: We see good opportunities in all of our markets.
We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive.
Speaker Change: but we place additional strategic emphasis on industrial and
Our industrial and automotive customers are increasingly turning to analog and embedded technologies to make their end products more reliable more affordable and lower empower.
Speaker Change: Our industrial and automotive customers are increasingly turning to analog and embedded technology.
Speaker Change: to make their end products more reliable, more affordable, and lower in power.
Speaker Change: These trends have resulted and will continue
These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth compared to our other markets.
Speaker Change: and growing chip content per application.
Speaker Change: and many more.
Speaker Change: Rafael will now review profitability, capital management, and our
Rafael will now review profitability capital management and our outlook.
Rafael R. Lizardi: Thanks Dave, and good afternoon everyone.
Rafael: Thanks, Dave and good afternoon, everyone.
Rafael R. Lizardi: They mentioned fourth quarter revenue was $4.1 billion.
Rafael: They've mentioned fourth quarter revenue was $4 $1 billion gross profit in the quarter was $2 $4 billion or 60% of revenue from a year ago gross profit decreased primarily due to lower revenue higher manufacturing costs associated with planned capacity expansions and reduced factory loadings gross profit margin.
Rafael R. Lizardi: Gross profit in the quarter was $2.4 billion, or 60% of revenue.
Rafael R. Lizardi: From a year ago, gross profit decreased primarily due to lower revenue, higher manufacturing costs associated with planned capacity expansions, and reduced factory load.
Welcome to the Texas Instruments Fourth Quarter 2023 Earnings Release Conference.
Rafael R. Lizardi: Gross Profit Margin Decrease 650 Basis
<unk> 650 basis points.
Rafael R. Lizardi: Operating expenses in the quarter were $898 million, up 4% from a year ago and about a
I'm Dave Pahl, Head of Investor Relations, and I'm joined by our Chief Financial Officer, Rafael. For any of you who missed the release, you can find it on our website at ti.com.
Rafael: Operating expenses in the quarter were $898 million up 4% from a year ago at about as expected.
Rafael R. Lizardi: On a trailing 12-month basis, operating expenses were $3.7 billion, or 21% of revenue.
Rafael: On a trailing 12 month basis operating expenses were $3 $7 billion or 21% of revenue.
This call is being broadcast live over the web and can be accessed through our web site. In addition, today's call is being recorded and will be available via replay. 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.
Rafael R. Lizardi: Operating profit was $1.5 billion in the quarter, or 38% of revenue.
Rafael: Operating profit was $1.5 billion in the quarter or 38% of revenue operating profit was down 30% from the year ago quarter.
Rafael R. Lizardi: operating profit was down 30% from the year ago.
Rafael R. Lizardi: Net income in the fourth quarter was $1.4 billion, or $1.49%.
Rafael: Net income in the fourth quarter was $1 $4 billion or $1 49 per share earnings per share included three cent benefit for items that were not in our original guidance.
Rafael R. Lizardi: Earnings per share included a 3 cent benefit for items that were not in our original guide.
Rafael R. Lizardi: Let me now comment on our capital management results, starting with our cash generation.
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 file and more complaints. I'd like to provide some information that's important for your calendar. Next week on Thursday, February 1st at 10 a.m. Central, we will have our Capital Management meeting. Similar to what we've done in the past, Rafael and I will summarize our progress and provide some insight into our business and our approach to capital allocation as we proceed. Moving on, today we'll provide the following. First, I'll start with a quick overview of the. Next, I'll provide insight into fourth quarter revenue results, with some details of what we're seeing with respect to our end. I'll then provide an annual summary of Revenue Breakout, and lastly, Rafael will cover the financial results and our guidance for the first quarter.
Rafael: I'll comment on our capital management results, starting with our cash generation.
Rafael: Cash flow from operations was $1 $9 billion in the quarter capital expenditures were $1 $1 billion in the quarter.
Rafael R. Lizardi: Cash flow from operations was $1.9 billion in the quarter.
Rafael R. Lizardi: capital expenditures were $1.1 billion
Rafael: In the quarter, we paid $1.2 billion in dividends and repurchased $65 million of our stock. We also increased our dividend per share by 5% in the fourth quarter, marking our 20th consecutive year of dividend increases in total we have returned $4.9 billion in the past 12 months to owners.
Rafael R. Lizardi: In the quarter, we paid $1.2 billion in dividends and repurchased $65 million of our...
Rafael R. Lizardi: We also increase our dividend per share by 5% in the fourth quarter.
Rafael R. Lizardi: Marking our 20th consecutive year of dividend income.
Rafael R. Lizardi: In total, we have returned $4.9 billion in the past 12 months to owners.
Rafael: Our balance sheet remains strong with $8 $6 billion of cash and short term investments at the end of the fourth quarter total debt outstanding was $11.3 billion with a weighted average coupon of three 5%.
Rafael R. Lizardi: Our balance sheet remains strong with $8.6 billion of cash and short-term investments at the end of the fourth quarter.
Rafael R. Lizardi: Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%.
Rafael R. Lizardi: Inventory at the end of the quarter was $4 billion, up $91 million from the prior quarter, and days were 219, up 14 days sequential.
Rafael: Inventory at the end of the quarter was $4 billion up $91 million from the prior quarter and days were 219 up 14 days sequentially.
Rafael R. Lizardi: Now let's look at some of these results for the year.
Rafael: Now, let's look at some of this results for a year in 'twenty to 'twenty three gaslog from operations was $6 $4 billion.
Rafael R. Lizardi: In 2023, cash flow from operations was $6.4 billion.
Rafael R. Lizardi: capital expenditures were $5.1 billion.
Starting with a quick overview. Revenue was $4.1 billion, a decrease of 10% sequentially and 13% from the same quarter a year ago. Analog revenue declined 12% year-over-year and embedded processing declined 10%; our other segment declined 25% from the same quarter last year. Thank you for joining us. Similar to last quarter, I'll focus on sequential performance as it's more informative.
Rafael: Capital expenditures were $5 $1 billion.
Rafael R. Lizardi: Free cash flow for 2023 was $1.3 billion or 8% of revenue.
Rafael: Free cash flow for 2023 was $1 $3 billion or 8% of revenue or free cash flow reflects the strength of our business model as well as our decision to invest in 300 millimeter manufacturing assets and inventory to support our overall objective to maximize long term free cash flow per share, which we believe is the primary <unk>.
Speaker Change: Thank you for joining us.
Rafael: River of long term value.
Speaker Change: Turning to our outlook for the first quarter, we expect TI revenue in the range of $3.45 to $3.75 billion and earnings per share to be in the range of $0.96 to $1.06.
Rafael: Turning to our outlook for the first quarter, we expect Ti revenue in the range of $3 four $5 billion to $3.75 billion and earnings per share to be in the range of 96 cents to a dollar and 16 cents.
Speaker Change: We now expect our 2024 effective tax rate to be about 13%.
We now expect our 'twenty 'twenty four effective tax rate to be about 13% in.
First, the industrial market was down mid-teens, as we saw that increasing. The automotive market was down mid single digits after three and a half years of very strong personal electronics was about flat, next communications equipment was down low single digits, and lastly, Enterprise Systems Group. In addition, as we do at the end of each calendar year, I'll describe our revenue by NMR.
Rafael: In closing, we will stay focused in the areas that add value in the long term, we continue to invest in our competitive advantages, which are manufacturing and technology, our broad product portfolio, where each of our channels and diverse and long lived positions.
Speaker Change: In closing, we will stay focused in the areas that add value in the long term.
Speaker Change: and many more.
Speaker Change: We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities.
Rafael: 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.
Speaker Change: Thank you for joining us.
As a percentage of revenue for 2023, industrial was 40%. Tore Svanberg, David Pahl, Rafael Lizardi, Dave Pahl, Personal Electronics 15, Communications Equipment 5, Enterprise Systems 4, and others. In 2023, industrial and automotive combined made up 74% of TI's revenue, up about nine percentage points from 2022 and up from 42% in 2021. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive. Our industrial and automotive customers are increasingly turning to analog and embedded technology to make their end products more reliable, more affordable, and lower in power. These trends have resulted in and will continue to result in growing chip content per application, and many more.
Speaker Change: Thanks, Rafael. Operator, you cannot open the lines for questions.
Speaker Change: in order to provide as many of you as possible an opportunity to ask your questions.
Dave: <unk> to ask your questions. Please limit yourself to a single question.
Speaker Change: and many more.
Speaker Change: After our response, we'll provide you an opportunity for an additional...
Dave: After our response, we'll provide you an opportunity for an additional follow up operator.
Speaker Change: Operator
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before.
Speaker Change: And at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone key.
Speaker Change: A confirmation tone will indicate your line is
Speaker Change: You may press star 2 if you would like to remove your question.
Speaker Change: Thank you for watching.
Speaker Change: Question the Starkey.
Speaker Change: Our first question comes from the line of Toshi Hari with Goldman Sachs. Please proceed with your question.
Speaker Change: Our first question comes from the line of Toshiya Hari with Goldman Sachs.
Toshiya Hari: Please proceed.
Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question.
Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question. My first question is on your Q1 outlook. I think at the midpoint, you're guiding revenue down 12% or so, which is clearly well below what we consider to be typical seasonality. Any end markets or regions or device types that you can call out that's driving that view, or is it broad-based weakness across all applications?
Toshi Hari: My first question is on your Q1 outlook I think at the midpoint, you're guiding revenue down.
Toshi Hari: 12% or so which is clearly well below what we consider to be typical seasonality.
Rafael will now review profitability, capital management, and our Thanks Dave, and good afternoon everyone. They mentioned their fourth quarter revenue was $4.1 billion. Gross profit in the quarter was $2.4 billion, or 60% of revenue. From a year ago, gross profit decreased primarily due to lower revenue, higher manufacturing costs associated with planned capacity expansions, and reduced factory load. Gross Profit Margin Decreased 650 Basis, Operating expenses in the quarter were $898 million, up 4% from a year ago and about a. On a trailing 12-month basis, operating expenses were $3.7 billion, or 21% of revenue. Operating profit was $1.5 billion in the quarter, or 38% of revenue; operating profit was down 30% from the year ago. Net income in the fourth quarter was $1.4 billion, or $1.49%.
Toshi Hari: Any any end markets or regions or device types that you can call out that's driving that that view or is it broad based weakness across all applications.
Speaker Change: I'll take that, Toshiya. Thanks for the question. In fourth quarter, we did see weakness in industrial, increasing weakness there. We saw the sequential decline in automotive. And as the guide would suggest, we believe that we'll just continue to operate in a weak environment and one where customers are continuing to rebalance their inventories over time.
Speaker Change: I'll take that thanks.
Speaker Change: Thanks for the question.
Speaker Change: And fourth quarter, we did see weakness.
Speaker Change: In industrial increasing weakness there.
Speaker Change: We saw the sequential decline.
Speaker Change: In automotive.
Speaker Change: As the guide would suggest we believe that we will just continue to operate.
Speaker Change: In a weak environment.
Speaker Change: And one where customers are continuing to rebalance their inventories overall, so but nothing specific to comment on that.
Speaker Change: So, but nothing specific to common.
Speaker Change: Sure I do if that thanks, Dave just on gross margins.
Speaker Change: You know I think you guys did a good job in explaining what what's driving that I'm still I'm, a little bit surprised with the year over year kind of drop through if you will.
Rafael R. Lizardi: Earnings per share included a 3 cent benefit for items that were not in our original guide. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.9 billion in the quarter, capital expenditures were $1.1 billion, and in the quarter, we paid $1.2 billion in dividends and repurchased $65 million of our... We also increased our dividend per share by 5% in the fourth quarter, marking our 20th consecutive year of dividend income.
Speaker Change: Gross margin dollars essentially dropping as much as you know your revenue.
I understand the Underutilization.
Speaker Change: Increase in depreciation, but what are you seeing from a pricing perspective or is it more pricing than volume that's driving the revenue decline and the decline in gross margins or if.
Speaker Change: If you can if you can kind of speak to your strategy from a pricing perspective, what are you seeing in the marketplace that would that would be helpful. Thank you, yes, yes and no.
Speaker Change: Remind everyone else I know you know the industry well, but.
Rafael R. Lizardi: In total, we have returned $4.9 billion in the past 12 months to owners. Our balance sheet remains strong with $8.6 billion of cash and short-term investments at the end of the fourth quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%.
Speaker Change: Pricing just doesn't move quick.
Speaker Change: Quickly.
Speaker Change: In our markets overall, and nor is that the primary reason why a customer chooses our products.
Speaker Change: So as we've mentioned before.
Speaker Change: Our pricing strategy Hasnt changed.
Rafael R. Lizardi: Inventory at the end of the quarter was $4 billion, up $91 million from the prior quarter, and days were 219, up 14 days sequentially. Now let's look at some of these results for the year. In 2023, cash flow from operations was $6.4 billion, capital expenditures were $5.1 billion, and free cash flow for 2023 was $1.3 billion, or 8% of revenue.
Speaker Change: And.
Speaker Change: Of course, we're always regularly monitoring the market.
Speaker Change: Pricing our products appropriately and as we've talked about now for I think a couple of quarters as we.
Speaker Change: Expected supply and demand to come more imbalance that we would expect pricing.
Speaker Change: To revert back to how it's behaved over the last 10 or 20 years and over the last six months or so that that's what we've seen so.
Speaker Change: Somewhat of a low single digit decline is what we're expecting.
Speaker Change: Out in time and described it as unusual.
Speaker Change: Thanks for the question. Thank you.
Speaker Change: Thanks for the question.
Speaker Change: and many more.
Speaker Change: So the next caller please.
Speaker Change: Our next question comes from the line of Timothy Arcuri with UBS. Please proceed.
Speaker Change: Thank you for joining us.
Speaker Change: Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.
Speaker Change: Turning to our outlook for the first quarter, we expect TI revenue in the range of $3.45 to $3.75 billion and earnings per share to be in the range of $0.96 to $1.06. We now expect our 2024 effective tax rate to be about 13%. In closing, we will stay focused on the areas that add value in the long term and many more. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities. Thank you for joining us.
Timothy Michael Arcuri: Thanks, a lot I wanted to ask about factory loadings, Dave.
Timothy Michael Arcuri: Thanks a lot. I wanted to ask about factory loadings. Dave, gross margin was down maybe 250 basis points. It's kind of implied to be down 250 basis points. Even if I strip out depreciation, it's down about 100 basis points for March. So it seems like utilization is coming down a bit. And CapEx also came in a little bit lower, too, for December. So the first question on that is, can you talk about loadings? Is March going to be the bottom in loadings, and we should see inventory begin to come down also in March? And then I had a follow-up on that.
Timothy Michael Arcuri: Dave gross margin was down maybe 250 basis points, that's kind of implied to be down 250 basis points, even if I strip out depreciation it's down about 100 basis points for March. So it seems like utilization is coming down a bit and Capex also came in a little bit lower to for December. So the first question on that is can you talk about loadings.
Timothy Michael Arcuri: Mark is going to be the bottom in loadings, and we should see inventory begin to come down also in March and then I had a follow up on that too.
Speaker Change: Yes, so thanks for the question so.
Speaker Change: yeah so no thanks for the question so um uh step back um you know in third quarter at the end of third quarter we talked about this uh as we have near our inventory levels uh then we have adjusted our factory loadings accordingly so in uh in third quarter we did some of that and that had an impact on uh on gross margins on under utilization uh fourth quarter adjustment was bigger than than uh third quarter and now going into first quarter we're taking that uh adjustment further so the first quarter uh adjustment on under utilization will be uh will be bigger but uh we continue to have an upward bias on uh on inventory as we continue to uh uh to build the the right buffers for the right parts to be ready uh on the other side of the of the cycle
Speaker Change: Step back.
Speaker Change: Third quarter at the end of third quarter, we talked about this.
Speaker Change: We have near our inventory levels.
Speaker Change: Then we have adjusted our factory loadings accordingly, so.
Speaker Change: In third quarter, we did some of that and that had an impact on.
Speaker Change: On gross margins on Underutilization fourth quarter adjustment was bigger than the third quarter.
Speaker Change: Thanks, Rafael.
Speaker Change: Now going into first quarter, we're taking that adjustment further so their first quarter adjustment on the realization will be will be bigger, but we continue to have an upward bias.
Speaker Change: On inventory as we continue to.
Speaker Change: To build the right buffers for the REIT bars to be ready on the <unk>.
Speaker Change: Operator, you cannot open the lines for questions in order to provide as many of you as possible with an opportunity to ask your questions, and many more.
Speaker Change: Other side of the cycle.
Speaker Change: Do you have a follow-up?
Speaker Change: A follow up.
Speaker Change: I did, yeah. So then on CapEx, can you talk about that? It was a little lower. It's running actually quite a bit below the $5 billion run rate now. So are you actually cutting CapEx now since you're bringing it on factory loading?
Speaker Change: I did yes. So then on Capex can you talk about that it was a little lower it's running actually quite a bit below the $5 billion run rate now. So so are you actually cutting capex now with since you're bringing on factory loading. Thanks.
Speaker Change: No, we're not. In fact, CapEx came in, as expected, $5.1 billion, and we've been talking about $5 billion per year. So it was right on target. And you should expect, and we expect, to continue running at about $5 billion per year through 2026 as we complete the investment plans that we've been talking about.
Speaker Change: No we're not in fact capex came in as expected.
Speaker Change: After our response, we'll provide you with an opportunity for an additional...
Speaker Change: Five $1 billion and we've been talking about.
Speaker Change: $5 billion per year so.
Speaker Change: Operator, Thank you. And at this time, we will be conducting a question and answer session.
Speaker Change: So it was right on target and you should expect and we expect to continue running at about $5 billion per year through 2026, as we complete the investment plans that we've been talking about.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone key. A confirmation tone will indicate your line is active. You may press star 2 if you would like to remove your question. Thank you for watching. Our first question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed.
Speaker Change: Great. Thanks, Tim we'll go to the next caller please.
Speaker Change: Thanks, Tim. We'll go to the next caller.
Speaker Change: Our next question comes from the lineup.
Speaker Change: Our next question comes from the line of Chris Danley with Citibank. Please proceed with your question.
Speaker Change: City Bank
Unnamed: Gross Profit Margin Decreased 650 B.C. Operating expenses in the quarter were $898 million, up 4% from a year ago, and about On a trailing 12-month basis, operating expenses were $3.7 billion, or 21% of revenue.
Chris Danely: Hey, Thanks, guys, just a follow up on the utilization rates so.
City Bank: Hey, thanks guys. Just a follow-up
City Bank: and so on.
Chris Danely: Is the target I guess inventory level has that not changed for you guys and so do you expect.
City Bank: and many more.
Chris Danely: Utilization rates to bottom in Q1 or do you think you might have some more inventory adjustments going into Q2 for Ti.
Unnamed: Operating profit was $1.5 billion in the quarter, or 38% of revenue. Operating profit was down 30% from the year ago. Net income in the fourth quarter was $1.4 billion, or $1.49 per capita.
Speaker Change: Yeah, no, thanks, Chris. So our, broadly speaking, our inventory targets have not changed over the last six, nine months through this cycle. So we still have some ways to go, clearly less than we did six months ago. But we still have some ways to go on that front. At one point, I talked about four to four and a half billion dollars worth of inventory. So that's in the ballpark. And we just finished just shy of four billion. But, you know, as far as when the underutilization bottoms, that's going to depend on revenue expectations. And at this point, we're only, as always, we only give one quarter at a time. So we'll see where we are 90 days from now. And we'll tell you about that. Maybe I'll just add that our target inventory is set, you know, really by device. We look at things like how many customers are buying the product, what the buying patterns look like, how long it takes us to manage. Manufacture the products. So it's really a bottoms up plan built on that very, very specifically. So that's what drives that target overall. And we want to have inventory position to to support growth over the over the long term. This is a side.
Speaker Change: Yes, no. Thanks, great. So our broadly speaking our inventory targets have not changed over the last six nine months.
Toshiya Hari: Hi, good afternoon.
Toshiya Hari: Thank you so much for taking the question. My first question is on your Q1 outlook. I think at the midpoint, you're guiding revenue down 12% or so, which is clearly well below what we consider to be typical seasonality. Any end markets or regions or device types that you can call out that's driving that view, or is it broad-based weakness across all applications?
Speaker Change: Through this cycle, so we still have a.
Speaker Change: Some ways to go clearly less than we did six months ago.
Unnamed: Earnings per share included a 3 cent benefit for items that were not in our original guide. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.9 billion, and capital expenditures were 1.1 billion dollars. In the quarter, we paid $1.2 billion in dividends and repurchased $65 million of our stock. We also increased our dividend per share by 5% in the fourth quarter, marking our 20th consecutive year of dividend income.
Speaker Change: But in some ways to go on that front and at one point.
Speaker Change: I talked about four to $4 $5 billion worth of inventory. So that's in the ballpark and we just finished just shy of.
Speaker Change: <unk> 4 billion, but as far as when.
Speaker Change: Underutilization bottoms, that's going to depend on revenue expectations.
Speaker Change: At this point, we're only that's always we only give one quarter at a time so.
Speaker Change: So we will see where we are 90 days from now and we'll tell you about that maybe.
Speaker Change: I'll take that, Toshiya.
Maybe I'll just add that our target inventory as set really by device.
Toshiya Hari: Thanks for the question. In the fourth quarter, we did see weakness in industrial, increasing weakness there. We saw a sequential decline in automotive, and as the guide would suggest, we believe that we'll just continue to operate in a weak environment and one where customers are continuing to rebalance their inventories over time. So, but nothing specific to common. Thank you. Thank you, and many more.
Unnamed: In total, we have returned $4.9 billion in the past 12 months to owners. Our balance sheet remains strong with $8.6 billion of cash and short-term investments at the end of the fourth quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of $3.5 billion.
Speaker Change: We look at things like how many customers are buying the product with the buying patterns look like how long it takes us to.
Speaker Change: Manufacturer of that product. So it's really a bottoms up plan built on that very very specifically so.
Speaker Change: That's what drives that target overall, and we want to have inventory positioned to support growth.
Unnamed: Inventory at the end of the quarter was $4 billion, up $91 million from the prior quarter, and days were 219, up 14 days. Now let's look at some of these results for the year. In 2023, cash flow from operations was $6.4 billion, and capital expenditures were $5.1 billion.
Speaker Change: Over the over the long term.
Speaker Change: I'd comment so a follow on Chris Yes.
Speaker Change: Have a follow-on, Chris?
Chris: Yeah. Thanks, guys I guess, just a little bit of color on the end market commentary thanks for that on the industrial side.
Speaker Change: Yes.
Speaker Change: just a little bit of color on
Chris: and the industrial side.
Chris: Sounds like most of the downside is due to excess inventory.
Speaker Change: It sounds like most of the downside is due to excess inventory not demand I just was hoping you could confirm that and then.
Unnamed: Free cash flow for 2023 was $1.3 billion, or 8% of revenue. Free cash flow reflects the strength of our business model as well as our decisions to invest in 300 millimeter manufacturing assets and inventory to support our overall objective to maximize long-term free cash flow per share, which we believe is the primary driver of long-term value. Turning to our outlook for the first quarter, we expect TI's revenue to be in the range of $3.45 to $3.75 billion and earnings per share to be in the range of 96 cents to $1.60. We now expect our 2024 effective tax rate to be about 13%.
Chris: Automotive Weekend
With automotive weakening is there any reason why automotive wouldn't fall under the same.
Chris: Are there any reason why automotive wouldn't fall under
Speaker Change: Our next question comes from the line of Timothy Arcuri with UBS.
Speaker Change: The issues that the industrial end market slash inventory would as well.
Chris: and many other issues that the industrial
Timothy Michael Arcuri: Please proceed.
Timothy Michael Arcuri: Thanks a lot.
Timothy Michael Arcuri: I wanted to ask about factory loadings. Dave, gross margin was down maybe 250 basis points. It's kind of implied to be down 250 basis points. Even if I strip out depreciation, it's down about 100 basis points for March. So it seems like utilization is coming down a bit. And CapEx also came in a little bit lower, too, for December.
Speaker Change: Yeah, so I'll start, and Rafael, if you want to add anything. I would say that, you know, the demand signals that we get from customers are orders that they place, whether, you know, that's either directly or through consignment feeds. So that's the data that we can see. We actually can't see their inventory levels. You know, we can anecdotally, as we see a market like personal electronics is down 30%, 40%. We know handsets and PCs, that market hasn't gone down as much as that. So we know anecdotally that we're shipping below demand. So we believe that that's what's going on in industrial. We have customers who have told us that they have built inventory and plan to correct that. So having a real clear picture of what their demand looks like and their channel inventories look like isn't something that we can see. Directly overall. So, and the comment on automotive, we know that customers there did want to build inventory, and we believe that they're in a good position now. So it wasn't surprising that we saw some.
Speaker Change: Yeah. So.
Speaker Change: Ill.
Speaker Change: I'll start with <unk> do you want to add anything I would say that.
Speaker Change: The demand signals that we get from customers or orders that they place, whether that's either directly or through consignment feeds.
Speaker Change: So that's that's the data that we can see we actually can't see their inventory levels.
Speaker Change: We can anecdotally as we see a market like personal electronics is down 30%, 40%, we know handsets and Pcs that market Hasnt gone down as much as that so we know anecdotally that.
Unnamed: In closing, we will stay focused on the areas that add value over the long term and continue to invest in our competitive advantages, which are manufacturing technology, a broad product portfolio, reach of our channels, and diverse and long-lived. 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 or per share growth over the long term. With that said, let me turn it back. Thanks, Rafael. Operator, you can now open the lines for questions in order to provide as many of you as possible with an opportunity to ask your questions. Please limit yourself to a single one.
Timothy Michael Arcuri: So the first question on that is, can you talk about loadings? Is March going to be the bottom for loadings, and should we see inventory begin to come down also in March?
Speaker Change: We're shipping below demand so.
We believe that that's what's going on in industrial we have customers who have halved.
Speaker Change: And then I had a follow-up on that, yeah so no thanks for the question so um uh step back um you know in third quarter at the end of third quarter we talked about this uh as we have near our inventory levels uh then we have adjusted our factory loadings accordingly so in uh in third quarter we did some of that and that had an impact on uh on gross margins on under utilization uh fourth quarter adjustment was bigger than than uh third quarter and now going into first quarter we're taking that uh adjustment further so the first quarter uh adjustment on under utilization will be uh will be bigger but uh we continue to have an upward bias on uh on inventory as we continue to uh uh to build the the right buffers for the right parts to be ready uh on the other side of the of the cycle, Do you have a follow-up?
Speaker Change: I have told us that they.
Speaker Change: Have built inventory and.
Speaker Change: Plan to correct that.
Speaker Change: So having a real clear picture of what the demand looks like in their channel.
Inventories look like isn't something that we can see directly overall so.
Speaker Change: And the comment on on automotive.
Speaker Change: We know that customers there didn't want to build inventory.
Speaker Change: And we believe that.
Operator: After our response, we'll provide you with an opportunity for an admission. Operator. Thank you. And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone. A confirmation tone will indicate that your line is open. You may press star 2 if you would like to remove your...
Speaker Change: They are in a good position now so it wasn't surprising that we saw a sequential decline there. So thanks, Chris go to the next caller. Please.
Speaker Change: So thanks, Chris. We'll go to the next call.
Speaker Change: Our next question comes from the line of Tom O'Malley with Barclays.
Speaker Change: Our next question comes from the line of Tom O'malley with Barclays. Please proceed with your question.
Chris Danely: Hey, and thanks for taking my question guys I just wanted to understand the linearity of the industrial and automotive declines.
Chris Danely: Hey, and thanks for taking my question, guys. I just wanted to understand the linearity of the industrial and automotive declines. When you set out in the quarter, baked into your expectations, were you kind of looking at these two businesses both a little bit better than they came in, or was one a bit worse than the other versus your expectations? And then just in terms of the timing of the quarter, it looks like your finished goods inventory went up a bit more than your other buckets. And I just wanted to understand, is that just because later in the quarter customers were signaling some weaker trends, or is there any reason behind the dynamic there? Thank you. Let me start with the second part of the question. And Dave, do you want to take the first one? No, the second part, that's just a reflection of our ability to build those inventory buffers that we were talking about. And what you're seeing there is on the finished goods side, that's one, as Dave alluded to earlier, that's one set of targets. That's at the finished goods level. Remember, we have 100,000 different parts, and the vast majority of those are what we call catalog, which means they sell to many, many customers. So we want to build a certain finished goods level for each one of those parts. But we're also building at the chip level. Think of a chip can go into two, three, ten different finished goods. So it works out well to have some chip level inventory operationally. But you also have to have some chip level inventory operationally. And you also want to have finished goods. So that's what you saw there. Yeah. And by end markets, Tom, our guidance, as you saw, where our revenues came in, we were, I think, less than 1% from the midpoint of the guidance range. So the business came in about as we expected, and nothing unusual versus our expectation in industrial or automotive overall.
Chris Danely: Set out in the quarter baked into your expectations. When you kind of looking at these two businesses.
I hope you enjoyed this. Also, if you have any questions, comments, or feedback, please leave them in the comments section below. That's it for this webinar. Thank you, everyone, for listening. Thank you, everyone, for watching. This is Chris Daryanani.
Chris Danely: Both a little bit better than they came in or was one of the worst of the other versus your expectations and then just in terms of the timing of the quarter. It looks like your finished goods inventory went up a bit more than your other bucket and I. Just wanted to understand is that just because later in the quarter customers were.
Speaker Change: I did it, yeah.
Speaker Change: So then on CapEx, can you talk about that? It was a little lower. It's running actually quite a bit below the $5 billion run rate now.
Speaker Change: So are you actually cutting CapEx now since you're bringing it on for factory loading?
Speaker Change: No, we're not. In fact, CapEx came in, as expected, $5.1 billion, and we've been talking about $5 billion per year. So it was right on target. And you should expect, and we expect, it to continue running at about $5 billion per year through 2026 as we complete the investment plans that we've been talking about.
I hope you enjoyed it. I hope you enjoyed it. Thank you for watching. Thank you for watching. We'll see you next time.
Chris Danely: Some weaker trends or is there any reason behind the dynamic there. Thank you.
Unnamed: Bye-bye. Our first question comes from the line of Toshiya Hari with Goldman Sachs, and many more. Hi, good afternoon.
Speaker Change: Let me start with the second part of the question and Dave you want to take the first one investor second part Thats, just a reflection of our.
Toshiya Hari: Thank you so much for taking the question. My first question is on your Q1 outlook. I think at the midpoint, you're guiding revenue down 12% or so, which is clearly well below what we consider to be typical seasonality. Any end markets or regions or device types that you can call out that's driving that view? Or is it broad-based weakness across all applications? Yeah, I'll take that, Toshiya.
Dave: Our ability to build those.
Inventory buffers that were talking about and what Youre seeing there is on the finished goods side that's one.
Dave: I alluded to earlier, that's one set of targets that we have enough of the finished goods level remember we have one.
Speaker Change: Thanks, Tim. We'll go to the next caller. Our next question comes from the lineup.
Unnamed: Thanks for the question. In the fourth quarter, we did see weakness in industrial, increasing weakness there. We saw a sequential decline in automotive.
Dave: 100000 different bars, and the vast majority of those are what we call catalog, which means they sell to many many customers. So we want to build.
Speaker Change: City Bank. Hey, thanks guys.
Certain finished good level for each one of those.
Speaker Change: Just a follow-up, and so on, and many more.
Dave: Of those parts, but we're also building at the chip.
Unnamed: And as the guide would suggest, we believe that we'll just continue to operate in a weak environment and one where customers are continuing to rebalance their inventories. So, but nothing specific to comment on. Do you have a follow-up? I do.
Speaker Change: Yeah, no, thanks, Chris.
Dave: The level of think of chicken growing two to $3 10 different finished goods. So so it works out well to have.
Dave: Some chip level inventory operationally, but you also have one of have finished goods. So that's what that's why you saw there and.
Speaker Change: So, broadly speaking, our inventory targets have not changed over the last six, nine months during this cycle.
Dave: And by end market Tom.
Unnamed: Thanks, Dave. Just on gross margins, you know, I think you guys did a good job explaining what's driving it. Still, I'm a little bit surprised with the year-over-year kind of drop-through, if you will, gross margin dollars essentially dropping as much as, you know, your revenue. I understand the underutilization, and the increase in depreciation, but what are you seeing from a pricing perspective? Is it more pricing than volume that's driving the revenue decline and the decline in gross margins? Or if you can kind of speak to your strategy from a pricing perspective, what you're seeing in the marketplace, that would be helpful. Thank you.
Dave: Our guidance as you saw where our revenues came in we were I think less than 1% from the midpoint of the.
Speaker Change: So we still have some ways to go, clearly less than we did six months ago.
Speaker Change: But we still have some ways to go on that front. At one point, I talked about four to four and a half billion dollars worth of inventory. So that's in the ballpark.
Dave: The guidance range.
Dave: So the business came in about as we expected.
Nothing unusual.
Dave: Our expectation in industrial or automotive overall.
Speaker Change: And we just finished just shy of four billion. But, you know, as far as when the underutilization bottoms, that's going to depend on revenue expectations. And at this point, we're only, as always, we only give one quarter at a time.
Chris Danely: Thank you for following.
Speaker Change: Thank you have a follow on for that.
Speaker Change: That was a two-part question. Okay. All right. Thank you. We appreciate it. Thanks. Next caller, please.
So it's a two part question.
Speaker Change: Yeah.
Speaker Change: Alright, guys. Thank you I appreciate it thanks.
Speaker Change: So we'll see where we are 90 days from now, and we'll tell you about that. Maybe I'll just add that our target inventory is set, you know, really by device. We look at things like how many customers are buying the product, what the buying patterns look like, and how long it takes us to manage. Manufacture the products. So it's really a bottoms up plan built on that very, very specifically. So that's what drives that target overall, and we want to have an inventory position to support growth over the long term. This is just a side.
Speaker Change: Caller please.
Speaker Change: Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.
Speaker Change: Our next question comes from the line of Ross Seymore with Deutsche Bank.
Unnamed: Yeah. Toshiya, and I'll, you know, remind everyone else, I know you know the industry well, but, you know, pricing just doesn't move quickly in our markets overall, and nor is it the primary reason why a customer chooses our products. So, and as we've mentioned before, our pricing strategy hasn't changed, and, you know, of course, we're always regularly monitoring the market and pricing our products appropriately. And as we've talked about for, I think, a couple of quarters now, as we expected supply and demand to come more in balance, we would expect pricing to revert back to how it behaved over the last 10 or 20 years. And over the last six months or so, that's what we've seen. So, you know, somewhat of a low single-digit decline is what we're expecting out in time, and I wouldn't describe that as unusual. Thanks for the question and many others. Thank you. Our next question comes from the line of Timothy Arcuri with UBS. Thanks a lot.
Hi, guys just wanted to ask about the product sides, the analog versus embedded embedded had a significantly better year dropping 3% versus the analog down 15, I know theres very different end market exposures for those but were there other competitive dynamics pricing dynamics.
Ross Seymore: Hi guys. Just wanted to ask about the product sides, the analog versus embedded. Embedded had a significantly better year, dropping 3% versus the analog down 15. I know there's very different end market exposures for those, but were there other competitive dynamics, pricing dynamics, strategic focus dynamics, anything else to explain the difference between the performance of those two sectors?
Speaker Change: Strategic focus dynamics anything else to explain the difference between the performance of those two segments.
Speaker Change: Yeah, Ross, I think your instincts are spot on that, you know, the first lens to look at things is through the end markets and Embedded has heavied up in industrial and automotive, so revenues there were stronger for a longer period of time. The second consideration is that Embedded relies on foundry wafer supply more heavily, most of our analog businesses done internally, so there the constraints lasted longer and have now been resolved and are behind us, so that created some of the lag between there as well. So, and as you know, our CapEx plans and spend will have been. More of our wafers overall built internally, which is inclusive of of Embedded. Do you have a follow on?
Speaker Change: Yes, Ross I think your instincts are spot on that.
Speaker Change: Have a follow-on, Chris?
Chris: Yes, just a little bit of color on the industrial side. Sounds like most of the downside is due to excess inventory.
Speaker Change: The first lens to look at things is through the end markets.
Speaker Change: Embedded has heavy up in industrial and automotive so revenues there.
Speaker Change: Stronger for a longer period of time.
Speaker Change: The second consideration is that embedded relies on.
Speaker Change: Automotive Weekend, Are there any reasons why the automotive industry wouldn't fall under and many other issues that the industrial sector faces? Yeah, so I'll start, and Rafael, if you want to add anything. I would say that, you know, the demand signals that we get from customers are orders that they place, whether, you know, that's either directly or through consignment feeds. So that's the data that we can see. We actually can'
Speaker Change: Foundry.
Speaker Change: For supply more heavily.
Speaker Change: Most of our analog businesses done internally, so they're the constraints lasted longer and.
Speaker Change: <unk>.
Now been resolved and are behind us so that created some of the lag between there as well so.
Speaker Change: And as you know our Capex plans and spend will have.
Speaker Change: More of our wafers overall built internally, which is inclusive of <unk>.
Unnamed: Um, I wanted to ask about factory loadings. Dave, gross margin was down maybe 250 basis points. It's kind of implied to be down 250 basis points. Even if I strip out depreciation, it's down about 100 basis points for March.
Speaker Change: You know, we can anecdotally see that a market like personal electronics is down 30%, 40%. We know handsets and PCs, that market hasn't gone down as much as that. So we know anecdotally that we're shipping below demand. So we believe that that's what's going on in the industrial sector. We have customers who have told us that they have built inventory and plan to correct that.
We have a follow on.
Speaker Change: Yes, I do and it's kind of a cyclical question you guys are astute students. The cyclicality of this whole industry. I think this is going to be included in your guide the sixth quarter of negative year over year comps.
Speaker Change: Yeah, I do. And it's kind of a cyclical question. You guys are astute students of cyclicality, this whole industry. I think this is going to be, including your guide, the sixth quarter of negative year over year comp.
Unnamed: So it seems like utilization is coming down a bit, and CAPEX also came in a little bit lower too for December. So the first question on that is, can you talk about load?
Speaker Change: and many more.
Speaker Change: Do you see anything Thats Ti specific thats different this cycle pricing just got so good before now with the bigger headwind you kind of address the pricing dynamic a little bit before but what's making this duration so much longer and is any of it ti specific.
Speaker Change: Do you see anything that's TI-specific that's different this cycle? You know, pricing just got so good before. Now it's a bigger headwind. You kind of addressed the pricing dynamic a little bit before. But what's making this duration so much longer? And is any of it TI-specific?
Unnamed: Is March going to be the bottom in loadings, and should we see inventory begin to come down also in March? And then I had a follow-up on that. Yeah, so, no, thanks for the question. So, step back, you know, at the end of the third quarter, we talked about this, as we neared our inventory levels, then we have adjusted our factory loadings accordingly. So, in the third quarter, we did some of that, and that had an impact on gross margins due to underutilization. However, the fourth quarter adjustment was bigger than the third quarter.
Speaker Change: So having a real clear picture of what their demand looks like and their channel inventories look like isn't something that we can see directly.
Speaker Change: Yeah, Ross, you know, I think I'll make a comment and Rafael, if you want to add anything, you know, all cycles are the same and they're all different, right, as we've all studied them over time. What's clearly different this time is how the markets have behaved in the bifurcation. We saw personal electronics begin to weaken the second quarter a year ago and automotive, you know, just we saw the sequential decline this last quarter. So in the other markets, somewhere in between. And then in addition, I think that, you know, we've had lots of other noise that's inside of the system, you know, whether that's been pricing, as you mentioned, we've had non-cancelable, non-reschedulable orders and other longer term contracts that have required customers to take product that they don't need. Whether companies are using digital. Distributors more heavily than others. So all of that adds noise into it. So I think, you know, we just need to let that noise ring itself out over the, you know, over the cycle. And what we're focused on, of course, is investing in our competitive advantages, getting stronger. We believe that we're in a great position to continue to gain share over the long term. Yeah, I just want to clarify for those who may be new on the call, when Dave talked about non-cancelable, non-returnable orders, that's not. We don't do that. Many of our competitors have done that. So that, in our view, distorts the market. That wasn't the case with us. And the second point, distributors, same thing. Our distributive footprint is much smaller than with many of our competitors. We're down to 25% or so of our revenue through distribution, so 75% direct, whereas many of our competitors are the opposite. So great, great clarification. Thank you, Ross. We'll go to the next caller.
Speaker Change: Yeah, Ross I think I'll.
Speaker Change: I'll make a comment and Raphael if you want to add anything.
Speaker Change: So, and the comment on automotive, we know that customers there did want to build inventory, and we believe that they're in a good position now. So it wasn't surprising that we saw some.
Raphael: All cycles are the same and they're all different right as we've as we've all studied them over time.
Raphael: What is clearly different this time is how the markets have behaved.
Raphael: And the bifurcation, we saw personal electronics begin to weaken in the second quarter, a year ago and automotive.
Speaker Change: So, thanks, Chris.
Speaker Change: We'll go to the next call. Our next question comes from the line of Tom O'Malley with Barclays.
Raphael: Just we saw a sequential decline this last quarter.
Raphael: So in the other markets somewhere in between so.
Chris Danely: Hey, and thanks for taking my question, guys. I just wanted to understand the linearity of the industrial and automotive declines.
Raphael: And then in addition, I think that.
Raphael: We've had.
Chris Danely: When you set out for the quarter, baked into your expectations, were you kind of looking at these two businesses both a little bit better than they came in, or was one a bit worse than the other versus your expectations?
Raphael: Lots of other noise, that's inside of the system.
Unnamed: And now, going into the first quarter, we're taking that adjustment further. So, the first quarter adjustment on underutilization will be bigger. But we continue to have an upward bias on inventory, as we continue to build the right buffers for the right parts to be ready on the other side of the cycle.
Raphael: Whether thats then pricing as you mentioned.
Raphael: Had noncancelable non reschedule orders and other longer term contracts that have required customers to take product that they don't need.
Chris Danely: And then just in terms of the timing of the quarter, it looks like your finished goods inventory went up a bit more than your other buckets. And I just wanted to understand, is that just because later in the quarter customers were signaling some weaker trends, or is there any reason behind the dynamic there? Thank you.
Raphael: Did weather.
Unnamed: Yeah. So then on CapEx, can you talk about that? It was a little lower.
Raphael: Companies are using distributors more heavily than others. So all of that adds noise into it.
Speaker Change: Let me start with the second part of the question.
Unnamed: It's running actually quite a bit below the $5 billion run right now. So are you actually cutting CapEx now since you're bringing down factory loading? No, we're not.
Raphael: So I think we just need to let that noise ring itself out over.
Speaker Change: And Dave, do you want to take the first one?
Dave Pahl: No, the second part; that's just a reflection of our ability to build those inventory buffers that we were talking about.
Raphael: Over the cycle.
Raphael: And what we're focused on of course is investing in our competitive advantages getting stronger we believe that we're in a great position to continue to gain share over the long term.
Unnamed: In fact, CapEx came in, as expected, $5.1 billion. And we've been talking about $5 billion per year. So it was right on target.
Dave Pahl: And what you're seeing here is on the finished goods side; that's one, as Dave alluded to earlier, that's one set of targets. That's at the finished goods level. Remember, we have 100,000 different parts, and the vast majority of those are what we call catalog parts, which means they sell to many, many customers. So we want to build a certain finished goods level for each one of those parts. But we're also building at the chip level.
Speaker Change: Wanted to clarify for those who maybe new on the call when they've talked about noncancelable non returnable orders thats not we don't do that many of our competitors have done that so that in our view distort.
Unnamed: And you should expect, and we expect, to continue running at about $5 billion per year through 2026 as we complete the investment plans that we've been talking about. Thanks, Tim. We'll go to the next caller. Our next question comes from the line: City Bank. Hey, thanks guys.
Speaker Change: The market now.
Speaker Change: That wasn't the case with us and the second point distributors same thing our distributor footprint, it's much smaller than many of our competitors were down to 25% or so while our revenue through distribution, so 75% direct.
Dave Pahl: Think of a chip can go into two, three, ten different finished goods. So it works out well to have some chip level inventory operationally. But you also have to have some chip level inventory operationally. And you also want to have finished goods. So that's what you saw there. Yeah.
Speaker Change: Whereas many of our competitors are the opposite so great great clarification. Thank you Ross will go to the next caller. Please.
Dave Pahl: And by end markets, Tom, our guidance, as you saw, where our revenues came in, we were, I think, less than 1% from the midpoint of the guidance range.
Speaker Change: Our next question comes from the line of Joe Moore with Morgan Stanley.
Speaker Change: Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.
Unnamed: Just to follow up. So, target, that. Yeah, no, thanks, Chris.
Joe Moore: Great. Thank you I Wonder if you could talk about the chips Act.
Joe Moore: Great, thank you. I wonder if you could talk about the CHIPS Act, how that's kind of flowing through both the investment tax credit and then any thoughts you may have on timing of kind of grant issuances or things like that.
Unnamed: So, broadly speaking, our inventory targets have not changed over the last six, nine months of this cycle. So, we still have some ways to go, clearly less than we did six months ago. But we still have some ways to go on that front.
Dave Pahl: So the business came in about as we expected, and nothing unusual versus our expectations in industrial or automotive overall. Thank you for following.
Joe Moore: That's kind of flowing through both the investment tax credit and then any thoughts you may have on timing of kind of grant issuances or things like that.
Speaker Change: Yeah, no, happy to talk about that. So, first, let me address the ITC first, and then I'll go to the grants. So, the ITC Investment Tax Credit, 25% credit on CapEx for manufacturing in the United States. We have accrued to date, over the last year and a half or so, $1.4 billion. We expect to get about $500 million of that later this year, probably in fourth quarter, as far as the current law and regulations stipulate. And we'll get the rest further down the road, mostly the following year and then after that. And we'll continue to accrue that benefit, just, again, 25% on anything we spend in the United States for manufacturing. That's the cash side and the balance. On the P&L, you're already, we're already seeing the benefit as lower depreciation. That tends to be, that benefit tends to be small, has been small so far, because, for example, some of that is for buildings that haven't even started to depreciate, but it will build up over time on that front. So, that's the ITC. The grants, we submitted our application for those. In December, and at this point, we will wait to hear from the Department of Commerce and see what happens.
Speaker Change: Yes, no happy to talk about that so first let me address the ICC first and then I'll go to the grant so the ITC investment tax credit 25% credit on <unk>.
Speaker Change: That was a two-part question. Okay.
Speaker Change: All right.
Speaker Change: Thank you.
Unnamed: At one point, I talked about $4 to $4.5 billion worth of inventory. So, that's in the ballpark, and we just finished just shy of $4 billion. But, you know, as far as when the underutilization bottoms, that's going to depend on revenue expectations. And at this point, we're only, as always, we only give one quarter at a time.
Speaker Change: We appreciate it. Thanks.
Capex for manufacturing in the United States.
Speaker Change: Next caller, please. Our next question comes from the line of Ross Seymore with Deutsche Bank.
Speaker Change: Have accrued to date over the last year, and a half or so $1 4 billion.
Ross Seymore: Hi guys, just wanted to ask about the product sides, the analog versus embedded.
Speaker Change: We expect to get above $500 million of that later this year, probably in the fourth quarter as far as the.
Ross Seymore: Embedded had a significantly better year, dropping 3% versus the analog, which dropped 15. I know there's very different end market exposures for those, but were there other competitive dynamics, pricing dynamics, strategic focus dynamics, or anything else to explain the difference between the performance of those two sectors?
Speaker Change: Current law and regulations.
Speaker Change: Stipulate and we'll get the rest.
Speaker Change: Further down the road most of the following year and then after that and we will continue to accrue.
Unnamed: So, we'll see where we are 90 days from now, and we'll tell you about that. Yeah, maybe I'll just add that our target inventory is set, you know, really by device. We look at things like how many customers are buying the product, what the buying patterns look like, and how long it takes us to manufacture the product.
Speaker Change: That benefit just again, 25% on anything we spend in the United States.
For manufacturing.
Speaker Change: Yeah, Ross, I think your instincts are spot on that, you know, the first lens to look at things is through the end markets, and Embedded has heavied on industrial and automotive, so revenues there were stronger for a longer period of time. The second consideration is that Embedded relies on foundry wafer supply more heavily, while most of our analog businesses are done internally, so there the constraints lasted longer and have now been resolved and are behind us, so that created some of the lag between there as well. So, and as you know, our CapEx plans and spend will have been. More of our wafers overall are built internally, which is inclusive of Embedded. Do you have a follow-on?
Speaker Change: That's the cash side in the balance sheet on the on the P&L you are ready we are already seeing the benefit us lower depreciation that tends to be that benefit tends to be small has been small so far.
Because for example, some of that is for buildings that haven't even started to depreciate, but it will build up over time.
Unnamed: So, it's really a bottoms-up plan built on that very, very specifically. So, that's what drives that target overall, and we want to have inventory positioned to support growth over the long term. That's like, have a following on Christmas. Yeah. That's just a little bit of color.
Speaker Change: On that front so that's the that's.
Speaker Change: The ITC.
Speaker Change: The Grand we submitted our application for dose.
Speaker Change: In December and at this point, we will wait to hear from the department of Commerce and see what happens there.
Speaker Change: <unk>.
Speaker Change: Yeah, I did. So I think, you know, obviously, that stuff will help the cash flow down the road. But, you know, your free cash flow is below the level of the dividend. Right now, I assume it's pretty important to keep paying the dividend. You know, where does that leave you in terms of share repurchases and other uses of cash?
Yes, I did.
Unnamed: The Industrial Side, Sounds like most of the downside is due to excess inventory for Automotive Week. Is there any reason why the automotive industry wouldn't fall under this category?
Speaker Change: So I think obviously that stuff will help the cash flow down the road, but your free cash flow is below the level of the dividend.
Now I assume it's pretty important to keeping the dividend where does that leave you in terms of share repurchases and other uses of cash.
Ross Seymore: Yeah, I do. And it's kind of a circular question. You guys are astute students of cyclicality, this whole industry. I think this is going to be, including your guide, the sixth quarter of negative year-over-year comp, and many more. Do you see anything that's TI-specific that's different this cycle? You know, pricing just got so good before. Now it's a bigger headwind.
Unnamed: Thank you. Thank you. Thank you. Thank you.
Unnamed: Yeah, so I'll start. And Rafael, if you want to add anything, I would say that, you know, the demand signals that we get from customers are orders that they place, whether, you know, that's either directly or through consignment feeds. So that's the data that we can see. We actually can't see their inventory levels.
Speaker Change: Yeah, first, you know, I would point you to our operating cash, you know, our business model is very strong and our operating cash flow is very strong and it supports our investments for growth through the cycle. So clearly with the levels of capex that we have right now, that hits the free cash flow, but, you know, big picture, understand and look at the operating cash, even in a depressed environment with the revenue depressed, the operating cash flow is very strong. We also have a very strong balance sheet, and we just finished the year at $8.6 billion. You know, when it comes to.
Speaker Change: Yes, first I would point to two or.
Speaker Change: So our operating cash in our business model is very strong and our operating cash flow.
Speaker Change: Is is very strong and it supports our investment for growth through the cycle. So clearly with the levels of Capex that we have right now that that hits, the free cash flow, but big picture.
Ross Seymore: You kind of addressed the pricing dynamic a little bit before.
Ross Seymore: But what's making this duration so much longer?
Ross Seymore: And is any of it TI-specific?
Unnamed: You know, we can anecdotally see that a market like personal electronics is down 30, 40%. We know handsets and PCs, that market hasn't gone down as much as that. So we know anecdotally that we're shipping below demand, so we believe that that's what's going on in the industrial sector. We have customers who have told us that they have built inventory and plan to correct that. So having a really clear picture of what their demand looks like and their channel inventories look like isn't something that we can see directly overall. So, and the comment on automotive, we know that customers there wanted to build inventory, and we believe that they're in a good position now. So it wasn't surprising that we saw a So, thanks Chris, we'll go to the next call. Our next question comes from the line of Tom O'Malley with Barclays. Hey, and thanks for taking my question, guys. I just wanted to understand the linearity of the industrial and automotive declines.
Speaker Change: Yeah, Ross, you know, I think I'll make a comment, and Rafael, if you want to add anything, you know, all cycles are the same, and they're all different, right, as we've all studied them over time.
Speaker Change: I understand and look at the operating cash even in a depressed environment with the revenue of the product. The operating cash flow is very strong. We also have very strong balance sheet.
And we just finished the year at $8 six.
Speaker Change: <unk>.
Speaker Change: What's clearly different this time is how the markets have behaved in the bifurcation. We saw personal electronics begin to weaken in the second quarter a year ago, and automotive, you know, just we saw the sequential decline this last quarter. So in the other markets, somewhere in between. And then, in addition, I think that, you know, we've had lots of other noise that's inside of the system, whether that's pricing, as you mentioned, we've had non-cancelable, non-reschedulable orders and other longer-term contracts that have required customers to take products that they don't need. Whether companies are using digital. Distributors more heavily than others. So all of that adds noise to it.
Speaker Change: Sure.
Speaker Change: When it comes to.
Speaker Change: When it comes to repurchases I would take you to our objectives on capital management for cash return.
Speaker Change: When it comes to repurchases, you know, I would take you to our objectives on capital management for cash return, and our objective is to return all free cash flow via dividends and repurchases. Each one of those has different objectives on dividends and repurchases, but we have a really good track record over many years of doing both of them.
Speaker Change: And our objective there is to return all free cash flow via dividends and repurchases.
Speaker Change: Each one of those has a different objective on dividends and repurchases, but we have a really good track record over many years of doing both of those.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you Joe.
Speaker Change: Go to the next caller, please.
Speaker Change: Go to the next caller please.
Speaker Change: Our next question comes from the line of Harlan Sur with JP Morgan.
Speaker Change: Our next question comes from the line of Harlan sur with Jpmorgan. Please proceed with your question.
Harlan: Yes. Good afternoon, thanks for taking my question.
Harlan Sur: Yeah, good afternoon. Thanks for taking my question. Up through Q3 of last year, the team had seen numerous consecutive quarters of increasing cancellations and push-outs, right? Typical customer behavior in a weak demand environment. I assume, given your commentary, that the team continues to see cancellations, push-outs, activity expanding into the December quarter. You're almost a month into March. You still seeing cancellations and push-outs expanding or starting to maybe see some signs of stabilization?
Harlan: Ups in Q3 of last painting of the team has seen numerous consecutive quarters of increasing cancellations and pushout. So a typical customer behavior in a weak demand environment I assume given your commentary that the team continues to see cancellations push outs activity expanding into the December quarter.
Speaker Change: So I think, you know, we just need to let that noise ring itself out over the, you know, over the cycle. And what we're focused on, of course, is investing in our competitive advantages and getting stronger.
Harlan: You're almost a month until March.
Unnamed: When you set out for the quarter, baked into your expectations, were you kind of looking at these two businesses, both a little bit better than they came in, or was one a bit worse than the other versus your expectations? And then just in terms of the timing of the quarter, it looks like your finished goods inventory went up a bit more than your other buckets. And I just wanted to understand, is that just because later in the quarter, customers were signaling some weaker trends, or is there any reason behind the dynamic there? Thank you. Let me start with the second part of the question. And Dave, do you want to take the first one?
Harlan: You're still seeing cancellations and push outs expanding are starting to maybe see some signs of stabilization.
Speaker Change: We believe that we're in a great position to continue to gain share over the long term. Yeah, I just want to clarify for those who may be new on the call, when Dave talked about non-cancelable, non-returnable orders, that's not. We don't do that. Many of our competitors have done that.
Speaker Change: Yes Harlan.
Speaker Change: Yeah, Harlan, you know, as you would expect, we have seen cancellations in the quarter and fourth quarter had remained elevated. I wouldn't describe them as increasing, but just at higher levels. You know, and we're still early inside of the quarter. I would say all of, you know, what's going on with cancellations and the backlog that we see is all comprehended in our guidance and in our hospitalization.
Speaker Change: As you would expect we have seen cancellations.
Speaker Change: In the quarter and fourth quarter had remained elevated I wouldn't describe them as increasing but.
Speaker Change: So that, in our view, distorts the market. That wasn't the case with us. And the second point, distributors, same thing. Our distribution footprint is much smaller than with many of our competitors. We're down to 25% or so of our revenue through distribution, so 75% direct, whereas many of our competitors are the opposite.
Speaker Change: Debt at higher.
Speaker Change: <unk>.
Speaker Change: And we're still early inside of the quarter I would say all of it.
Speaker Change: What's going on with cancellations in the backlog that we see as all comprehended.
Speaker Change: And in our guidance and our outlook.
Speaker Change: Yes, Paolo effect, and then from a geographical perspective.
Speaker Change: Perfect. And then, yeah, from a geographical perspective.
Speaker Change: So great, great clarification.
Speaker Change: Thank you, Ross.
Speaker Change: We'll go to the next caller. Our next question comes from the line of Joe Moore with Morgan Stanley.
Unnamed: Sure. The second part is just a reflection of our ability to build those inventory buffers that we were talking about. And what you're seeing there is on the finished goods side; that's one, as Dave alluded to earlier, that's one set of targets that we have. That's at the finished goods level. Remember, we have 100,000 different parts, and the vast majority of those are what we call catalog parts, which means they sell to many, many customers.
Speaker Change: China Headquarters Shipman. Seen about 20% of your sales through the October quarter of last year. This geography has experienced the most significant decline during this downturn. It's down about 33% year-to-date up through Q3 of last year. Your total business was down 13%. Is this geography continuing to contribute to the weakness stepping into this year or is the weakness more U.S. and European-based?
Speaker Change: China headquartered shipments at about 20% of your sales to the October quarter of last year. This geography has experienced the most significant decline during this downturn, while its down about 33% year to date up through Q3 of last year. Your total business was down.
Joe Moore: Great, thank you.
Joe Moore: I wonder if you could talk about the CHIPS Act, how that's kind of flowing through both the investment tax credit and then any thoughts you may have on timing of grant issuances or things like that.
<unk> is this geography continuing to contribute to the weakness.
Speaker Change: Yeah, no; happy to talk about that. So, first, let me address the ITC first, and then I'll go to the grants.
Going into this year or is the weakness more.
Speaker Change: The us and European based.
Speaker Change: Yes, I would say when you look.
Speaker Change: Yeah, I would say when you look regionally this quarter, just from a dollar standpoint, you've got sequentially all the regions were down with the exception of the rest of Asia. So nothing unusual with China going on specifically there overall. So, again, when we look at our business, I think most of that is explained by the end markets. And certainly, you know, we hadn't seen a recovery inside of China that I think most of us were.
Speaker Change: So, the ITC Investment Tax Credit, a 25% credit on CapEx for manufacturing in the United States. We have accrued to date, over the last year and a half or so, $1.4 billion. We expect to get about $500 million of that later this year, probably in the fourth quarter, as far as the current law and regulations stipulate. And we'll get the rest further down the road, mostly the following year and then after that.
Speaker Change: Regionally this quarter.
Speaker Change: From a just from a dollar standpoint.
Speaker Change: <unk> got.
Speaker Change: Sequentially, all the regions were down with the.
Speaker Change: With the exception of the rest of Asia.
Unnamed: So we want to build a certain finished goods level for each one of those parts, but we're also building at the chip level. Think of a chip that can go into two, three, ten different finished goods. So it works out well to have some chip-level inventory operationally. But you also want to have finished goods. So that's what you saw there.
Speaker Change: So.
Speaker Change: Nothing unusual with China going on specifically their overall so.
Speaker Change: Again, when we look at our our business I think most of that.
Speaker Change: And we'll continue to accrue that benefit, just, again, 25% on anything we spend in the United States for manufacturing. That's the cash side and the balance. On the P&L, you're already, we're already seeing the benefit as lower depreciation. That tends to be, that benefit tends to be small, has been small so far, because, for example, some of that is for buildings that haven't even started to depreciate, but it will build up over time on that front. So, that's the ITC. The grants. We submitted our application for those. In December, and at this point, we will wait to hear from the Department of Commerce and see what happens. Yeah, I did. So I think, you know, obviously, that stuff will help the cash flow down the road.
Speaker Change: As explained by the end markets and certainly we hadn't seen a recovery inside of China that I think most of us were expecting.
Unnamed: Yeah. And by end markets, Tom, our guidance, as you saw, where our revenues came in, we were, I think, less than 1% from the midpoint of the guidance range. So the business came in about as we expected, and nothing unusual versus our expectation in industrial or automotive. Thank you for the two-part question. Yeah, that counts as two.
Speaker Change: Okay, thank you, Dave.
Speaker Change: Okay. Thank you Dave.
Speaker Change: Okay.
Go to the next caller please.
Speaker Change: Go to the next caller, please.
Speaker Change: Our next question comes from the line of Joshua which alter with TD Cowen and company. Please proceed with your question.
Speaker Change: Our next question comes from the line of Joshua Buchalter with T.D. Cowan.
Joshua Buchalter: Hey, guys. Thanks for taking my question. I wanted to ask about how you're thinking about OpEx given the extended softness. Any thoughts on getting more defensive with OpEx as the weakness?
Joshua: Hey, guys. Thanks for taking my question.
Joshua: I wanted to ask about how youre thinking about opex given the extended softness.
Joshua: Any.
Joshua: Any thoughts on.
Joshua: Getting more defensive with Opex as the weakness.
Joshua: Last longer than expected or are you grew opex, 8% in 2023 is that sort of the right level that you think you need to be investing in the business for the long term growth. Thank you.
Joshua Buchalter: Last longer than expected or you grew OPEX 8% in 2023. Is that sort of the right level that you think you need to be investing in the business for the long-term growth? Thank you.
Unnamed: Okay. All right, thank you. Appreciate it, guys. Thank you. We appreciate it, bye. Thanks.
Unnamed: Next caller, please. Our next question comes from the line of Ross Seymour with Deutsche Bank. Hi guys, just wanted to ask about the product sides, the analog versus embedded.
Speaker Change: Yeah, you know, big picture, we have a disciplined process of allocating capital to R&D and SG&A to the best opportunities. And we've held a steady hand throughout a number of years, pre-pandemic, during the pandemic, post-pandemic, where we managed OPEX very well during that time and didn't get ahead of our skis. So, we will continue with that, with that disciplined process. Remember, of course, these investments, particularly industrial automotive, which is what we're biased in, are investments. They're very long-term in nature. You're not going to, you know, what you save now is going to, would hurt your long-term revenue growth. So, we're not going to, we're not going to do that. So, we're going to maintain those investments for the long term.
Speaker Change: Yes <unk>.
Speaker Change: Sure.
Speaker Change: A disciplined process of allocating.
Speaker Change: But, you know, your free cash flow is below the level of the dividend.
Speaker Change: Capital through R&D, and SG&A to the best opportunities and we've held a steady hand throughout a number of years pre pandemic during the pandemic post pandemic.
Speaker Change: Right now, I assume it's pretty important to keep paying the dividend.
Speaker Change: You know, where does that leave you in terms of share repurchases and other uses of cash?
Unnamed: Embedded had a significantly better year, dropping 3% versus the analog, down 15. I know there's very different end market exposures for those, but were there other competitive dynamics, pricing dynamics, you know, strategic focus dynamics, anything else to explain the difference between the performance of those two seconds? Yeah, Ross, I think your instincts are spot on that, you know, the first lens to look at things is through the end markets, and Embedded is heavied up in industrial and automotive. So revenues there were stronger for a longer period of time. The second consideration is that Embedded relies on foundry wafer supply more heavily.
Speaker Change: Yeah, first, I would point you to our operating cash. Our business model is very strong, and our operating cash flow is very strong, and it supports our investments for growth through the cycle.
Speaker Change: Where we manage opex very well during that time and doing get ahead of our skis.
Speaker Change: So we will continue.
Speaker Change: With that with a disciplined process remember of course, these investments, particularly industrial automotive, which is where we're biasing our investments theyre very long term in nature.
Speaker Change: So clearly, with the levels of capex that we have right now, that hits the free cash flow, but, you know, the bigger picture, understand and look at the operating cash. Even in a depressed environment with revenue depressed, the operating cash flow is very strong. We also have a very strong balance sheet, and we just finished the year at $8.6 billion. You know, when it comes to repurchases, you know, I would take you to our objectives for capital management for cash return, and our objective is to return all free cash flow via dividends and repurchases.
Speaker Change: Youre not going to.
Speaker Change: No.
Speaker Change: When you say now is going to hurt your long term revenue growth. So we're not going to we're not going to do is we're going to maintain.
Unnamed: Most of our analog businesses are done internally. So there, the constraints lasted longer and have now been resolved and are behind us. So that created some of the lag between there as well. So, and as you know, our CapEx plans and spend will have more of our wafers overall built internally, which is inclusive of Embedded. Do you have a follow-on? Yeah, I do.
Speaker Change: Those investments for the long term.
Speaker Change: Yeah, thank you. I guess I wanted to ask about your fixed cost leverage. I mean, in the past, you've talked about, I think, 75% gross margin fall through on incremental revenue. Is that still the right metric we should be using given revenues, you know, a good amount lower and depreciation is larger? I'd just be curious to hear if anything in the mechanics of that math has changed. And basically, when can the incremental 300 millimeter capacity start flowing through the gross margins and be margin accretive? Thank you.
Speaker Change: Josh Yes.
Josh: Yes. Thank you I guess I wanted to ask about your fixed cost leverage I think you have in the past you've talked about I think 75% gross margin fall through on incremental revenue is that still the right metric, we should be using given revenues good amount lower than.
Josh: Depreciation.
Josh: As larger I'd just be curious to hear if anything in the mechanics of that map has changed.
Unnamed: And it's kind of a cyclical question. You guys are astute students of the cyclicality of the sole industry. I think this is going to be including your guide the sixth quarter of negative year over year comp. Um, do you see anything that's TI-specific that's different this cycle? You know, pricing just got so good before, now it's a bigger headwind. You kind of addressed the pricing dynamic a little bit before, but what's making this duration so much longer, and is any of it TI-specific? Yeah, Ross. You know, I think I'll make a comment.
Josh: Basically when 300 note the incremental 300 millimeter capacity.
Speaker Change: Each one of those has different objectives for dividends and repurchases, but we have a really good track record over many years of doing both of them.
Josh: Start flowing through the gross margin and be margin accretive.
Speaker Change: Yeah, so the math is still the same. The fall through you should use is 70% to 75%. That is still a reasonable starting point. You then have to adjust for depreciation, as you alluded to, and our depreciation. I gave you an update on that 90 days ago, but I'll reinforce that in a second. But you have to adjust for that. And then, you know, there are always puts and takes on any given quarter. Like right now, it's under utilization, but at some point, that goes the other way. And throughout this time, as you pointed out, we will continue to benefit increasingly from 300 millimeter, more 300 millimeter wafers, which have a cost advantage. So let me go back to depreciation just to make sure everybody has the right number. It's the same as what I said 90 days ago. For 2024, expect $1.5 to $1.8 billion. And for 2025, expect $2 to $2.5 billion.
Speaker Change: Yes, so the math is still the same the poultry issue USD, 70% to 75% that is still a reasonable starting point you then have to adjust for depreciation and as you alluded to.
Speaker Change: Thank you.
Speaker Change: And our depreciation.
Speaker Change: Go to the next caller, please.
Speaker Change: Our next question comes from the line of Harlan Sur with JP Morgan. Yeah, good afternoon. Thanks for taking my question. Up through Q3 of last year, the team had seen numerous consecutive quarters of increasing cancellations and push-outs, right? Typical customer behavior in a weak demand environment. I assume, given your commentary, that the team continues to see cancellations, push-outs, and activity expanding into the December quarter. You're almost a month into March. Are you still seeing cancellations and push-outs expanding, or starting to maybe see some signs of stabilization? Yeah, Harlan, you know, as you would expect, we have seen cancellations in the quarter, and the fourth quarter remained elevated.
Speaker Change: Give you an update on that 90 days ago.
Speaker Change: I will.
Speaker Change: Reinforce that in a second but but you have to adjust for that and then there are always.
Unnamed: And Rafael, if you want to add anything, you know, all cycles are the same, and they're all different, right, as we've all studied them over time. What's clearly different this time is how the markets have behaved during the bifurcation. We saw personal electronics begin to weaken in the second quarter a year ago, and automotive, you know, just the sequential decline this last quarter. So, in the other markets, somewhere in between. So, and then, in addition, I think that, you know, we've had lots of other noise that's inside of the system, whether that's pricing, as you mentioned, we've had non-cancellable, non-reschedule Whether companies are using distributors more heavily than others. So, all of that adds noise to it.
Speaker Change: Puts and takes on any given quarter like right now its underutilization, but at some point that goes the other way.
Speaker Change: Throughout this time as you pointed out we will continue to benefit.
Speaker Change: <unk> from 300 millimeter.
Speaker Change: More 300 millimeter wafers, which add to our.
Speaker Change: Our cost advantage.
Speaker Change: So let me go back to depreciation just to make sure everybody has the right number is the famous what I said 90 days ago for 2024 expect one 5 million to $1 8 billion for 2025, we expect two to $2 5 billion.
Speaker Change: Thank you, Josh. We'll go to the next caller, please.
Speaker Change: Thank you Josh will go to the next caller please.
Harlan Sur: I wouldn't describe them as increasing, but just at higher levels. You know, and we're still early inside of the quarter. I would say all of, you know, what's going on with cancellations and the backlog that we see is all comprehended in our guidance and in our hospitalization. Perfect. And then, yeah, from a geographical perspective. China Headquarters Shipman. Seen about 20% of your sales through the October quarter of last year.
Speaker Change: Our next question comes from the line of C. J Muse with Cantor Fitzgerald. Please proceed with your question.
Speaker Change: Our next question comes from the line of CJ Muse with Cantor Fitzgerald. Please proceed with your question.
Chris Danely: Good afternoon. Thank you for taking the question. I guess first question, your revenue outlook for March basically gets us back to kind of pre-COVID first half 2020 levels, yet at the same time your inventory is roughly double. And so curious, how are you thinking about kind of normalized inventory over time? And also, how are you thinking about coming out of the trough, what kind of a gross margin recovery will look like, given where your inventory levels are today?
Speaker Change: Hey, good afternoon. Thank you for taking the question I guess first question. Thank you.
Speaker Change: Our revenue outlook for March basically gets us back to kind of pre Covid first half 2020 levels yet at the same time your inventories roughly double and so I'm curious how are you thinking about kind of normalized inventory over time and also how are you thinking about coming out of the trough what kind of a gross margin recovery.
We'll look like given where your inventory levels are today.
Harlan Sur: This geography has experienced the most significant decline during this downturn. It's down about 33% year-to-date up through Q3 of last year. Your total business was down 13%. Is this geography continuing to contribute to the weakness stepping into this year, or is the weakness more U.S. and European-based?
Unnamed: So, I think, you know, we just need to let that noise play out over the, you know, over the cycle, and what we're focused on, of course, is investing in our competitive advantages and getting stronger. We believe that we're in a great position to continue to gain share over the long term. Yeah, I just want to clarify for those who maybe knew on the call when they talked about non-cancellable, non-returnable orders. That's not true; we don't do that. Many of our competitors have done that. So, that, in our view, distorts the market. But that wasn't the case with us.
Speaker Change: So, that's a multi-part question with many angles to that. What I would tell you, high level, we're very comfortable with our inventory level. Right now, we're just shy of $4 billion. As I said earlier on the call, we have a continued upward bias for at least one more quarter, probably a couple quarters at least, an upward bias on that. But that is good inventory for catalog parts that sell to many customers, that last a long time. So, I feel really good about that. But we'll see how things play out on the other side of the cycle and depending on demand and different things. But I would expect to continue holding relatively high levels of inventory. We're just in a different position than we were even three or four years ago. In terms of how much of our revenue and our parts are in industrial automotive, in catalog type of parts that last a long time. So, our strategy is such that it makes sense to have that inventory. Our order fulfillment processes have also improved. We have TI.com and different tools that we can leverage to go direct to market. We have a much higher percent of our revenue now, 75% is direct. So, all those factors play into having more inventory as a real leverage point that we can use to serve our customers even better.
So.
Multipart question Manny.
Speaker Change: Angles to that what I would tell you high level, we're very comfortable with our inventory level.
Speaker Change: Right now were just shy of $4 billion.
Speaker Change: I said earlier on the call. We have continued upward bias for at least one more quarter, probably a couple of quarters at least.
Speaker Change: An upward bias on that but that is good.
Speaker Change: <unk> inventory for catalog par that sell to many customers that last a long time, so I feel really good.
Speaker Change: Yeah, I would say when you look regionally this quarter, just from a dollar standpoint, you've got sequentially all the regions were down with the exception of the rest of Asia. So there's nothing unusual with China going on specifically there overall. So, again, when we look at our business, I think most of that is explained by the end markets. And certainly, you know, we hadn't seen a recovery inside of China that I think most of us had expected.
Speaker Change: That but we'll see how things play out on the other side of the cycle and depending on demand and different things.
Speaker Change: But I would expect to continue holding rapidly high levels of inventory.
Unnamed: And the second point, distributors, same thing. Our distributor footprint is much smaller than with many of our competitors. We're down to 25% or so of our revenue to distribution, so 75% direct, whereas many of our competitors are the opposite. So, great, great clarification. Thank you, Ross.
Speaker Change: We just in a different position than we were even even three or four years ago in terms of how much of our revenue and our parts are in industrial automotive and catalog type of parts that last a long time.
Speaker Change: Okay, thank you, Dave. Go to the next caller, please. Our next question comes from the line of Joshua Buchalter with T.D.
Speaker Change: So our strategy such that it makes sense to have to have that inventory our order fulfillment.
Speaker Change: <unk> also improved we have.
Joshua Buchalter: Cowan. Hey guys,
Unnamed: We'll go to the next caller. Our next question comes from the line of Joe Moore with Morgan Stanley. Great, thank you.
Joshua Buchalter: Thanks for taking my question. I wanted to ask about how you're thinking about OpEx given the extended softness.
Speaker Change: Ti dot com and different tools that we can leverage to go direct to market would have a much higher percent of our of our revenue are now 75% of direct so all of those.
Joshua Buchalter: Any thoughts on getting more defensive with OpEx as the weakness? Last longer than expected, or you grow OpEx 8% in 2023. Is that sort of the right level that you think you need to be investing in the business for long-term growth? Thank you.
Unnamed: I wonder if you could talk about the CHIPS Act, how that's kind of flowing through both the investment tax credit and then any thoughts you may have on timing of kind of grant issuances or things like that. Yeah, no; happy to talk about that. So first, let me address the ITC first, and then I'll go to the grant. So the ITC investment tax credit, a 25% credit on CAPEX for manufacturing in the United States, we have accrued to date over the last year and a half or so $1.4 billion. We expect to get about $500 million of that later this year, probably in the fourth quarter as far as the current law and regulations stipulate. And we'll get the rest further down the road, mostly the following year and then after that.
Speaker Change: Factors play into May.
Speaker Change: Having more inventory is.
Speaker Change: As a real leverage point that we can use to.
Speaker Change: Some of our customers even better.
Speaker Change: If our C J.
Speaker Change: and T.J.
Speaker Change: Hey, Thanks, Dave a quick follow up to a prior question I know you can't share too much but at your application clearly and for the chips Act I guess, we should hear results between now and the summer I guess is there anything you can share on that front.
T.J: Thanks, Dave. A quick follow-up to a prior question. I know you can't share too much, but your application clearly in for the CHIPS Act. I guess we should hear results between now and the summer. I guess, is there anything you can share on that front and perhaps how it's kind of impacting your thoughts on the capacity you're bringing online?
Speaker Change: Yeah, you know, big picture. We have a disciplined process of allocating capital to R&D and SG&A for the best opportunities.
Speaker Change: Perhaps how.
Speaker Change: And we've held a steady hand throughout a number of years, pre-pandemic, during the pandemic, and post-pandemic, where we managed OPEX very well during that time and didn't get ahead of our skis. So, we will continue with that, with that disciplined process. Remember, of course, these investments, particularly industrial automotive, which is what we're biased toward, are investments. They're very long
Speaker Change: It's kind of impacting your thoughts on the capacity that you're bringing online.
Speaker Change: Yes no.
Speaker Change: Yeah, no, you know, unfortunately, no, there's nothing we can share. It's really up to the Department of Commerce. We sent our application and we'll see where that goes. What I would say, just like I've said before, is when we decided about a year ago to take our capex up from $3.5 billion per year to $5 billion per year, and this tremendous plan to build more fabs in the United States, we comprehended CHIPS grant in that decision. So that was part of our thinking there. But at this point, yeah, that's all we can share on that front.
Speaker Change: Unfortunately, no there's nothing we can share its really up to the departmental commerce, we sent their application.
And we'll see where that goes what I would say just just like I said I've said before is when we.
Speaker Change: Decided about a year ago to take our Capex up.
Speaker Change: $3 5 billion per year to $5 billion per year.
Speaker Change: And this tremendous planned to do.
Speaker Change: Bill more fabs in the United States, We comprehended chips grant in that in that decision. So that was part of our thinking there but.
Unnamed: And we'll continue to accrue that benefit, just again, 25% on anything we spend in the United States for manufacturing. That's the cash side and the balance sheet. On the P&L, you're already, we're already seeing the benefit as lower depreciation. That benefit tends to be small, has been small so far. Because, for example, some of that is for buildings that haven't even started to depreciate, but it will build up over time on that front.
Speaker Change: You're not going to, you know, what you save now is going to, will hurt your long-term revenue growth. So, we're not going to, we're not going to do that. So, we're going to maintain those investments for the long term.
At this point, yes, that's all we can we can share on that front.
Speaker Change: Thank you, CJ. And I think we've got time for one more call, please.
Speaker Change: Thank you C J and I think we've got time for one more call. Please.
Speaker Change: Yeah, thank you. I guess I wanted to ask about your fixed cost leverage. I mean, in the past, you've talked about, I think, 75% gross margin fall through on incremental revenue. Is that still the right metric we should be using given revenues are, you know, a good amount lower, and depreciation is larger? I'd just be curious to hear if anything in the mechanics of that math has changed. And basically, when can the incremental 300 millimeter capacity start flowing through the gross margins and be margin accretive? Thank you.
Speaker Change: Our last question comes from the line of Chris Casso with Wolf Research.
Speaker Change: Our last question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question.
Chris Danely: Yes. Thank you.
Chris Danely: Yes, thank you. Guys, I'm just trying to understand a little bit about, you know, why the customers may have reacted as they did. Because we know your lead times have normalized, you know, well in advance of the rest of the industry. Do you think this is just simply a function of end markets, you know, took another leg down here? Do you think perhaps, you know, some of your customers were delaying their inventory adjustments until they saw, you know, lead times for the rest of the industry had come down? Because we know that that's also some of your competitors lagged your lead time normalization. Perhaps that was a factor here?
Chris Danely: Guys I, just just just trying to understand a little bit about.
Chris Danely: One of the customers may have reacted as they did because we know your lead times have normalized well in advance of the rest of the industry. Do you think this is just simply a function of end markets took another leg down here do you think perhaps some of your customers were delaying their inventory adjustments until they saw.
Unnamed: So that's the ITC. The grants. We submitted our application for those in December. And at this point, we will wait to hear from the Department of Commerce and see what happens. Yeah, I did.
Unnamed: So I think, you know, obviously, that stuff will help cash flow down the road. But, you know, your free cash flow is below the level of the dividend. Right now, I assume it's pretty important to keep paying the dividend. But, you know, where does that leave you in terms of share repurchases and other uses of cash? Yeah, first, I would point you to our operating cash. You know, our business model is very strong, and our operating cash flow is very strong, and it supports our investment for growth through the cycle. So, clearly, with the levels of capex that we have right now, that hits the free cash flow, but, you know, the bigger picture and look at the operating cash, even in a depressed environment with revenue depressed, the operating cash flow is very strong. We also have a very strong balance sheet, and we just finished a year at $8.6 billion. You know, when it comes to...
Chris Danely: Lead times for the rest of the industry come down because we know that that's also some of your competitors lagged your lead time normalization, perhaps that was a factor here.
Speaker Change: Yeah, Chris, as you know, you can't pin it on one thing, especially we've got, you know, well over 100,000 customers and 80,000 products that we're managing. As Rafael is talking about, you know, building inventory, you know, we've got essentially all of our catalog products or almost all of our catalog products now immediately available on TI.com. And our objective with inventory and the capacity we're putting on place is to have our customer service metrics remain high, which means keeping lead times stable. So, you know, I think in some markets we've seen customers that... have told us that they were planning and have built their capacity and their inventories to grow at 25% in the coming year. And they showed up and their plans changed and they're only going to grow 10%, right? So they told us they won't be ordering product for some time as they, you know, equalize those numbers. They're still going to have healthy growth. But, you know, it's hard to put that across. Obviously. All of those 100,000 customers into one short, concise statement. Have a follow on?
Chris Danely: Yes.
Speaker Change: Yeah, so the math is still the same. The fall through you should use is 70% to 75%. That is still a reasonable starting point. You then have to adjust for depreciation, as you alluded to, and our depreciation. I gave you an update on that 90 days ago, but I'll reinforce that in a second. But you have to adjust for that. And then, you know, there are always puts and takes on any given quarter. Like right now, it's under utilization, but at some point, that goes the other way. And throughout this time, as you pointed out, we will continue to benefit increasingly from 300 millimeter, more 300 millimeter wafers, which have a cost advantage. So let me go back to depreciation just to make sure everybody has the right number. It's the same as what I said 90 days ago. For 2024, expect $1.5 to $1.8 billion. And for 2025, the company expects to earn $2 to $2.5 billion.
Speaker Change: Chris This is <unk>.
Speaker Change: No.
Speaker Change: You can't.
Speaker Change: Pin it on one thing, especially we've got.
Speaker Change: Well over 100000 customers and 80000 products.
Speaker Change: That that we're managing.
Speaker Change: Raphael is talking about building inventory.
Speaker Change: We've got essentially all of our catalog products for almost all of our catalog products now immediately available on Ti dot com and our objective with inventory as the capacity, we're putting on places to have our customer service metrics remain high which means keeping lead times lead times are stable. So.
Speaker Change: I think in some markets, we've seen customers that.
Speaker Change: They have told us that they were planning and have built.
Unnamed: When it comes to repurchases, you know, I would take you to our objectives for capital management for cash return, and our objective there is to return all free cash flow via dividends and repurchases. Each one of those has different objectives for dividends and repurchases, but we have a really good track record over many years of doing both of them. Great, thank you. Joe, go to the next caller, please. Our next question comes from the line of Harlan Sur with J.P. Morgan. Yeah, good afternoon.
Their capacity and their inventories to grow at 25%.
In the coming year and they showed up in their plans changed and there are only going to grow 10% right. So they told us they won't be ordering product for some time as they.
Speaker Change: Equalize those those numbers, they're still going to have healthy growth but.
It's hard to put that across all of those 100000 customers into one short concise statement have follow on.
Unnamed: Thanks for taking my question. Up through Q3 of last spring, the team had seen numerous consecutive quarters of increasing cancellations and push-outs, right? Typical customer behavior in a weak demand environment. I assume, given your commentary, that the team continues to see cancellations, push-outs, and activity expanding into the December quarter. You're almost a month into March.
Speaker Change: Yes, fair enough. And if you could help us with, you know, the impact of the underutilization right now, you know, how much of a headwind is that providing right now on a cost to sales basis? And then on the other side of this, you know, when we finally get to a recovery, you know, what will be the right way to model this? You know, will, you know, will there be, you know, a bigger snapback as some of the underutilization comes off? Or do we just kind of go back to sort of those mid-70s incremental margins on the way back?
Speaker Change: Yes fair enough.
Speaker Change: And if you could help us with.
Speaker Change: Thank you, Josh. We'll go to the next caller, please. Our next question comes from the line of CJ Muse with Cantor Fitzgerald.
Speaker Change: The impact of the Underutilization right now how much of a headwind is that providing right now.
Speaker Change: Cost of sales basis, and then on the other side of this when we finally get to a recovery what would be the right way to model. This.
Chris Danely: Please proceed with your question. Good afternoon.
Speaker Change: <unk>.
Speaker Change: Will there be a bigger snapback as some of the under utilization comes off or do we just kind of go back to sort of mid <unk> incremental margins on the way back up.
Chris Danely: Thank you for taking the question. I guess my first question is, your revenue outlook for March basically gets us back to kind of pre-COVID first half 2020 levels, yet at the same time, your inventory is roughly double. And so curious, how are you thinking about kind of normalized inventory over time? And also, how are you thinking about coming out of the trough, what kind of gross margin recovery will look like, given where your inventory levels are today?
Unnamed: Are you still seeing cancellations and push-outs expanding or starting to maybe see some signs of stabilization? Yeah, Harlan, as you would expect, we have seen cancellations in the quarter and fourth quarter remained elevated. I wouldn't describe them as increasing, but just at higher levels. You know, and we're still early inside of the quarter.
Speaker Change: Yes, so what I would tell you first we don't quantify underutilization, but you've been fairly reasonably back into it just.
Speaker Change: Yeah, so what I would tell you first, we don't quantify underutilization, but you can fairly reasonably back into it just looking at our numbers, our midpoint, or our range, our midpoint, and then consider the depreciation, expected depreciation increase, and it'd be relatively straightforward for you to back into something reasonable for first quarter on the underutilization impact there. Now, after that, it's all going to depend on revenue and revenue expectations, because, of course, depending what those are in the second half of the year, let's say 90 days from now, then that will be a big factor in determining how the factories will run. But the bigger picture is, you know, all this deployment of CapEx that we're doing is all on 300 millimeter, which has a 40% cost advantage versus 200 millimeter. As several questions people asked earlier, it has ITC benefits on that, so it's coming in at 25% discount on the ITC, and we'll see how much we get on grants. So the fall through on those investments for many, many years will be very positive, I would say. So with that, Dave? Yep, thanks, Rafael. Thank you all for joining us. We look forward to sharing our capital. Management update next Thursday, February 1st at 10 a.m. Central Time, as I mentioned earlier, and a replay of this call will be available shortly on our website. Good evening.
Speaker Change: Looking at our numbers our midpoint.
Speaker Change: Our range, our midpoint and then.
Speaker Change: Consider the depreciation expected depreciation increase and it would be relatively straightforward for you to back into something reasonable for first quarter on the Underutilization impact there.
Unnamed: I would say all of, you know, what's going on with cancellations and the backlog that we see is all comprehended in our guidance and in our... And then, yeah, from a geographical perspective, China Headquarters Shipments have seen about 20% of your sales through the October quarter of last year. Now, this geography has experienced the most significant decline during this downturn, where it's down about 33%, you know, year-to-date up through Q3 of last year. Your total business was down 13, right? Is this geography continuing to contribute to the weakness entering this year, or is the weakness more U.S. and European-based?
Speaker Change: So, that's a multi-part question with many angles to that. What I would tell you, at a high level, we're very comfortable with our inventory level. Right now, we're just shy of $4 billion. As I said earlier on the call, we have a continued upward bias for at least one more quarter, probably a couple quarters at least. But that is good inventory for catalog parts that sell to many customers and that last a long time. So, I feel really good about that. But we'll see how things play out on the other side of the cycle and, depending on demand and different things, but I would expect to continue holding relatively high levels of inventory. We're just in a different position than we were even three or four years ago.
Speaker Change: Now after that it's all going to depend on revenue and revenue expectations because of course.
Speaker Change: Depending on what those are in the second half of the year, Let's say 90 days from now then that will be a big factor in determining how the factories will run but the bigger picture is all of this deployment of Capex that we're doing it all in 300 millimeter.
Speaker Change: We said.
Speaker Change: 40% cost advantage versus 200 versus 200 millimeter.
Speaker Change: <unk>.
Unnamed: Yeah, I would say when you look regionally this quarter, just from a dollar standpoint, you've got sequentially all the regions were down with the exception of the rest of Asia. So there's nothing unusual with China going on specifically there overall. So again, when we look at our business, I think most of that is explained by the end markets. And certainly, you know, we hadn't seen a recovery inside of China that I think most of us were expecting.
Speaker Change: Several question people asked earlier it has ITC benefits on that so.
Speaker Change: It's coming in at 25% discount on the ITC and we will see how much we get them grant. So so they follow through on those investments for many many years will be.
Speaker Change: We are very positive I would say so with that Dave. Thanks Raphael.
Speaker Change: You all for joining us we look forward to sharing our capital management update next Thursday February one.
Unnamed: Okay. Thank you, Dave. Go to the next caller, please. Our next question comes from the line of Josh Chowdhury, T.D.
Speaker Change: In terms of how much of our revenue and our parts are in industrial automotive, the catalog type of parts that last a long time, so, our strategy is such that it makes sense to have that inventory. Our order fulfillment processes have also improved. We have TI.com and different tools that we can leverage to go direct to market. We have a much higher percent of our revenue now; 75% is direct. So, all those factors play into having more inventory as a real leverage point that we can use to serve our customers even better, and T.J.
Speaker Change: 10 am central time, as I mentioned earlier and a replay of this call will be available shortly on our website good evening.
Unnamed: Cowan. Hey, guys. Thanks for taking my question. I wanted to ask about how you're thinking about OpEx given the extended softness. Any thoughts on getting more defensive with OpEx as the weakness?
Speaker Change: And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Speaker Change: And this concludes today's conference and you may disconnect your lines.
Speaker Change: Thank you for your participation.
Speaker Change: Yes.
Speaker Change: Thank you for watching. Thank you for watching.
[music].
Unnamed: last longer than expected, or you grew up at 8% in 2023. Is that sort of the right level that you think you need to be investing in the business for long-term growth? Thank you.
Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Unnamed: Yeah, you know, the big picture. We have a disciplined process of allocating capital to R&D and SG&A for the best opportunities. And we've held a steady hand throughout a number of years, pre-pandemic, during the pandemic, and post-pandemic, where we managed OPEX very well during that time and didn't get ahead of our skis. So we will continue with that, with that disciplined process. Remember, of course, these investments, particularly industrial automotive, which is what we're biased in our investments, they're very long term in nature. You're not going to, you know, what you save now is going to hurt your long term revenue growth. So we're not going to we're not going to do that.
Speaker Change: [music].
Speaker Change: Okay.
T.J: Thanks, Dave.
Speaker Change: Okay.
Speaker Change: A quick follow-up to a prior question. I know you can't share too much, but your application is clearly in for the CHIPS Act. I guess we should hear results between now and the summer.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: I guess, is there anything you can share on that front and perhaps how it's kind of impacting your thoughts on the capacity you're bringing online? Yeah, no, you know, unfortunately, no, there's nothing we can share. It's really up to the Department of Commerce.
Speaker Change: Thank you for watching!
Speaker Change: We sent our application, and we'll see where that goes. What I would say, just like I've said before, is when we decided about a year ago to take our capex up from $3.5 billion per year to $5 billion per year and this tremendous plan to build more fabs in the United States, we considered the CHIPS grant in that decision. So that was part of our thinking there. But at this point, yeah, that's all we can share on that front.
Unnamed: So we're going to maintain those investments for the long term. Yeah, thank you. I guess I wanted to ask about your fixed cost leverage. I mean, in the past, you've talked about, I think, 75% gross margin fall through on incremental revenue. Is that still the right metric we should be using given revenues are, you know, a good amount lower, and depreciation is larger? I'd just be curious to hear if anything in the mechanics of that math has changed. And basically, when can the incremental 300 millimeter capacity start flowing through the gross margins and be margin accretive? Thank you. Yeah, so the math is still the same. The fall three you should use is 70% to 75%.
Speaker Change: Thank you, CJ. And I think we've got time for one more call, please. Our last question comes from the line of Chris Casso with Wolf Research.
Chris Danely: Yes, thank you. Guys, I'm just trying to understand a little bit about why the customers may have reacted as they did. Because we know your lead times have normalized, you know, well in advance of the rest of the industry. Do you think this is just simply a function of end markets, you know, took another leg down here? Do you think perhaps, you know, some of your customers were delaying their inventory adjustments until they saw, you know, lead times for the rest of the industry had come down? Because we know that some of your competitors also lagged behind your lead time normalization. Perhaps that was a factor here.
Unnamed: That is still a reasonable starting point. You then have to adjust for depreciation, as you alluded to in our depreciation. I gave you an update on that 90 days ago, but I'll reinforce that in a second.
Unnamed: And then there are always puts and takes on any given quarter. Like right now, it's underutilization. But at some point, that goes the other way.
Speaker Change: Yeah, Chris, as you know, you can't pin it on one thing, especially since we've got, you know, well over 100,000 customers and 80,000 products that we're managing. As Rafael is talking about, you know, building inventory, we've got essentially all of our catalog products or almost all of our catalog products now immediately available on TI.com. And our objective with inventory and the capacity we're putting in place is to have our customer service metrics remain high, which means keeping lead times stable.
Unnamed: Throughout this time, as you pointed out, we will continue to benefit increasingly from more 300-millimeter wafers, which have a cost advantage. So let me go back to depreciation just to make sure everybody has the right number. It's the same as what I said 90 days ago. For 2024, expect $1.5 to $1.8 billion. And for 2025, expect $2 to $2.5 billion. Thank you, Josh.
Unnamed: We'll go to the next caller. Our next question comes from the line of C.J. Mews with Cancer Fitzgerald. Please proceed. Good afternoon.
Speaker Change: So, you know, I think in some markets we've seen customers that have told us that they were planning and had built their capacity and their inventories to grow at 25% in the coming year.
Unnamed: Thank you for taking the question. I guess my first question is, your revenue outlook for March basically gets us back to kind of pre-COVID first half 2020 levels. Yet at the same time, your inventory is roughly double.
Speaker Change: And they showed up, and their plans changed, and they're only going to grow 10%, right? So they told us they won't be ordering product for some time as they, you know, equalize those numbers. They're still going to have healthy growth. But, you know, it's hard to put that across. Obviously, all of those 100,000 customers into one short, concise statement.
Unnamed: And so curious, how are you thinking about kind of normalized inventory over time? And also, how are you thinking about coming out of the trough, what kind of a gross margin recovery will look like, given where your inventory levels are today? So, that's a multi-part question with many angles to that. What I would tell you, at a high level, we're very comfortable with our inventory level. Right now, we're just shy
Speaker Change: Have a follow on?
Speaker Change: Yes, fair enough. And if you could help us with, you know, the impact of the underutilization right now, you know, how much of a headwind is that providing right now on a cost to sales basis? And then on the other side of this, you know, when we finally get to a recovery, what will be the right way to model this? Will, you know, will there be, you know, a bigger snapback as some of the underutilization comes off? Or do we just kind of go back to sort of those mid-70s incremental margins on the way back?
Unnamed: As I said earlier on the call, we have a continued upward bias for at least one more quarter, probably a couple quarters at least, an upward bias on that. But that is good inventory for catalog parts that sell to many customers that last a long time. So, I feel really good about that.
Speaker Change: Yeah, so what I would tell you first, we don't quantify underutilization, but you can fairly reasonably back into it just looking at our numbers, our midpoint, or our range, our midpoint, and then consider the depreciation, the expected depreciation increase, and it'd be relatively straightforward for you to back into something reasonable for the first quarter on the underutilization impact there. Now, after that, it's all going to depend on revenue and revenue expectations because, of course, depending on what those are in the second half of the year, let's say 90 days from now, then that will be a big factor in determining how the factories will run. But the bigger picture is, you know, all this deployment of CapEx that we're doing is all on 300 millimeter, which has a 40% cost advantage versus 200 millimeter.
Unnamed: But we'll see how things play out on the other side of the cycle and, depending on demand and different things, but I would expect to continue holding relatively high levels of inventory. We're just in a different position than we were even three or four years ago in terms of how much of our revenue and our parts are in industrial automotive, the catalog type of parts that last a long time. So, our strategy is such that it makes sense to have that inventory. Our order fulfillment processes have also improved. We have TI.com and different tools that we can leverage to go direct to market.
Unnamed: We have a much higher percent of our revenue now; 75% is direct. So, all those factors play into having more inventory as a real leverage point that we can use to serve our customers even better. To follow on it. Thanks, Dave. A quick follow-up to a prior question. I know you can't share too much, but your application is clearly in for the CHIPS Act.
Speaker Change: As several questions people asked earlier, it has ITC benefits on that, so it's coming in at a 25% discount on the ITC, and we'll see how much we get on grants. So the fall through on those investments for many, many years will be very positive, I would say. So with that, Dave? Yep, thanks, Rafael. Thank you all for joining us. We look forward to sharing our capital. Management update next Thursday, February 1st at 10 a.m. Central Time, as I mentioned earlier, and a replay of this call will be available shortly on our website.
Unnamed: I guess we should hear results between now and the summer. Is there anything you can share on that front and, you know, perhaps how it's kind of impacting your thoughts on the capacity you're bringing online? Yeah, no, you know, unfortunately, no, there's nothing we can share.
Unnamed: It's really up to the Department of Commerce. We sent our application, and we'll see where that goes. What I would say, just like I said before, is when we decided about a year ago to take our CapEx up from $3.5 billion per year to $5 billion per year and this tremendous plan to build more fabs in the United States, we considered CHIP's grant in that decision. So that was part of our thinking there. But at this point, yeah, that's all we can share on that front. Thank you, CJ. And I think we've got time for one more call, please.
Speaker Change: Good evening.
Speaker Change: And this concludes today's conference, and you may disconnect your lines.
Speaker Change: Thank you for your participation.
Unnamed: Our last question comes from the line of Chris Casso with Wolf Research. Yes, thank you. Guys, I'm just trying to understand a little bit about why the customers may have reacted as they did because we know your lead times have normalized well in advance of the rest of the industry. Do you think this is just simply a function of end markets taking another leg down here? Do you think perhaps, you know, some of your customers were delaying their inventory adjustments until they saw, you know, lead times for the rest of the industry come down? Because we know that some of your competitors also lagged your lead time normalization. Perhaps that was a factor here?
Speaker Change: Thank you for watching.
Speaker Change: Thank you for watching.
Speaker Change: Thank you for watching!
Unnamed: Yeah, Chris, as you know, you can't pin it on one thing, especially since we've got, you know, well over 100,000 customers and 80,000 products that we're managing. As Rafael was talking about, you know, building inventory, we've got essentially all of our catalog products or almost all of our catalog products now immediately available on ti.com. And our objective with inventory and the capacity we're putting in place is to have our customer service metrics remain high, which means keeping lead times and lead times stable. So, you know, I think in some markets, we've seen customers that have told us that they were planning and have built their capacity and their inventories to grow at 25% in the coming year. And they showed up, and their plans changed, and they're only going to grow by 10%, right? So they told us they won't be ordering product for some time. As they, you know, equalize those numbers, they're still going to have healthy growth. But, you know, it's hard to put that across all of those 100,000 customers into one short, concise statement. Do we have a follow-on?
Unnamed: Yes, fair enough. And if you could help us with, you know, the impact of the underutilization right now, you know, how much of a headwind is that providing right now on a cost-to-sales basis? And then on the other side of this, you know, when we finally get to a recovery, what will be the right way to model this? Will, you know, will there be, you know, a bigger snapback as some of the underutilization comes off, or do we just kind of go back to sort of those mid-70s incremental margins on the way back? Yeah, so I will tell you first, we don't quantify underutilization, but you can fairly reasonably back into it just looking at our numbers, our midpoint, or our range, our midpoint, and then consider the depreciation, the expected depreciation increase, and it'd be relatively straightforward for you to back into something reasonable for the first quarter on the underutilization impact there.
Unnamed: Now, after that, it's all going to depend on revenue and revenue expectations because, of course, depending on what those are in the second half of the year, let's say 90 days from now, then that will be a big factor in determining how the factories will run. But the bigger picture is, you know, all this deployment of CAPEX that we're doing is all on 300 millimeter, which has a 40% cost advantage versus 200 millimeter. As several questions people asked earlier, it has ITC benefits for that. So, it's coming in at a 25% discount on the ITC, and we'll see how much we get in grants. So, falling through on those investments for many, many years will be very positive, I would say.
Dave Pahl: So, with that, Dave. Yep. Thank you, Rafael. Thank you all for joining us. We look forward to sharing our capital management update next Thursday, February 1st at 10 a.m. Central Time, as I mentioned earlier, and a replay of this call will be available shortly on our website.
Unnamed: And this concludes today's conference, and you may disconnect your lines, for you. Good evening. Good evening, everyone.