Q2 2024 Texas Instruments Inc Earnings Call
Welcome to the Texas Instruments second quarter 2024 earnings conference call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael Lizardi.
Dave Pahl: For any of you who missed the release, you can find it on our website at ti.com slash ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website.
For any of you who missed the release, you can find it on our website at ti.com slash IR. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website.
Unknown Executive: This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the Notice Regarding Forward-Looking Statements contained in the earnings release published today, as well as TI's most recent SEC filings for a more complete description. Today, we'll provide the following. First, Haviv will start with a quick overview of the court.
This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations.
We encourage you to review the Notice Regarding Forward-Looking Statements contained in the earnings release published today, as well as TI's most recent SEC filings, for a more complete description.
Haviv: Today we'll provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he'll provide insight into second quarter revenue results with some details of what we're seeing with respect to our end markets.
Haviv: Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for the third quarter of 2024.
Dave Pahl: Next, he'll provide insight into the second quarter revenue results, with some details of what we're seeing with respect to our end market. Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for the third quarter of 2020. With that, Dave, I also start by welcoming everyone to the call.
Haviv: With that, let me turn it over to Haviv.
Haviv: Thanks, Dave. Let me also start by welcoming everyone to the call. I'm looking forward to joining our quarterly earnings calls moving forward and sharing more details about our business strategy with the investment community.
Haviv Ilan: I'm looking forward to joining our quarterly earnings calls moving forward and sharing more details about our business strategy with the investment community. It is an opportunity for me to directly share more information about our results and our strategic progress. With that, I'll start with a quick overview of the second quarter.
Haviv: It is an opportunity for me to directly share more information about our results and our strategic progress.
Haviv: With that, I'll start with a quick overview of the second quarter.
Haviv Ilan: Revenue in the quarter came in about as expected. $3.8 billion, an increase of 4% sequentially and a decrease of 16% year-over-year. Analog revenue declined 11% year-over-year, and Embedded Processing declined 31%.
Haviv: Revenue in the quarter came in, about as expected, at $3.8 billion, an increase of 4% sequentially and a decrease of 16% year-over-year.
Haviv: Analog revenue declined 11% year-over-year and embedded processing declined 31%. Our other segment declined 22% from the year-ago quarter.
Haviv Ilan: Our other segment declined 22% from the year-ago quarter. Now, I'll provide some insight into our second quarter revenue by end market. Our results continue to reflect the asynchronous behavior across our end markets that we've seen throughout this cycle. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the industrial market was down low single digits. The automotive market was down mid-single-day
Haviv: Now, I'll provide some insight into our second quarter revenue by end market. Our results continue to reflect the asynchronous behavior across our end markets that we've seen throughout this cycle.
Haviv: Similar to last quarter, I'll focus on sequential performance, as it is more informative at this time.
Haviv: First, the industrial market was down low single digits.
Haviv: The automotive market was down mid-single digits.
Haviv Ilan: Personal Electronics grew mid-teens with broad-based growth while demonstrating continued improvement compared to its low point in the first quarter of 2026. Next, communication equipment was up mid single digits, and finally, Enterprise Systems was up about 20%. Lastly, before I pass it on to Rafael, I'd like to share a few comments regarding our capacity investment. We and our customers remain pleased with our progress on the expansion of our 300 millimeter manufacturing
Haviv: Personal Electronics grew mid-teens with broad-based growth while demonstrating continued improvement compared to its slow point in the first quarter of 2023.
Haviv: Next, Communication Equipment was up mid-single digits, and finally, Enterprise Systems was up about 20%.
Haviv: Lastly, before I pass it on to Rafael, I'd like to share a few comments regarding our capacity investments.
Rafael: We and our customers remain pleased with our progress of the expansion of our 300 mm manufacturing capacity.
Haviv Ilan: These investments reflect our confidence in the opportunity ahead, which remains high for several reasons. First, we have a high level of confidence in the secular growth of semiconductor content, particularly in industrial and automotive, where we have greater exposure and a strong product position. Second, geopolitically dependable, low-cost, 300mm capacity will be increasingly critical and valuable, and our investments enable us to support customer demand at scale.
Rafael: These investments reflect our confidence in the opportunity ahead, which remains high for several reasons.
Rafael: First, we have a high level of confidence in the secular growth of semiconductor content, particularly in industrial and automotive, where we have greater exposure and strong product positions.
Rafael: Second, geopolitically dependable, low-cost, 300mm capacity will be increasingly critical and valuable, and our investments enable us to support customer demand at scale.
Rafael R. Lizardi: To share more details on our progress, which we believe is helpful for all of our shareholders to understand, I plan to hold an off-cycle capital management call with Rafael and Dave on August 20th. During the call, I will provide more granularity on our capacity investments along with a framework of revenue and free cash flow per share scenarios. With that, I will turn it over to Rafael to review profitability, capital management, and our outlook.
Speaker Change: To share more details on our progress, which we believe is helpful for all of our shareholders to understand, I plan to hold an off-cycle capital management call with Rafael and Dave on August 20th.
Speaker Change: During the call, I will provide more granularity on our capacity investments along with a framework of revenue and free cash flow per share scenarios.
Speaker Change: With that, let me turn it over to Rafael to review profitability, capital management, and our outlook. Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, second quarter revenue was $3.8 billion.
Rafael R. Lizardi: Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, the second quarter revenue was $3.8 billion. Gross profit in the quarter was $2.2 billion, or 58% of revenue. Sequentially, Gross Profit Margin increased 60 basis points, primarily due to higher revenue, as well as lower manufacturing unit costs due to increased factory loadings and more manufacturing internally with more wafers on 300 millimeters. Operating expenses in the quarter were $963 million, up 3% from a year ago and about as expected.
Rafael: Gross profit in the quarter was $2.2 billion or 58% of revenue.
Rafael: Sequentially, gross profit margin increased 60 basis points, primarily due to higher revenue as well as lower manufacturing unit costs due to increased factory loadings and more manufacturing internally, with more wafers on 300mm.
Speaker Change: Operating expenses in the quarter were $963 million, up 3% from a year ago, and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion, or 23% of revenue.
Rafael R. Lizardi: On a trailing 12-month basis, operating expenses were $3.7 billion, or 23% of revenue. Operating profit was $1.2 billion in the quarter, or 33% of revenue, and was down 37% from the year-ago quarter. Net income in the second quarter was $1.1 billion, or $1.22 per share.
Speaker Change: Operating profit was $1.2 billion in the quarter, or 33% of revenue, and was down 37% from the year-ago quarter.
Speaker Change: Net income in the second quarter was 1.1 billion dollars, or $1.22 per share. Earnings per share included a 5 cent benefit for items that were not in our original guidance.
Rafael R. Lizardi: Earnings per share included a five-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 $1.6 billion in the quarter and $6.4 billion on a trailing 12-month basis. Capital expenditures were $1.1 billion in the quarter and $5 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.5 billion.
Speaker Change: Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.6 billion in the quarter and $6.4 billion on a trailing 12-month basis.
Speaker Change: Capital expenditures were $1.1 billion in the quarter and $5 billion over the last 12 months.
Speaker Change: Free cash flow on a trailing 12-month basis was $1.5 billion. As a reminder, free cash flow includes benefits from the CHIPS Act Investment Tax Credit, which was $312 million for second quarter.
Rafael R. Lizardi: As a reminder, free cash flow includes benefits from the CHIPS Act Investment Tax Credit, which was $312 million for the second quarter. In the quarter, we paid $1.2 billion in dividends and repurchased $71 million of our stock. In total, we've returned $4.9 billion to our owners in the past 12 months. Our balance sheet remains strong, with $9.7 billion of cash and short-term investments at the end of the second quarter. In the quarter, we repaid $300 million in debt.
Speaker Change: In the quarter, we paid $1.2 billion in dividends and repurchased $71 million of our stock. In total, we returned $4.9 billion to our owners in the past 12 months.
Speaker Change: Our balance sheet remains strong with $9.7 billion of cash and short-term investments at the end of the second quarter.
Speaker Change: In the quarter, we repaid $300 million of debt. Total debt outstanding is now $14 billion with a weighted average coupon of 3.8%.
Rafael R. Lizardi: Total debt outstanding is now $14 billion with a weighted average coupon of 3.8%. Inventory at the end of the quarter was $4.1 billion, up $23 million from the prior quarter, and days were 229, down 6 days sequentially. For the third quarter, we expect TI revenue in the range of $3.94 to $4.26 billion and earnings per share to be in the range of $1.24 to $1.48. We continue to expect our effective tax rate to be about 13%.
Speaker Change: Inventory at the end of the quarter was $4.1 billion, up $23 million from the prior quarter, and days were 229, down 6 days sequentially.
Speaker Change: For the third quarter, we expect TI revenue in the range of $3.94 to $4.26 billion, and earnings per share to be in the range of $1.24 to $1.48.
Speaker Change: We continue to expect our effective tax rate to be about 13%.
Rafael R. Lizardi: In closing, we will stay focused on the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, the reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through discipline, capital allocation, and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash or per share growth over the long term. With that, I turn it back to Dave.
Speaker Change: In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions.
Speaker Change: We will continue to strengthen disadvantages through discipline, 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.
Dave Pahl: 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 question. After our response, we'll provide you with an opportunity for a follow-up. Operator?
Speaker Change: With that, let me turn it back to Dave.
Dave: Thanks, Rafael. Operator, you can now open the lines for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you an opportunity for a follow-up. Operator?
Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please, there's a poll for questions.
Speaker Change: Our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.
Unknown Attendee: Thanks a lot. Um, there were some comments from a geopolitical perspective, you know, one of the candidates was talking about the, you know, China-Taiwan relationship. And, and I'm just asking, you know, how the geopolitical environment is sort of impacting your customers' buying decisions. I think you said last call that even some of your Chinese customers who are exporting product want, you know, geopolitically dependable capacity. I think you talked about that being kind of an increasingly big factor in autos. Can you talk about that? And is that beginning to drive some, you know, share gains for you? Thanks, team. I'll take that, Haviv.
Timothy Michael Arcuri: And I'm just asking, you know, how the geopolitical environment is sort of impacting your customers' buying decisions. I think you said last call that even some of your Chinese customers who are exporting product
Speaker Change: want, you know, geopolitically dependable capacity. I think you talked about that being kind of an increasingly big factor in autos. Can you talk about that and is that beginning to drive some, you know, share gains for you?
Haviv Ilan: First, geopolitical dependable capacity is not a new thing for us. We started to see these requests coming, I think, two or three years ago when tensions started to rise. But as we reflect on it now, three years in, it's obvious that there is more and more attention, usually at the highest levels of our customers. I'm talking about the leadership of CEOs or chief purchasing officers, looking at their supply chain and making sure that they are going to be immune from whatever is thrown at them. Part of it is geopolitical tensions.
Haviv: Thanks, team. I'll take that. It's Haviv. First, geopolitical dependable capacity is not a new thing for us. We've started to see these requests coming, I think, two or three years ago when tensions started to rise. But as we reflect on it now, three years in, it's obvious that
Speaker Change: There is more and more attention, usually at the highest levels of our customers. I'm talking about, you know, leadership of CEOs or Chief Purchasing Officers.
Speaker Change: Looking at their supply chain and making sure that they are going to be immune from, you know, whatever is thrown at them. Part of it is geopolitical tensions.
Haviv Ilan: And this is where TI is a great answer. We are a very unique supplier in the sense that we can provide the capacity at scale, meaning the amount of vapors and the size of the capacity that we are building are very high. It is a very affordable solution.
Speaker Change: And this is where TI is a great answer. We are a very unique supplier in the sense of we can provide the capacity at scale, meaning the amount of wafers and the size of the capacity that we are building is very high.
Haviv Ilan: Building our parts on 300 millimeter wafers allows for a lower cost per chip. And then building them internally in our assembly and test houses also provides a very good low cost structure. And last but not least, this geopolitically dependable capacity, meaning our fabs are being built in the US, mainly in Texas and in Lehigh, Utah. And we provide capacity that is at scale, affordable, and dependable. And yes, every time there is some news out there, we're seeing more interest. We've seen that grow over the last several years.
Speaker Change: It is a very affordable capacity, us building our parts on 300mm wafers allows for a lower cost per chip.
Speaker Change: And then building them internally in our assembly and test houses also provides a very good cost structure. And last but not least is this geopolitically dependable capacity, meaning our fabs are being built in the U.S., mainly in Texas and in Lehigh, Utah.
Speaker Change: And we provide a capacity that is at scale, affordable, and dependable.
Speaker Change: And yes, every time there is some news out there, you know, we are seeing more interest. We've seen that grown over the last several years, and in that sense, our discussions with our customers.
Haviv Ilan: And in that sense, our discussions with our customers are providing us with more opportunities to win positions in future platforms. I do believe we are taking a bigger share, and this is part of our confidence to continue with our investments to serve that opportunity moving forward. Last but not least, you have touched China.
Speaker Change: are providing us more opportunity to win positions in future platforms. I do believe we are taking a bigger share and this is part of our
Speaker Change: confidence to continue with our investments to serve that opportunity moving forward. Last but not least, you have touched China. Yes, you're right. If I take an example, and just on the automotive side,
Haviv Ilan: Yes, you're right. If I take an example, and just on the automotive side, our customers in China do care a lot about their export business. In that sense, our capacity is highly welcomed by them because we can compete at the market price with a very competitive offering and yet have that dependability to sell to their customers not only in China but also outside of China for their export. Follow on Tim. I do.
Speaker Change: Our customers in China do care a lot about their export business. In that sense, our capacity is highly welcomed by them, because we can compete at the market price with a very competitive offering, yet have that dependability.
Speaker Change: to sell their customers not only in China, but also outside of China for their export business.
Timothy Michael Arcuri: Yes. Rafael, can you give us an update on ChIPSAC? Do you know how much you're getting yet?
Speaker Change: [inaudible]
Speaker Change: I do, yes. Rafael, can you give us an update on ChIPS Act? Do you know how much you're getting yet? And can you kind of talk about that?
Rafael R. Lizardi: And can you kind of talk about that? Yeah, sure, Tim. So on the grants, frankly, we're still going through the process. So we submitted the application, and we're just working through the details with the CHIPS program office. But given your question, let me also comment on the ITC, the investment tax credit. Today, to date, we have accrued about $1.8 billion in total; that's under 25% of the ITC. This benefit has already started flowing through the income statement as lower depreciation. In addition, in the second quarter, we received, as I said in the prepared remarks, $312 million of cash benefits.
Rafael: Yeah, sure, Tim. So on the grants, frankly, we're still going through the process. So we submitted the application and we're just working through the details with the CHIPS program office. But given your question, let me comment also on the ITC, the Investment Tax Credit. Today.
Speaker Change: To date, we have accrued about 1.8 billion dollars.
Speaker Change: In total, that's under 25% ITC, this benefit already started flowing through the income statement as lower depreciation. In addition, in second quarter we received, as I said in the prepared remarks, $312 million of cash benefits.
Operator: And that is reflected in operating and free cash flow. And we expect to receive another $200 million in 3Q and for a total of $1 billion in 2024. Thank you, Tim.
Speaker Change: And that is reflected in operating and free cash flow. And we expect to receive another $200 million in 3Q and for a total of $1 billion for 2024.
Unknown Attendee: We'll go to the next caller. Hi guys, thanks for taking my questions. Um, in Q2, it looked like the strength was primarily from personal electronics. Give us some color on where your expectations for the growth in Q3 sequentially are coming from. Is it still primarily from personal electronics? and I guess maybe calculators or other stuff.
Speaker Change: Great, thank you Tim. We'll go to the next caller please.
Speaker Change: Thank you. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.
Stacy Aaron Rasgon: Hi guys, thanks for taking my questions. In Q2 it looked like the strength was primarily from personal electronics.
Stacy Aaron Rasgon: Give an industrial a lot of word down it and maybe calculators as well. I don't know other other was pretty strong I was wondering if you give us some color on where your expectations for The growth in Q3 sequentially is coming from is it still primarily a personal electronics?
Speaker Change: and I guess maybe calculators or other stuff. How do I think about the end market trends as we go forward in the next quarter?
Rafael R. Lizardi: How do I think about the end market trends as we go forward? Thanks for the question, Stacy. I'll start, and I'll let Dave add some more color on Q2. So, if I go back to the second quarter, yes, if you look at our results, industrial did decline in the low single digits, and automotive continued to decline in the mid-single digits.
Speaker Change: Thanks for the question, Stacy. I'll start and I'll let Dave add some more color on Q2. So if I go back to the second quarter, yes, if you look at our results, industrial did decline at the low single digits, automotive
Rafael R. Lizardi: That was the third quarter in a row of that decline, although from an over-year perspective, it's still doing well, meaning less than 10% of a decline. It declined about 9% in Q2. Yes, there is strength in personal electronics, and I do see that market, you know, it went through the entire cycle. It dropped some time in the first quarter of 2023, and we've seen that market strengthen. And again, it grew mid-teens sequentially but close to 20% year-over-year. So, there is definitely strength over there.
Dave: continued the decline, at mid single digit. That was the third quarter in a row of that decline. Although from an ear over ear perspective, it's still doing well, meaning a less than 10% of a decline. Declined about 9% in Q2. Yes, there is strength in personal electronics. And it's, I do see that market, you know, it went through the entire cycle. It dropped sometime in the first quarter of 2023.
Dave: And we've seen that market strengthening, and again, it grew mid-teens.
Dave: sequentially but close to 20% year over year so there is definitely strength over there.
Rafael R. Lizardi: And I would also say that on the enterprise market, again, smaller revenue for us, but we are seeing a recovery over there, and I believe that the inventory correction is behind us. Regarding the other business, it grew thanks to our calculator business, as you mentioned, but also our DLP business, which mainly serves the personal electronics market. Dave, maybe you can add some more color on the sectors as we talk about Q2.
Dave: And I would also say that on the enterprise market, yeah, smaller revenue for us, but we are seeing a recovery over there, and I believe that inventory correction is behind us.
Speaker Change: Regarding the other business, it grew thanks to our calculator business as you mentioned,
Speaker Change: Mainly serves the personal electronics market.
Speaker Change: And Dave, maybe you can add some more color on the sectors as we talk about Q2. Yeah, I think as we have seen, even inside of industrial,
Rafael R. Lizardi: Yeah, I think, as we have seen, even inside of industrial, we've had sectors behave asynchronously. So, when we first began to see weakness in industrial, which really began in the third quarter, that was the peak in the third quarter of Q2. That was the peak in industrial.
Dave: We've had sectors behave asynchronously, so...
Dave: When we first began to see weakness in industrial, which really began in the third quarter, that was the peak in industrial. We talked about seeing about half of the sectors or so show weakness, and those early, about come earlier stage.
Dave Pahl: We talked about seeing about half of the sectors or so show weakness, and those early, I'll call them early stage sectors, some of them have found bottoms and begun to grow, and you can see some of that bottoming process taking place. The others, we're only three or so quarters in, and we've got several of them that are continuing to decline at double-digit rates. So, again, as we've seen, all of our markets behave asynchronously inside of the sectors. Do you have a follow on Stacy?
Speaker Change: Sectors, some of them have found bottoms and begun to grow, and you can see some of that bottoming process taking place.
Speaker Change: The others, you know, we're only three or so quarters in and we've got several of them that are continuing to decline.
Speaker Change: Dave Pahl, CFO Alphabet and Google
Unknown Attendee: I do actually, you know, maybe to re ask the same question. So you're guiding revenue sequentially up, you know, close to $300 million. How do I think about that $300 million growth parsing out across the end market? Yes, Stacy, I'm on the calls, but still, we are not going to predict or give guidance by market for the third quarter.
Speaker Change: I do actually, you know, maybe to re-ask the same question, so you're guiding revenue sequentially up, you know, close to $300 million. How do I think about that $300 million growth parsing out across the end markets into Q3?
Speaker Change: Yes, Stacy, you know, yeah, I'm on the calls, but still, we are not going to predict or to give guidance by market for the third quarter. I mean, it's at the midpoint of the range. We expect revenue to grow about, you know, 7%.
Rafael R. Lizardi: I mean, it's at the midpoint of the range; we expect revenue to grow about, you know, 7%. But as you know, it's not unusual for us to see sequential growth in the third quarter. I mean, typically, this is a season that- Is PE what I'm asking? Is it mostly PE?
Speaker Change: But as you know, it's not unusual for us to see sequential growth in the third quarter. I mean, typically, this is a seasonal... Is it P.E. is what I'm asking. Is it mostly P.E.? Typically, you know...
Rafael R. Lizardi: Typically, no. Yeah, typically Q3 is a quarter where, if you go back to pre-COVID days, this is the quarter where customers are preparing their end equipment or their end product for the holiday season. So it's usually a strong quarter for the company, and we are seeing very similar behavior right now at the midpoint of the range of our forecast. I don't know, Dave, if you want to add anything. I think that's good. Thank you, Stacy.
Speaker Change: Yeah, typically Q3 is a quarter where we know if you go back to pre-COVID days, this is the quarter where customers are preparing their end equipment or their end products for the holiday season. So it's usually a strong quarter for the company.
Dave Pahl: And we are seeing that very similar behavior right now at the midpoint of the range of our forecast. I don't know, Dave, if you want to add anything. I think that's good. Thank you, Stacy. And we'll go to the next call. Thank you, guys.
Operator: And we'll go to the next caller. Thank you, guys. Thank you.
Vivek Arya: Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question. Thanks for taking my question. I wanted to ask about the Chinese market and what you're seeing in terms of not just the demand side, but are you seeing any incremental supply coming on that could create a concern from a pricing perspective? Because every time this question is asked of industries, so not just TI, the answer is always that, well, the IP is not there, they don't have product breadth and whatnot, but they're still buying a lot of trailing-edge equipment. So at what point, Haviv, does that start to become a concern from just a global capacity and global pricing perspective? Thanks, Vivek.
Speaker Change: Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question.
Speaker Change: Thanks for taking my question. I wanted to ask about the China market and what you are seeing in terms of not just the demand side, but are you seeing any incremental supply?
Speaker Change: Coming on that can create a concern from a pricing perspective because
Speaker Change: Every time this question is asked to industries, so not just AI, the answer is always that well, the IP is not there, they don't have product breadth and whatnot, but they're still buying a lot.
Speaker Change: of Trailing Edge Equipment. So at what point, Haviv, does that start to become a concern from just a global capacity and global pricing perspective for Texas Instruments?
Haviv Ilan: Let me start with the first part of your question on how the Chinese market did, because I think it was a good quarter for our Chinese business. Our China headquarters business grew sequentially by about 20% versus the first quarter. And we've seen momentum across all markets. I mean, all five markets grew sequentially by, I think, 15 or 20%. So they all did well.
Aviv: Thanks Vivek. Let me start with a first part of your question on how the China market did because I think it was a good quarter for our China business. Our China headquarters business grew sequentially at about 20% versus the first quarter.
Speaker Change: And we've seen a momentum across all markets. I mean, all five markets grew sequentially, I think, 15 or 20%. So they all did well.
Haviv Ilan: And this is after, you know, seven quarters of sequential decline. So if you think about the way I look at the Chinese market, and it was exposed to all end markets for TI, it took seven quarters for this asynchronous cycle to go through, you know, starting with PE, personal electronics, then spreading to industrial and enterprise, and just lately to automotive. But all of these have now corrected, and Q2 was a good quarter for our business.
Speaker Change: And this is after, you know, seven quarters of sequential decline. So if you think about the way I look at the China market, and it was exposed to all...
Speaker Change: to all market to all the end market for TI, it took seven quarters for this asynchronous cycle to go through, you know, starting with with PE personnel electronics, then spreading to industrial and enterprise and just lately to automotive, but all of these have now corrected and Q2 was a good quarter for our business.
Haviv Ilan: And I believe we are now shipping to end demand, meaning customers have stopped managing their inventories over there. Now, in terms of the competition in China, I don't think that's, I mean, we've been very vocal about it. This is not the first, not the last.
Speaker Change: And I believe we are now shipping to end-demand, meaning customers have stopped managing their inventories over there. Now, in terms of the competition in China, I don't think that's, I mean, we've been very vocal about it. This is first, not new.
Haviv Ilan: That competition has intensified over the past several years, and I think it's growing stronger. I think it's a mistake for us to think that these guys are only doing, you know, simple tasks.
Speaker Change: That competition has intensified over the past several years, and I think it's growing stronger. I think it's a mistake for us to think that these guys are only doing simple parts. These are very ambitious, highly educated.
Haviv Ilan: These are very ambitious, highly educated competitors. And our job here at TI, and that's what I try to teach the team, is to compete. And I will tell you that, yes, the market is more competitive in China, but we can compete, and we can win business at, you know, very attractive margins. So we are going to continue to do that. Our goal and objective is to continue to do that.
Speaker Change: competitors. And our job here in TI and that's what I try to teach the team is to compete. And I will tell you that, yes, the market is more competitive in China, but we can compete and we can win business in, you know, very attractive margins. So we are going to continue to do that.
Speaker Change: Our goal, objective, is to continue and gain market share in China.
Haviv Ilan: And if I just add one thing, Haviv, the growth in China that we saw was strong across all the markets, including automotive and industrial there, so I think that's an important point. So, Vivek, do you have a follow-up? Yes. Thank you, Dave.
Habib: And if I just add one thing, Haviv, the growth in China that we saw was strong across all the markets, including automotive and industrial there. So I think that's an important point. So Vivek, do you have a follow-up?
Unknown Attendee: So, I know for Q3 you're not giving specific end-market commentary, but just from an industry perspective, how would you describe the supply-demand situation in the industrial and automotive markets? Sam, just because we see such a broad range of data points, do you think we are past the worst in terms of inventory adjustment and supply issues for those two end markets? And if you could describe the situation in those two markets separately, that would be really helpful. Dave, I'll let you take this one.
Vivek: Yes, thank you Dave. So, I know for Q3 you're not giving specific end market commentary, but just from an industry perspective, how would you describe the supply-demand situation in industrial and automotive semis, just because we see such a
Speaker Change: Page PAGE of NUMPAGES www.verbalink.com
Dave Pahl: Okay, yeah. I think of what we can see, Vivek. Of course, we don't get any data feeds on customer inventory, and we don't get any data feeds on customer shipments, but we can look into things like order patterns. We can look at feeds that we get in consignment. We can see what's happening with our inventories and in our positions. So, as we've talked about, cancellations, as an example, as a measure, have continued to come down. And our lead time, as I described, is very stable. We've got immediate availability for almost all of our products.
Speaker Change: Dave, I'll let you take this one. Okay, yeah, I think of what we can see, Vivek.
Speaker Change: Of course, we don't get any data feeds on customer inventory. We don't get any data feeds on customer shipments.
Dave Pahl: But we can look into things like the order patterns, we can look at feeds that we get in consignment.
Dave Pahl: We can see what's happening with our inventories and our positions. So, as we've talked about, cancellations, as an example, as a measure, have continued to come down. Our lead time, as I described, is very stable. We've got immediate availability of almost all of our products. So, that does drive lower visibility with backlog because customers can get product when they need it.
Dave Pahl: So, that does drive lower visibility with backlog because customers can get product when they need it. And we do believe that some markets, you know, PE bottomed back in the first quarter of 23 and has been more seasonal since then. We've seen some of the other markets that, as we've shared earlier, are beginning to grow. So, you know, there's likely a bottom forming within some of those markets. We've got industrial and automotive that have continued to decline. Now, I'd say with industrial. As I mentioned earlier, some of the sectors are forming a bottom. Others are continuing to decline.
Dave Pahl: And we do believe that some markets, you know, PE bottomed.
Dave Pahl: [inaudible]
Dave Pahl: Now I'd say with industrial, I mentioned earlier, some of the sectors are forming a bottom, others are continuing to decline.
Dave Pahl: And automotive, we've got three quarters behind us, right? So, that's how, as we look at where we are positioned today, but we don't have a strong signal that can tell us exactly how to answer the question. Yeah, the only comment I will add, Vivek, in terms of the difference, so, you know, automotive so far, at least, just here today, is down mid single digits. And that is off of a very good 2023 for us, right?
Dave Pahl: and Automotive, where we've got three quarters, three quarters behind us. Right. So that's how, as we look into where we are positioned today, but we don't have a strong signal that can tell us exactly to be able to answer the question that you asked.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Yeah, the only one comment I will add, Vivek, in terms of the difference, so, you know, automotive so far at least, just year to date, is down mid-single digits, and that is off of a very good 2023 for us, right, we grew about 17% in 2023.
Haviv Ilan: We grew about 17% in 2023, and I think it's just helped by the strong secular content growth that we see in automotive. And this is across both combustion engines or ICE and EVs.
Speaker Change: And I think it's just helped by the strong secular content growth that we see in automotive. And this is across both combustion engines, or ICE, and EVs. So that may be the difference, the slight difference I see between these two markets.
Haviv Ilan: So that's maybe the difference, the slight difference I see between these two markets. Okay, thank you, Vivek. We'll go to the next caller, please. Thank you.
Speaker Change: Okay. Thank you, Vivek. We'll go to the next caller, please.
Speaker Change: Thank you. Our next question comes from the line of Ross Seymour with Deutsche Bank. Please proceed with your question.
Operator: Our next question. Hi, guys. Thanks for letting me ask the question. Haviv, great to have you on the call. So I'll ask one for you. And maybe Rafael would chime in as well.
Ross Clark Seymore: Hi guys, thanks for letting me ask a question. Haviv, it's great to have you on the call, so I'll ask one for you and maybe Rafael would chime in as well.
Unknown Attendee: You guys have given at least Rafael in the past some mid-quarter updates or earnings call updates on CapEx and depreciation versus your pre-existing plan. So are you still planning to spend 5 billion a year and are the depreciation ranges you gave before still apply? Or are we going to have some more flexibility on those metrics going forward? Okay, I'll start and Rafael, maybe you can provide some more color.
Ross Clark Seymore: You guys have given, at least Rafael, in the past some mid-quarter updates or earnings call updates on CapEx and depreciation versus your pre-existing plan. So are you still planning to spend five billion a year and is the depreciation ranges, Rafael, you gave before still apply or are we going to have some more flexibility on those metrics going forward?
Speaker Change: Okay I'll start and Rafael maybe you can you can provide some more color. So first again our strategy has not changed and it continues to serve as well as I said before the secular growth in industrial automotive and now our position our market position and our product portfolio position gives us the confidence
Haviv Ilan: So first, again, our strategy has not changed, and it continues to sell as well. As I said before, the secular growth in industrial and automotive and our position, our market position, and our product portfolio position give us the confidence that there is a higher opportunity over there. On top of it, as we said earlier, customers do want and value a geopolitically dependable capacity. So we are pleased with our progress.
Rafael: that there is a higher opportunity over there. On top of it, as we said earlier, customers do want and value a geopolitically dependable capacity. So we are pleased with our progress. Our CAPEX strategy provides us both with capacity for growth and flexibility.
Haviv Ilan: Our CapEx strategy provides us both with capacity for growth and flexibility. And, at the end of the day, CapEx supports revenue growth, and we need to be prepared for different scenarios. Now, we always continue to evaluate our plans and investments based on what we see in the demand environment, the dynamics, the growth opportunities in the market. And to talk more about that, as I said in my prepared remarks, we are going to have our off-cycle capital management call in a month, in four weeks. It's just an opportunity to share additional insight.
Speaker Change: And at the end of the day, CapEx supports revenue growth and we need to be prepared for different scenarios. Now, we always continue to evaluate our plans and investment based on what we see on the demand environment, the dynamics, the growth opportunities in the market.
Speaker Change: To talk more about it, as I said in my prepared remarks, we are going to have our off-cycle capital management call.
Speaker Change: In a month in four weeks. It's just an opportunity to share just additional insight. So we'll go through Our investment plan with more granularity on what exactly we are doing per factory and then we'll provide a framework
Haviv Ilan: So we'll go through our investment plan with more granularity on what exactly we are doing per factory. And then we'll provide a framework of revenue scenarios and what free cash flow per share and CapEx would do versus each and every scenario. And regarding depreciation, Rafael, I don't know if you want to add anything. Yeah.
Rafael: Ref. of the University of Texas, and I am here to talk about the depreciation of revenue scenarios and what would free cash flow per share and CAPEX do versus each and every scenario. Regarding depreciation, Rafael, I don't know if you want to add anything. Yeah, so I'll just comment on depreciation. Ross, I'm going to narrow that depreciation range a little bit both for 24 and 25.
Rafael R. Lizardi: So I'll just comment on depreciation. Rafael, I'm going to narrow that depreciation range a little bit, both for 2024 and 2025. So for 2024, we now expect depreciation to be between $1.5 and $1.6 billion. And for 2025, we now expect depreciation to be about $2 to $2.3 billion. Do you have a follow-on question, Ross? I do. And thanks for all those details, Haviv and Rafael. So, one for you, Rafael.
Rafael: For 2024, we now expect depreciation to be between $1.5 and $1.6 billion. And for 2025, we now expect depreciation to be about $2 to $2.3 billion.
Unknown Attendee: If I heard you write about the gross margin rising in the second quarter, and you mentioned that loadings increased, I thought that they were going to decrease the burns of inventory now that you had that at kind of the $4 billion target. So did something change there? And what are the expectations for utilization going forward? Yeah, no, so the loadings came in about as expected.
Rafael: Do you have a follow-on, Ross?
Rafael: I do, and thanks for all those details, Haviv and Rafael. So, one for you, Rafael.
Ross Clark Seymore: If I heard you write in the gross margin rising in the second quarter, you mentioned that loadings increased, I thought that they were going to decrease to burn some inventory now that you had that as kind of the $4 billion target. So did something change there? And what's the expectations for utilization going forward?
Speaker Change: Yeah, no, so the loadings came in about as expected, but let me just tell you more about it. Second quarter loadings were up.
Rafael R. Lizardi: But let me just tell you more about it. Second quarter loadings were up versus first quarter. And, as you saw, we were essentially flat on inventory. So, essentially, the ins and outs were pretty much offsetting.
Speaker Change: versus the first quarter.
Speaker Change: And as you saw, we're essentially flat on inventory, so essentially, the ins and outs, we're pretty much offsetting. When it comes to third quarter, we expect factory loadings to be flat to slightly up.
Rafael R. Lizardi: When it comes to the third quarter, we expect factory loadings to be flat to slightly up. And in our base case, for the APS guidance that we have, that's what we have in there. But of course, we have time during the quarter to adjust those loadings depending on what we expect for the fourth quarter. On GPM specifically for the third quarter, I would, in the base case, at the midpoint of our guidance, I would expect GPM percent to be up versus second quarter. Thank you. Thank you, Ross.
Speaker Change: and you know in our base case for our the APS guidance that we have that's what we have in there but of course we have time during the quarter to adjust those loadings depending on
Speaker Change: On what we expect for fourth quarter. On GPM specifically for third quarter, I would, in the base case, at the midpoint of our guidance, I would expect GPM percent to be up versus second quarter.
Speaker Change: Thank you. Thank you, Ross. We'll go to the next caller, please.
Operator: We'll go to the next caller. Our next question comes from the line of Chris Danely with Citibank. Please proceed with your question.
Speaker Change: Thank you. Our next question comes from the line of Chris Danely with Citibank. Please proceed with your question.
Chris Danely: Hey, thanks for letting me ask a question guys. Just to follow up on Ross's question in terms of gross margin. So depreciation is going up like 100 million bucks roughly per quarter for next year. But if utilization rates keep going up, i.e. if nothing gets any worse.
Chris Danely: Appreciation is going up like 100 million bucks roughly per quarter for next year, but if utilization... Sure, sure, I'll be happy, and I'll keep it, well, at the end of the day, yes, it is possible that that is the case. It's all going to depend on revenue, of course, so the main driver is revenue. So as we, and in addition to revenue, as we bring more, executing our strategy to load more 300 millimeter wafers and bring more external loadings internal, default through excluding depreciation, will likely trend more in the range of 75% to 85% on a year-on-year basis.
Speaker Change: Do you think, is it possible that your gross margins are bottoming now, or is there anything else that could drive them lower, or maybe provide a tailwind, just give us the mechanics around it for the next several quarters?
Speaker Change: Sure sure and I'll be happy and I'll
Speaker Change: I'll keep it, well, at the end of the day, yes, it is possible that that is the case.
Speaker Change: It's all going to depend on revenue, of course. So the main driver is revenue. So as we, and in addition to revenue, as we bring more, executing our strategy to load more 300 millimeter wafers.
Speaker Change: and bringing more external loadings internal, default through excluding depreciation.
Speaker Change: will likely trend more in the range of 75 to 85 percent on a year-on-year basis.
Chris Danely: Now, of course, any one quarter, even any one year, you may have puts and takes that, you know, utilization or factory loadings is one of those that sometimes goes against you, sometimes goes in favor of you. But in general, expect that fall through at 75% to 85%, not counting depreciation.
Speaker Change: Now, of course, any one quarter, even any one year, you may have puts and takes that, you know, utilization or factory loadings is one of those, that sometimes it goes against you, sometimes it goes...
Speaker Change: In general, expect that fall through in 75-85%, not counting depreciation.
Rafael R. Lizardi: So, you know, you do the math, whatever revenue assumption you want to put over the next several quarters or years, do that fall through, and then you can very easily model where, and then I just gave you depreciation, right? So you can then model what gross margins can do over the next several years. Great breadcrumbs, are very useful.
Speaker Change: You do the math, whatever revenue assumption you want to put over the next several quarters or years, do that follow through and you can very easily model where, and then I just gave you depreciation, right? So you can then model what gross margins can do over the next several years.
Unknown Attendee: My follow-up is just on bookings. I think last quarter... Is that still true, and do you think that for the industrial automotive sector? Yeah, so I, you know, again, as you look at those things, revenue did increase as well as orders throughout the quarter, which is, which is very typical for us to see in a second quarter. And certainly, as we've got growth at the midpoint, that would not be unexpected. You know, again, those other sides of lead times for all of our products, having immediate availability and stable lead times, cancellations continuing to decline, all those things, I think, point to supply and demand becoming more in balance and that availability. So, and there was a second part of your question, Chris, that I'm not addressing. I'm not sure what it was.
Speaker Change: Great, thanks for the additional breadcrumbs. They're very useful. My follow-up is just on bookings. I think last quarter...
Speaker Change: You said that bookings were increasing every month. Is that still true? And do you think that for the industrial automotive space, we're at least getting close to the bottom there? Or do you feel any better about either of those end markets on a relative basis?
Speaker Change: Yeah, so I, you know, again, as you look at those things, revenue did increase as well as orders throughout the quarter, which is very typical that we would see in a second quarter. And certainly as we've got growth at the midpoint, that would not be unexpected.
Speaker Change: You know, again, those other sides of lead times, really on all of our products, having immediate availability and stable lead times.
Speaker Change: cancellations continuing to decline all those things I think point to
Speaker Change: Supply and demand becoming more in balance and that availability. So and there is a second part of your question, Chris, that I'm not addressing. I'm not sure what it was. Can you just repeat it for me?
Chris: Yeah, it was just, you know, our bookings still increasing month over month and then between the auto or the industrial and market.
Chris: Do you feel any better or worse about either of those?
Dave Pahl: Can you just repeat it for me? Yeah, it was just right. Well, yeah, again, I think that we've got, you know, half of the sectors that, again, we can see forming a bottom inside of industrial overall that, you know, it's been elongated. But, you know, if you look at it sector by sector, it's probably a better view overall, and for auto, you know, this is our third quarter of decline. You know, we're down about thirteen percent from where the revenue peaked. It's a pretty shallow decline compared to how the other markets have behaved so far. So, you know, that's that that's what it is. Thank you, Chris.
Speaker Change: Well yeah again I think that we've got you know half of the sectors that again we can see forming a bottom inside of industrial overall that you know it's been elongated but you know if you look at it sector by sector it's probably a better view overall.
Speaker Change: And in auto, you know, this is our third quarter of decline, you know, we're down about 13%, you know, from, from where the revenue peaked.
Speaker Change: It's a pretty shallow decline compared to how the other markets had behaved so far. So that's what we see. So thank you, Chris. Thanks a lot.
Operator: Next slide. You bet. Hi, good afternoon.
Speaker Change: Thank you. Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.
Unknown Attendee: Thank you so much for taking the question. Haviv, maybe one for you on CapEx and how you're thinking about long-term revenue growth. You've always had this slide in your capital management call deck where you show revenue supported. I think you had $30 billion in 2006.
Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question.
Toshiya Hari: Haviv, maybe one for you on CapEx and how you're thinking about...
Speaker Change: You know, long term revenue growth. You've always had this slide in your capital management call deck.
Haviv Ilan: For 2030, you had $45 billion. I know you're constantly evaluating your plans, and you talked about presenting various scenarios on the August call. But I'm curious, are the $30 billion for 2006 and $45 billion for 2030 still kind of the base case scenarios for you? Or has there been any change since your conversations with customers? So Toshiya, first, I do want to leave something for August.
Speaker Change: where you show revenue supported. I think you have for 26, you have 30 billion for 2030, you have 45 billion. I know you're constantly evaluating your plans and you talked about presenting various scenarios.
Speaker Change: on the August call. But I'm curious, is the $30 billion for 2026 and $45 billion for 2030, are those still kind of the base case scenarios for you? Or has there been any change post-conversations with customers?
Haviv Ilan: So I think it's going to be just a better environment to go provide this information. We'll also provide supporting materials, and we'll update the presentation where you'll see, as I said, the different scenarios and how we see them. And to me, it's step by step.
Speaker Change: So, Toshiya, first, I do want to leave something for August , so I think it's going to be just a better environment to go provide this information. We'll also provide supporting materials and we'll update the presentation where you'll see, as I said, the different scenarios and how we see them.
Haviv Ilan: Right now, when I think about how we establish our CapEx plan, we need to think about what the next peak wants to do. We'll discuss that. We'll discuss different scenarios of revenue leading to the next peak. And, you know, what will CapEx do accordingly? And as a result, what will our free cash flow per share be? Again, I don't want to give the whole pitch right now, but I think it's going to be important for investors to come and hear our latest updates. I do,
Speaker Change: To me, it's step by step. Right now, when I think about how we establish our CapEx plan, we need to think about what the next peak wants to do. We'll discuss that. We'll discuss different scenarios of revenue leading to the next peak, and what will a CapEx do accordingly, and as a result, what free cash flow per share will be.
Speaker Change: Again, I don't want to give the whole pitch right now, but I think it's going to be important for investors to join and hear our latest updates.
Unknown Attendee: Thanks, Dave. Just a question on embedded processing. Revenue was down sequentially, and the year-over-year decline actually accelerated. Analog, we've seen some stabilization. So I'm just curious what you're seeing on the embedded processing side. Is this purely volume pressure, or is there a pricing or competitive component here as well? I think operating margins for that business came in a little bit as well sequentially. So just
Speaker Change: Understood.
Speaker Change: I do. Thanks, Dave. Just a question on embedded processing. Revenue is down sequentially and
Speaker Change: Dave Pahl, Founder & General Manager Embedded Processing
Speaker Change: here as well. I think operating margins for that business came in a little bit as well sequentially, so just curious. Thank you.
Haviv Ilan: Thank you. Yeah, let me start first with a high-level embedded business. So when I look underneath the numbers, it's getting stronger. Our product portfolio is improving. And when I look at this decade, just the opportunity for that business to be a major contributor to TI's growth of free cash flow per share is very high. So I'm very encouraged by the progress of the business. Now regarding the cycle, first embedded as a little bit of a different structure compared to analog, it's mainly composed of industrial and automotive, so it has less exposure to personal electronics enterprise or communication equipment.
Dave Pahl: Yeah, let me start first with a high level embedded business. So when I look at the underneath beyond the numbers, it's getting stronger. Our product portfolio is improving. And when I look at the at this decade, the just the opportunity for that business.
Speaker Change: To be a major contributor for TI's growth of free cash flow per share is very high. So I'm very encouraged by the progress of the business.
Speaker Change: Now, regarding the cycle, first embedded as a little bit of a different structure compared to analog, it's mainly composed of industrial and automotive, so it has less exposure into industrial. Thank you.
Speaker Change: Personal Electronics Enterprise, all communication equipment.
Haviv Ilan: And these two markets kind of stick later, right? So if you look at the embedded business versus analog, it's fixed a year after, kind of the middle of 2023 versus the middle of 2022 for the analog business. In addition to that, the embedded business today, although, as Rafael mentioned, it's being changed, was mainly supported by foundry vapors during the upcycle. And we felt more limitations over there compared to our internal supply capacity. So now that these supply issues are resolved, we are seeing customers just adjusting their inventory. That's what I believe is happening. And therefore embedded is seeing that sharper correction.
Speaker Change: And these two markets kind of picked later, right? So if you look at the embedded business versus analog, it's picked a year after, kind of middle of 2023 versus the middle of 2022 for the analog business. In addition to that, the embedded business today, although as Rafael mentioned, it's being changed,
Rafael: was mainly supported from foundry vapors during the upcycle and we felt more limitation over there compared to our internal supply capacity.
Speaker Change: So now when these supply issues are resolved...
Speaker Change: We are seeing customers just adjusting their inventory. That's what I believe is happening.
Speaker Change: and therefore embedded, you think, that sharper correction.
Rafael R. Lizardi: But again, when I look at it from the top, embedded is strengthening and I think it will continue to serve us very well moving forward. Let me just add on the operating profit question or angle that you had. Just as a reminder, as Sabir said, traditionally, embedded has relied on external vapors, but we now have, we're bringing them in, and we have the Lehigh factory is disproportionately will serve embedded. And therefore, embedded is taking a disproportionate amount of the fixed cost charges there.
Speaker Change: But again, when I look at it from the top, embedded is strengthening and I think will continue to serve us very well moving forward.
Speaker Change: Let me just add on the operating profit question or angle that you had.
Speaker Change: Just as a reminder, as Haviv said, Traditionally Embedded has relied on external wafers, but we now have, we're bringing them in, and we have the Lehigh factory.
Saviv: is disproportionately will serve embedded, and therefore embedded is taking disproportionate amount of the fixed cost charges there.
Rafael R. Lizardi: But just like that is put right now, it will be a tailwind. It's a headwind now, but it will be a tailwind in the future as we qualify more and more parts, embedded parts as well as analog at that Lehigh factory. Christopher, thank you so much.
Saviv: But just like that is put right now, it will be a tailwind, it's a headwind now, it will be a tailwind in the future as we qualify more and more parts and better parts as well as analog at that Lehigh factory.
Speaker Change: Thank you so much. Have a great day.
Speaker Change: Thank you. Our next question comes from the line of Harlan Sur with JP Morgan. Please proceed with your question.
Operator: Have a great day. Yeah, thank you for taking my question, and great to have you on the call, Haviv. Maybe to follow up on the embedded question, right, because this business grew 3% last year versus your analog business, which was down 15. Yeah, year-to-date, it's down about as much as your peers, or I would argue slightly better.
Harlan L. Sur: Yeah, thank you for taking my question and great to have you on the call, Haviv. Maybe to follow up on the embedded question, right, because...
Harlan L. Sur: Because this business grew 3% last year versus your analog business, which was down 15%. Yeah, year-to-date, it's down about as much as your peers, or I would argue slightly better.
Speaker Change: You've articulated the positive strategy changes previously like more catalog
Speaker Change: Broad market focus.
Speaker Change: So, bottom line, again, over the past few years, it seems like you've made good improvements in this business.
Unknown Attendee: You've articulated the positive strategy changes previously, like more catalog and broad market focus. So bottom line, again, over the past few years, it seems like you've made good improvements in this business. So as the team moves embedded more to internal manufacturing, combined with the strategy shift, maybe, Haviv, can you just comment on the design-win momentum? What areas are you particularly doing well in? And I'm not sure, Rafael, how should we think about the improvements in embedded margins as you move what was once mostly outsourced to internal manufacturing? Yeah, let me start, and I'll let Rafael add some more color.
Speaker Change: So as the team moved embedded more to internal manufacturing combined with the strategy shift
Javid: Maybe Haviv, can you just comment on the design wind momentum? What areas are you particularly doing well in? And I'm not sure, Rafael, how should we think about the improvements in embedded margins as you move what was once mostly outsourced to internal manufacturing?
Haviv Ilan: But again, as you mentioned, the embedded business has gone through change in the last four or five years, and Amikai has done a great job to position the business such that it benefits our competitive advantages. Think about manufacturing and technology. So, shifting really from almost like 80% external to, when done, maybe the opposite, 80% internally built, building a higher breadth of products or not less, you know, concentration of revenue per socket and us expanding our product portfolio, utilizing the reach of our market channels.
Javid: Yeah, let me start and I'll let Rafael add some more color, but again, as you mentioned, the embedded business has gone through a change in the last four or five years.
Speaker Change: Amica has done a great job to position the business such that it benefits our competitive advantages. Think about manufacturing and technology, so shifting really from almost like 80% external to, when done, maybe the opposite, 80% internal builds.
Rafael: Billing a higher breadth of products, so not less, you know, concentration of revenue per socket and...
Rafael: at Expanding Our Product Portfolio, Utilizing
TI: The rich of our market channels, think about the loud sales team of TI, think about TI.com.
Haviv Ilan: Think about the large sales team of TI, think about TI.com. The more catalogued the product, the better fit to our strategy. So in that sense, that is moving well. In terms of design momentum, again, it's mainly an industrial and automotive business. So very high visibility on the automotive side, but as you also know, it takes time.
TI: The more catalogues the product, the better it fits to our strategy. So in that sense, that is moving well. In terms of design, in Momentum, again, it's mainly an industrial and automotive business.
TI: [inaudible]
Haviv Ilan: So I'm encouraged by the design in momentum. Our funnel increased tremendously when I compared it to the analog side, because you know, every funnel of every supplier grows. But we've seen a disproportionate growth of our design in momentum for embedded versus the previous year and also versus the analog, just in terms of the rate. And I will give some examples. We see good momentum in real-time control. Think about EVs, on-board chargers, and think about traction inverters.
TI: But we've seen a disproportionate growth of our designing momentum for embedded versus previous year and also versus analog just in terms of the rates.
TI: And I will give some examples. We see good momentum in real-time control. Think about EVs, on-board chargers, think about traction inverters.
Haviv Ilan: Very good momentum in connectivity, the automotive industry, and beyond. Think about car entry, tire pressure monitoring, and other body-related opportunities in the automotive market. I can continue with kind of more application-specific products like our radar systems. We have a great position and a growing position in radar, winning a lot of new business, both with the T1s and the OEMs. This is from imaging radar for the front to the corner radar to even parking assist and also in-cabin sensing that radar is taking a bigger and bigger part in the automotive market.
TI: Very good momentum in connectivity automotive and beyond. Think about car entries and tire pressure monitoring and other body related opportunities in the automotive market.
TI: I can continue with kind of our more application specific products like our radar systems. We have great position and growing position in radar, winning a lot of new business.
TI: Both with the tier 1s and the OEMs, this is from imaging radar for the front, to the corner radar, to even parking assist, and also in-cabin sensing. That radar is taking a bigger and bigger part in the automotive market.
Haviv Ilan: And many other examples on the industrial side. Here, the number of end equipment is really vast, you know, hundreds of end equipment. But this is where our catalog MCUs, where we are really reviving the presence of TI and building a new portfolio based on our MSP family, are doing very well in winning new business across the board, across the markets, utilizing our channel advantage. So, I can go on and on here, but again, just evidence of my excitement of what this business can do for us in the second half of this decade. Rafael?
TI: And many other examples on the industrial side, here the number of end equipments is really vast, you know, hundreds of end equipments.
TI: This is where our catalogue MCUs that we are really reviving the presence of TI and building a new portfolio.
TI: Based on our MSP family, is doing very well in winning new business across the board, across the markets, utilizing our channel advantage. So I can go on and on here, but again, just evidence of my excitement of just what this business can do for us in the second half of this decade.
Rafael R. Lizardi: Yeah, I'll just add on your question on fault-throughs for embedded. Of course, we don't give guidance separate for the segments. So, the 75 to 85% gross margin fault-through X depreciation that I talked about earlier applies to both. You know, outside of, if we didn't have Lehigh, and I'll address that in a second, we didn't have that, I would say, generally, analog would be at the higher end of that range, and embedded would be at the lower end.
TI: Rafael? Yeah, I'll just add on your question on fault throughs for embedded. Of course, we don't give guidance separate for the segments, so they...
Rafael: The 75 to 85% growth margin fall through X depreciation that I talked about earlier applies to both.
Rafael R. Lizardi: But for the next year, two or three, because Lehigh, all those costs are, all those fixed costs are already there, including people, we're going to have some nice tailwind, and a good portion of that will go to embedded. But over the longer term, 75 to 85% X depreciation is a good guide to you. Yeah, follow on Harlan. Yeah, in terms of channel reach, right? We haven't heard you guys talk about ti.com in quite some time, right?
Speaker Change: Unknown Speaker You know, outside of if we didn't have Lehigh and I'll address that in a second, we didn't have that I would say generally analog would be at the higher end of that range.
Betty: and Betty would be at the lower end, but for the next year, two or three, because Lehigh, all those fixed costs are already there, including people.
Betty: We're going to have some nice tailwind, and a good portion of that will go to embedded. But over the longer time frame, 75% to 85% x depreciation is a good guide to use.
Rafael R. Lizardi: I think the last data point we got was that it drove about 2 billion in sales in calendar 22. And it sort of has this additional benefit from a business planning perspective of being a really good sort of leading indicator of demand inflection. As you sort of potentially pass the bottom of sort of the current cycle here, wondering if there's been any notable movement or trends on ti.com. And maybe from a longer-term perspective, like what initiatives has the team put in place to sort of further improve the customer pull on ti.com, you know, from a mid to longer-term perspective? Yeah, let me start more on the mid to longer term and then let Dave add some more color on how it looks versus, you know, the cycle.
Betty: Do you have a follow-on, Harlan?
Harlan L. Sur: Yeah, in terms of channel reach, we haven't heard you guys talk about
Harlan L. Sur: TI.com in quite some time. I think the last data point we got was it drove about $2 billion in sales in calendar 22, and it sort of has this additional benefit from a business planning perspective.
Harlan L. Sur: of being a really good sort of leading indicator of demand inflection.
Speaker Change: As you sort of potentially pass the bottom of sort of the current cycle here, wondering if there's been any notable movement or trends in TI.com, and maybe from a longer term perspective, like what initiatives
Speaker Change: has the team put in place to further improve the customer pull to TI.com from a mid- to longer-term perspective.
Speaker Change: Yeah, let me start more in the mid to longer term and then let Dave add some more color on how it looks versus, you know, the cycle. So in terms of the investment in TI.com, yes, they are continuing. These are very strategic and important investments for us. We believe there is a huge opportunity.
Haviv Ilan: So in terms of the investment in TI.com, yes, they are continuing. These are very strategic and important investments for us. We believe there is a huge opportunity to digitize what we call the last mile, or that interface between us and the customers. There are many, many customers; still a long tail of customers that we can't see today. But as they move to TI.com, we can supply them with more information, and we can even provide the opportunity to place backlog electronically directly with TI.
Dave Pahl: to digitize what we call the last mile or that interface between us and the customers. There are many, many customers, still a long tail of customers that we can't see today, but as they move...
Dave Pahl: To TI.com we can supply them with more information, we can even provide the opportunity to place backlogs electronically directly with TI.
Haviv Ilan: And in that sense, the importance for us is to just know our customers better, understand the end equipment, and provide the relevant product portfolio to serve their growth and win market share, right? So that data is, to us, very, very important. And that direct connectivity with the customer is important. To do just that, we are investing in IT systems, we are investing in warehouses, and, if you will, logistics to serve these customers just in time as they need it.
Dave Pahl: And in that sense, the importance for us is to just know our customers better, understand the end equipment, and provide the relevant product portfolio to our customers.
Dave Pahl: [inaudible]
Dave Pahl: in warehouses or...
Dave Pahl: If you will, logistics to serve.
Dave Pahl: these customers just in time as they need it.
Haviv Ilan: And that is part of the way customers would opt to go to TI and just connect directly to us. Now, in terms of the short term, Dave, maybe you can talk a little bit about what we're seeing there through the cycle.
Dave Pahl: of the way customers would opt to TI and just connect directly to us.
Dave Pahl: In terms of the short term, Dave, maybe you can talk a little bit about what we're seeing there as to the cycle.
Dave Pahl: And as we would have expected, you know, orders that are placed through TI.com are down significantly from... Pete, just, I think... showing where we are with availability of product. But the great thing with TI.com is customers connect through APIs and put their planning systems on that. When they do have a shortage, they can look into our inventory. They can see it.
Dave Pahl: Yeah, and as we would have expected, you know, orders that are placed through TI.com are down significantly from...
Dave Pahl: Yeah, from the speak, just, I think,
Dave Pahl: Just telling of where we are with availability of product. But the great thing with TI.com is customers connect through APIs.
Speaker Change: and put their planning systems on that. When they do have a shortage, they can look into our inventory, they can see it, some have even automated that process and have products shipped in many cases the same day.
Dave Pahl: Some have even automated that process and have products shipped in many cases the same way. So we think the long-term strategic value of TI.com is much higher than the transactions that will cross. So thank you, Harlan, and we'll go to the next caller. Great, thank you.
Speaker Change: So, we think the long-term strategic value of TI.com is much higher than the transactions that will cross it here in the short term.
Speaker Change: [inaudible]
Speaker Change: So thank you, Harlan. We'll go to the next caller, please.
Speaker Change: Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley . Please proceed with your question.
Unknown Attendee: I wonder just as you kind of think about this longer-term strategy, you've got, you know, well over 200 days of inventory, and you have relatively low factory utilization. Like, do you think this means we won't have shortages down the road and that people can look at the capacity that you have the inventory that you have, and they won't have the need to accumulate inventory? Is that part of the thinking? And or do you think it's just inevitable that we'll get back to that at some point?
Joseph Lawrence Moore: Great, thank you.
Joseph Lawrence Moore: I wonder, just as you kind of think about this longer-term strategy...
Joseph Lawrence Moore: You've got, you know, well over 200 days of inventory, you have relatively low factory utilization. Like, do you think this means we won't have...
Joseph Lawrence Moore: Shortages down the road that people can look at the capacity that you have the inventory that you have and they won't have the need to accumulate inventory is that part of the thinking and or do you think it's just inevitable that we'll get back to to that at some point?
Haviv Ilan: Again, the investment first in capacity ahead of the event and then in inventory is done to really improve customer service, right? And we believe it's important to keep that not only now when it's kind of easy and we have a market cycle at, you can call it, a low point. The test for our company would be at the next up cycle, okay? Not only an up cycle that is, you can model, Joe, any up cycle that you want, but we want to be supporting our customers at the highest level, even if the cycle looks like a very steep one.
Speaker Change: Again, the investment first in capacity ahead of the event and then in inventory is done to really improve customer service, right? And we believe it's important to keep that not only now when it's kind of easy and the...
Speaker Change: We have a market cycle at the...
Speaker Change: You can call it A Low Point. The task for our company would be at the next up cycle. Okay? Not only an up cycle that is, you can model, Joe, any up cycle that you want, but we want to be supporting our customers at their highest level.
Joe: Even if the cycle looks like a very steep one, and we model, for example, the COVID cycle as a similar one, and that's what drives...
Haviv Ilan: And we model, for example, the COVID cycle as a similar one, and that's what drives our investments. I think it's very, very important to sell your customers ahead of the competition at times like that, because that's the opportunity to gain share, and we are going to be prepared for that opportunity. Having said that, all that is done in a very thoughtful way.
Speaker Change: I think it's very, very important to sell your customers ahead of the competition at times like that, because that's the opportunity.
Speaker Change: to gain share, and we are going to be prepared.
Speaker Change: for that opportunity. Having said that, all that is done in a very thoughtful way. Inventory is being built at the right part where we have this diversity and longevity position.
Haviv Ilan: Inventory is being built at the right part where we have this diversity and longevity position, such that we don't risk the scrap of the inventory. I'm pleased with the progress we've made, but the test will come, and I'm sure it will come one day at the next upcycle. Yeah, I mean, just to follow up on that, to the extent that your competition, you know, is doing things more the way they traditionally have, and probably will see boom and bust cycles, you know, what happens in that next upturn? If they can't get parts from three of your competitors, you know, is there a way you can keep them from accumulating inventory of TI components, even though they shouldn't need to?
Speaker Change: I'm pleased with the progress we've made, but the test will come, and I'm sure it will come one day at the next upcycle.
Speaker Change: Yeah, I mean, just to follow up on that, to the extent that your competition...
Speaker Change: You know is doing things more the way they traditionally have and probably will see boom-bust cycles
Speaker Change: What happens in that next upturn if they can't get parts from three of your competitors? Is there a way you can keep them from accumulating inventory of TI components, even though they shouldn't need to? That seems like it's part of the industry behavior in the past. How focused are you on trying to dampen that?
Haviv Ilan: I mean, that seems like it's part of the industry behavior in the past. You know, how focused are you on trying to dampen that? Again, I think our capacity and the inventory level that we have built are such that we tend to provide good or very high customer service levels, right? So our intention is to maintain lead time through the cycle. But it depends on what cycle you throw at us. There is always going to be that one cycle or that steep cycle that maybe we won't be able to do.
Speaker Change: Again, I think our capacity and the inventory level that we have built are such that we tend to provide good or very high customer service levels, right?
Speaker Change: Our intention is to maintain lead time through the cycle. It depends what cycle you throw at us. There is always going to be that one cycle or that steep cycle that maybe we won't be able to do it. But we have modeled the company in such a way that in most...
Haviv Ilan: But we have modeled the company in such a way that in most... demand situations, we would be able to maintain a good customer or high customer service levels through the cycle, which hopefully will keep the lead time short, which I'm pretty sure will encourage customers not to hoard inventory. That has to be proven, but that's the way we want to prepare for the future. Very helpful. Thank you.
Speaker Change: Dave Pahl Dave Pahl Dave Pahl
Speaker Change: through the cycle, which hopefully will keep the lead time short, in which I'm pretty sure will encourage customers not to hoard inventory. That has to be proven, but that's the way we want to prepare for the future.
Dave Pahl: If I added one thing, I'd just say that I spent eight years in sales, a joke I never once took, a double order. And so, trying to control customer behavior. When things get tight, people want to build more inventory, right? And so that's just the behavior that I think will be in our industry. A Pursuable Future, but we can gain share in those periods of time. That said, we'll go to the next next call or next and last. Yeah, thanks. Good evening.
Speaker Change: Yeah. Very helpful, thank you.
Speaker Change: And if I added one thing, I'd just say that I spent eight years in sales. You know, a joke, I never once took a double order.
Speaker Change: and so trying to control customer behavior.
Speaker Change: When things get short, people want to build more inventory, right?
Speaker Change: So that's just the behavior that I think that will be in our industry for the future.
Speaker Change: Foreseeable Future, but we can gain share in those periods of time and that's that's the advantage of having the capacity in place. So that said, we'll go to the next next call or the next and last caller please.
Speaker Change #100: Thank you. Our last question comes in the line of Chris Caso with Wolf Research. Please proceed with your question.
Unknown Attendee: The question is on your earlier comments on China. You know, sounds like that rebounded fairly robustly in the first quarter. Could you give us some more color on what you were seeing within China? And then, you know, do you think do you feel that those Chinese customers are still burning through inventory? Are you still under shipping to? Yeah, thanks for the question.
Christopher Caso: Good evening. The question is on your earlier comments on China. It sounds like that rebounded fairly robustly in the first quarter. Could you give us some more color on what you were seeing within China? Do you feel that those Chinese customers are still burning through inventory? Are you still under shipping demand there?
Haviv Ilan: First, I would say that in China, there is a very distinct signal that customers have walked down their inventories. And we've seen that, you know, spreading through time with the market. If you think about the synchronous behavior that we have described of the different markets, we saw the same in China. You know, the personal electronics business peaked in China somewhere in 2021, enterprise and industrial sometime in 22, and then the automotive business peaked sometime in 23.
Speaker Change #102: Thanks for the question. First, I would say that in China, there is a very distinct signal that customers have walked down their inventories. And we've seen that, you know,
Speaker Change #103: Spreading through time with the market, if you think about...
Speaker Change #103: The asynchronous behavior that we have described of the different markets, we saw the same in China. You know, the personal electronics business picked in China somewhere in 2021, enterprise and...
Speaker Change #103: and industrial sometimes in 22 and then automotive picked sometimes in 23. So you saw that that peak spread over three years.
Haviv Ilan: So you saw that peak spread over three years, which I think is the reason we saw such an elongated decline of seven quarters in a row. And we went backwards to our history. And it's been one of the longest, if not the longest, cycle we've seen. But I can see clearly that it's mainly played out.
Speaker Change #103: which I think is the reason we saw such an elongated decline of seven quarters in a row. We went backwards to our history and it's been one of the longest, if not the longest, cycle we've seen.
Haviv Ilan: Of course, you will always find pockets and a few sectors in the industrial market that are still going through that. But it's very clear that once you start to shift to end demand, you will see such behavior of, in our case, 20% sequential growth. And, you know, that momentum is being built across the markets; all markets did very well in China, growing between, you know, 15 to 20 something percent. Okay, so, very robust, coherent. And that's what a recovery looks like.
Speaker Change #103: But I can see clearly that it's mainly played out. Of course, you will always find pockets and a few sectors.
Speaker Change #103: on the industrial market that are still going through that, but it's very clear that once you start to shift to end demand, you will see such behavior of, in our case, 20% sequential growth.
Speaker Change #103: And, you know, that momentum is being built across the markets. All markets did very well in China.
Speaker Change #103: growing between 15 to 20-something percent. Very robust, coherent, and that's like a recovery looks like. Now, we haven't seen that across the other markets. I will even tell you that the areas like Europe and Japan are in an early phase, and hopefully, it doesn't take seven quarters per geography.
Haviv Ilan: Now, we haven't seen that across the other markets; I will even tell you that areas like, you know, Europe and Japan are in an early phase, and hopefully, it doesn't take seven quarters per geography. But China was kind of the first into the upcycle, the beginning of COVID, the first one to correct on the down. And now, to me, the first one kind of raises a very, you know, strong sequential growth with momentum. So that's the way I would summarize it without trying to imply that we'll see the same behavior in each and every other market. Power on, Chris.
Speaker Change #103: But China was kind of the first into the upcycle, the beginning of COVID, the first one to correct on the down, and now to me the first one kind of raising a very strong sequential growth with momentum.
Speaker Change #103: That's the way I would summarize it without trying to imply that we'll see the same behavior in each and every other market.
Unknown Attendee: I do, thanks. And just a quick follow up, and I'm sure this is another thing you'll address on the August call. But you narrowed the range for depreciation next year, next year down a little bit. Last quarter, you talked about CapEx, kind of, you know, being around this $5 billion level per year. Was $5 billion still a reasonable way of looking at CapEx? Yeah, there is no there is no news here strategically, but Rafael, maybe you want to guide us on CapEx? No, absolutely not.
Speaker Change #103: Do you have a follow-on, Chris?
Chris: I do, thanks. And just a quick follow-up, and I'm sure this is another thing you'll address on the August call, but you narrowed the range for depreciation next year down a little bit.
Chris: Last quarter you talked about CapEx, you know, kind of, you know, being around this $5 billion level per year, it was down sequentially in the second quarter. Is $5 billion still a reasonable way of looking at CapEx this year?
Chris: Yeah, there is no, there is no news here strategically, but Rafael, maybe you want to guide on CapEx this year? No, absolutely not. This year, $5 billion. What you saw in second quarter is just little puts and takes.
Rafael R. Lizardi: This year $5 billion. What you saw in the second quarter is just little puts and takes on a quarterly basis. But for 2024, $5 billion of CapEx and the depreciation numbers I gave are reflective of that. Let me wrap up with what we said previously. At our core, we are engineers.
Chris: On a quarterly basis, but for 2024, $5 billion of CapEx and the depreciation numbers I gave are reflective of that.
Speaker Change #104: Let me wrap up with what we've said previously, at our core, we are engineers, our technology is the foundation of our company, but ultimately our objective and the best metric to measure progress and generate value for owners is the long-term growth of precast local share.
Haviv Ilan: Our technology is the foundation of our company, but ultimately, our objective and the best metric to measure progress and generate value for owners is the long-term growth of Precast Opel Share. While we strive to achieve our objective, we'll continue to pursue our three ambitions. First, we will act like owners. We will own the company for decades. We will adapt and succeed in a world that's ever-changing.
Speaker Change #104: While we strive to achieve our objective, we'll continue to pursue our three ambitions. First, we will act like owners. We'll own the company for decades. We will adapt and succeed in a world that's ever-changing, and we will be a company that we are personally proud to be part of and we would want as our neighbor.
Haviv Ilan: And we will be a company that we are personally proud to be part of and that we would want as our neighbor. When we are successful, our employees, customers, communities, and owners will all benefit. Thank you. Have a good evening.
Speaker Change #104: When we are successful, our employees, customers, communities, and owners all benefit.
Speaker Change #104: Thank you and have a good evening.
Speaker Change #105: And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.
Speaker Change #106: www.texasinstruments.org www.texasinstruments.org
Dave Pahl: ...........................?? U.S. Money Reserve, Welcome to the Texas Instruments second quarter 2024 earnings conference call. I'm Dave Pahl, head of investor relations, and I'm joined by our chief executive officer, Haviv Ilan, and our chief financial officer, Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.com slash ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website.
Dave Pahl: Welcome to the Texas Instruments second quarter 2024 earnings conference call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by our Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael Lizardi.
Speaker Change #107: For any of you who missed the release, you can find it on our website at ti.com slash ir.
Dave Pahl: This call is being broadcast live over the web and can be accessed through our website.
Dave Pahl: In addition, today's call is being recorded and will be available via replay on our website.
Unknown Executive: This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements, contained in the earnings release published today, as well as TI's most recent SEC filings for a more complete description. Today, we'll provide the following. First, Haviv will start with a quick overview of the course.
Dave Pahl: 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.
Dave Pahl: 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.
Dave Pahl: Next, he'll provide insight into the second quarter revenue results, with some details of what we're seeing with respect to our end market. Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for the third quarter of 2020. With that, I'll turn it over to him.
Haviv: Today we'll provide the following updates. First, Haviv will start with a quick overview of the quarter.
Javier: Next, he'll provide insight into second quarter revenue results with some details of what we're seeing with respect to our end markets.
Javier: Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for the third quarter of 2024.
Dave Pahl: Thanks, Dave. Let me also start by welcoming everyone to the call. I'm looking forward to joining our quarterly earnings calls moving forward and sharing more details about our business strategy with the investment community. It is an opportunity for me to directly share more information about our results and our strategic progress. With that, I'll start with a quick overview of the second quarter. Revenue in the quarter came in, about as expected, at $3.8 billion, an increase of 4% sequentially and a decrease of 16% year-over-year. Analog Revenue declined 11% year-over-year, and Embedded Processing declined 31%.
Dave Pahl: With that, let me turn it over to Haviv.
Haviv: Thanks, Dave. Let me also start by welcoming everyone to the call.
Rafael: I'm looking forward to joining our quarterly earnings calls moving forward and sharing more details about our business strategy with the investment community.
Haviv: It is an opportunity for me to directly share more information about our results and our strategic progress.
Rafael: With that, I'll start with a quick overview of the second quarter.
Rafael: Revenue in the quarter came in, about as expected, at $3.8 billion, an increase of 4% sequentially and a decrease of 16% year-over-year.
Rafael: Analog revenue declined 11% year-over-year and embedded processing declined 31%. Our other segment declined 22% from the year-ago quarter.
Haviv Ilan: Our other segment declined 22% from the year-ago quarter. Now, I'll provide some insight into our second quarter revenue by end market. Our results continue to reflect the asynchronous behavior across our end markets that we've seen throughout this cycle. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the industrial market was down low single digits. The automotive market was down mid-single digit
Rafael: Now, I'll provide some insight into our second quarter revenue by end market.
Rafael: Our results continue to reflect the asynchronous behavior across our end markets that we've seen throughout this cycle.
Rafael: Similar to last quarter, I'll focus on sequential performance, as it is more informative at this time.
Rafael: First, the industrial market was down low single digits.
Rafael: The automotive market was down mid-single digits.
Haviv Ilan: Personal Electronics grew mid-teens with broad-based growth while demonstrating continued improvement compared to its low point in the first quarter of 2026. Next, communication equipment was up mid single digits, and finally, Enterprise Systems was up about 20%. Lastly, before I pass it on to Rafael, I'd like to share a few comments regarding our capacity investment. We and our customers remain pleased with our progress on the expansion of our 300 millimeter manufacturing
Rafael: Personal Electronics grew mid-teens with broad-based growth while demonstrating continued improvement compared to its slow point in the first quarter of 2023.
Rafael: Next, Communication Equipment was up mid-single digits, and finally, Enterprise Systems was up about 20%.
Rafael: Lastly, before I pass it on to Rafael, I'd like to share a few comments regarding our capacity investments.
Rafael: We and our customers remain pleased with our progress of the expansion of our 300 mm manufacturing capacity.
Haviv Ilan: These investments reflect our confidence in the opportunity ahead, which remains high for several reasons. First, we have a high level of confidence in the secular growth of semiconductor content, particularly in industrial and automotive, where we have greater exposure and a strong product position. Second, geopolitically dependable, low-cost, 300mm capacity will be increasingly critical and valuable, and our investments enable us to support customer demand at scale.
Rafael: These investments reflect our confidence in the opportunity ahead, which remains high for several reasons.
Rafael: First, we have a high level of confidence in the secular growth of semiconductor content, particularly in industrial and automotive, where we have greater exposure and strong product positions.
Rafael: Second, geopolitically dependable, low-cost, 300mm capacity will be increasingly critical and valuable, and our investments enable us to support customer demand at scale.
Haviv Ilan: To share more details on our progress, which we believe is helpful for all of our shareholders to understand, I plan to hold an off-cycle capital management call with Rafael and Dave on August 20th. During the call, I will provide more granularity on our capacity investments along with a framework of revenue and free cash flow per share scenarios. With that, I will turn it over to Rafael to review profitability, capital management, and our outlook. Thanks, Haviv, and good afternoon, everyone.
Speaker Change #109: To share more details on our progress, which we believe is helpful for all of our shareholders to understand, I plan to hold an off-cycle capital management call with Rafael and Dave on August 20th.
Speaker Change #109: During the call, I will provide more granularity on our capacity investments along with a framework of revenue and free cash flow per share scenarios.
Rafael: With that, let me turn it over to Rafael to review profitability, capital management, and our outlook. Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, second quarter revenue was $3.8 billion.
Rafael R. Lizardi: As Haviv mentioned, second quarter revenue was $3.8 billion. Gross profit in the quarter was $2.2 billion, or 58% of revenue. Sequentially, gross profit margin increased 60 basis points, primarily due to higher revenue, as well as lower manufacturing unit costs due to increased factory loadings and more manufacturing internally with more wafers on 300 millimeters. Operating expenses in the quarter were $963 million, up 3% from a year ago and about as expected.
Rafael: Gross profit in the quarter was $2.2 billion or 58% of revenue.
Rafael: Sequentially, gross profit margin increased 60 basis points, primarily due to higher revenue as well as lower manufacturing unit costs due to increased factory loadings and more manufacturing internally, with more wafers on 300mm.
Speaker Change #110: Operating expenses in the quarter were $963 million, up 3% from a year ago and about as expected.
Rafael R. Lizardi: On a trailing 12-month basis, operating expenses were $3.7 billion, or 23% of revenue. Operating profit was $1.2 billion in the quarter, or 33% of revenue, and was down 37% from the year-ago quarter. Net income in the second quarter was $1.1 billion, or $1.22 per share.
Speaker Change #110: On a trailing 12-month basis, operating expenses were $3.7 billion, or 23% of revenue.
Speaker Change #110: Operating profit was 1.2 billion dollars in the quarter or 33% of revenue and was down 37% from the year ago quarter.
Speaker Change #110: Net income in the second quarter was 1.1 billion dollars, or $1.22 per share. Earnings per share included a 5 cent benefit for items that were not in our original guidance.
Rafael R. Lizardi: Earnings per share included a five-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 $1.6 billion in the quarter and $6.4 billion on a trailing 12-month basis. Capital expenditures were $1.1 billion in the quarter and $5 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.5 billion.
Rafael R. Lizardi: As a reminder, free cash flow includes benefits from the CHIPS Act Investment Tax Credit, which was $312 million for the second quarter. In the quarter, we paid $1.2 billion in dividends and repurchased $71 million of our stock. In total, we've returned $4.9 billion to our owners in the past 12 months. Our balance sheet remains strong, with $9.7 billion of cash and short-term investments at the end of the second quarter. In the quarter, we repaid $300 million of debt. Total debt outstanding is now $14 billion with a weighted average coupon of 3.8%.
Speaker Change #110: Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.6 billion in the quarter and $6.4 billion on a trailing 12-month basis.
Speaker Change #110: Capital expenditures were $1.1 billion in the quarter and $5 billion over the last 12 months.
Speaker Change #110: Free cash flow on a trailing 12-month basis was $1.5 billion.
Speaker Change #110: As a reminder, free cash flow includes benefits from the CHIPS Act Investment Tax Credit, which was $312 million for second quarter.
Speaker Change #110: In the quarter, we paid $1.2 billion in dividends and repurchased $71 million of our stock.
Speaker Change #110: In total, we've returned $4.9 billion to our owners in the past 12 months.
Speaker Change #110: Our balance sheet remains strong with $9.7 billion of cash and short-term investments at the end of the second quarter.
Speaker Change #110: In the quarter, we repaid $300 million of debt. Total debt outstanding is now $14 billion with a weighted average coupon of 3.8%.
Rafael R. Lizardi: Inventory at the end of the quarter was $4.1 billion, up $23 million from the prior quarter, and days were 229, down 6 days sequentially. For the third quarter, we expect TI revenue in the range of $3.94 to $4.26 billion and earnings per share to be in the range of $1.24 to $1.48. We continue to expect our effective tax rate to be about 13%.
Speaker Change #110: Inventory at the end of the quarter was $4.1 billion, up $23 million from the prior quarter, and days were 229, down 6 days sequentially.
Speaker Change #110: For the third quarter, we expect TI revenue in the range of $3.94 to $4.26 billion, and earnings per share to be in the range of $1.24 to $1.48.
Speaker Change #110: We continue to expect our effective tax rate to be about 13%.
Rafael R. Lizardi: In closing, we will stay focused on the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, the reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through discipline, capital allocation, and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash per share growth over the long term. With that, let me turn it back to Dave.
Speaker Change #110: In closing, we will stay focused in the areas that add value in the long term.
Speaker Change #110: We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions.
Speaker Change #110: We will continue to strengthen disadvantages through discipline, 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.
Dave Pahl: 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 question. After our response, we'll provide you with an opportunity for a follow-up. Operator?
Speaker Change #110: With that, let me turn it back to Dave. Thanks, Rafael. Operator, you can now open the lines for questions.
Dave Pahl: In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you an opportunity for a follow-up. Operator?
Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change #111: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change #111: For participants using speaker equipment, it may be necessary to pick up your handset before pressing these star keys.
Speaker Change #112: One moment please, there's a poll for questions.
Speaker Change #113: Our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.
Unknown Attendee: Thanks a lot. Um, there were some comments from a geopolitical perspective, you know, one of the candidates was talking about the, you know, China-Taiwan relationship. And, and I'm just asking, you know, how the geopolitical environment is sort of impacting your customers' buying decisions. I think you said last call that even some of your Chinese customers who are exporting product want, you know, geopolitically dependable capacity. I think you talked about that being kind of an increasingly big factor in cars. Can you talk about that? And is that beginning to drive some, you know, share gains for you? Thanks, team. I'll take that. It's Haviv.
Timothy Michael Arcuri: And I'm just asking, you know, how the geopolitical environment is sort of impacting your customers' buying decisions. I think you said last call that even some of your Chinese customers who are exporting product
Speaker Change #114: want, you know, geopolitically dependable capacity. I think you talked about that being kind of an increasingly big factor in autos. Can you talk about that and is that beginning to drive some, you know, share gains for you?
Haviv Ilan: First, geopolitical dependable capacity is not a new thing for us. We started to see these requests coming, I think, two or three years ago when tensions started to rise. But as we reflect on it now, three years in, it's obvious that there is more and more attention, usually at the highest levels of our customers. I'm talking about, you know, the leadership of CEOs or chief purchasing officers, looking at their supply chain and making sure that they are going to be immune from, you know, whatever is thrown at them. Part of it is geopolitical tensions.
Speaker Change #115: Thanks, team. I'll take that. It's Haviv. First, geopolitical dependable capacity is not a new thing for us. We've started to see these requests coming, I think, two or three years ago when tensions started to rise. But as we reflect on it now, three years in, it's obvious that
Speaker Change #115: There is more and more attention, usually at the highest levels of our customers. I'm talking about, you know, leadership of CEOs or Chief Purchasing Officers.
Haviv Ilan: And this is where TI is a great answer. We are a very unique supplier in the sense that we can provide the capacity at scale, meaning the amount of wafers and the size of the capacity that we are building are very high. It is a very affordable capacity. Building our parts on 300 millimeter wafers allows for a lower cost per chip. And then building them internally in our assembly and test houses also provides a very good low cost structure.
Speaker Change #115: Looking at their supply chain and making sure that they are going to be immune from, you know, whatever is thrown at them. Part of it is geopolitical tensions.
Speaker Change #116: And this is where TI is a great answer. We are a very unique supplier in the sense of we can provide the capacity at scale, meaning the amount of wafers and the size of our, the capacity that we are building is very high.
Haviv Ilan: And last but not least, this geopolitically dependable capacity, meaning our fabs are being built in the US, mainly in Texas and in Lehigh, Utah. And we provide a capacity that is at scale to serve that opportunity moving forward. And, last but not least, you have touched China.
Speaker Change #116: It is a very affordable capacity, us building our parts on 300mm wafers allows for a lower cost per chip.
Speaker Change #116: And then building them internally in our assembly and test houses also provides a very good cost structure. And last but not least is this geopolitically dependable capacity, meaning our fabs are being built in the U.S., mainly in Texas and in Lehigh, Utah.
Speaker Change #116: And we provide a capacity that is at scale, affordable, and dependable.
Speaker Change #116: And yes, every time there is some news out there, you know, we are seeing more interest. We've seen that grow over the last several years, and in that sense, our discussions with our customers.
Speaker Change #116: are providing us more opportunity to win positions in future platforms. I do believe we are taking a bigger share and this is part of our
Haviv Ilan: Yes, you're right. If I take an example, and just on the automotive side, our customers in China do care a lot about their export business. In that sense, our capacity is highly welcomed by them because we can compete in the market price with a very competitive offering and yet have that dependability to sell to their customers not only in China but also outside of China for their export business. Follow on Tim. I do.
Speaker Change #116: confidence to continue with our investments to serve that opportunity moving forward. Last but not least, you have touched China. Yes, you're right. If I take an example and just on the automotive side.
Speaker Change #117: Our customers in China do care a lot about their export business. In that sense, our capacity is highly welcomed by them, because we can compete at the market price with a very competitive offering, yet have that dependability.
Speaker Change #117: to sell their customers not only in China but also outside of China for their export business.
Timothy Michael Arcuri: Yes. Um, Rafael, can you give us an update on ChIPSAC? Do you know how much you're getting yet? And can you kind of talk about that? Yeah, sure, Tim.
Speaker Change #117: [inaudible]
Raphael: I do, yes. Rafael, can you give us an update on ChIPSAC? Do you know how much you're getting yet? And can you kind of talk about that?
Rafael R. Lizardi: So on the grants, frankly, we're still going through the process. So we submitted the application, and we're just working through the details with the CHIPS program office. But given your question, let me also comment on the ITC, the investment tax credit. Today, and to date, we have accrued about $1.8 billion in total. That's under the 25% ITC. This benefit has already started flowing through the income statement as lower depreciation. In addition, in the second quarter, we'd receive, as I said in the prepared remarks, $312 million in cash benefits.
Raphael: Yeah, sure, Tim. So on the grants, frankly, we're still going through the process. So we submitted the application and we're just working through the details with the CHIPS program office. But given your question, let me comment also on the ITC, the Investment Tax Credit. Today,
Speaker Change #119: To date, we have accrued about 1.8 billion dollars.
Speaker Change #119: In total, that's under 25% ITC. This benefit already started flowing through the income statement as lower depreciation. In addition, in second quarter, we received, as I said in the prepared remarks, $312 million of cash benefits.
Rafael R. Lizardi: And that is reflected in operating and free cash flow. And we expect to receive another $200 million in 3Q and for a total of $1 billion in 2024. Thank you, Tim.
Speaker Change #119: And that is reflected in operating and free cash flow. And we expect to receive another $200 million in 3Q and for a total of $1 billion for 2024.
Operator: We'll go to the next caller. Hi, guys. Thanks for taking my questions.
Speaker Change #120: Great, thank you Tim. We'll go to the next caller please.
Speaker Change #121: Thank you. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.
Unknown Attendee: Um, in Q2, it looked like the strength was primarily from personal electronics. Give an industrial a lot of words down it, and maybe calculators as well. I don't know other was pretty strong. I was wondering if you could give us some color on where your expectations for the growth in q3 sequentially are coming from. Is it still primarily personal electronics? and I guess maybe calculators or other stuff. How do I think about the end market trends as we go forward? Thanks for the question, Stacy.
Stacy Aaron Rasgon: Hi guys, thanks for taking my questions. In Q2 it looked like the strength was primarily from personal electronics.
Stacy Aaron Rasgon: Give an industrial a lot of word down it and maybe calculators as well. I don't know other other was pretty strong I was wondering if you give us some color on where your expectations for The growth in q3 sequentially is coming from is it still primarily a personal electronics?
Speaker Change #122: and I guess maybe calculators or other stuff. How do I think about the end market trends as we go forward in the next quarter?
Rafael R. Lizardi: I'll start, and I'll let Dave add some more color on Q2. So if I go back to the second quarter, yes, if you look at our results, industrial did decline by a low single digit. Automotive continued to decline at mid-single digit. That was the third quarter in a row of that decline. Although from an year-over-year perspective, it's still doing well, meaning less than 10% of a decline. It declined about 9% in Q2.
Speaker Change #123: Thanks for the question, Stacy. I'll start and I'll let Dave add some more color on Q2. So if I go back to the second quarter, yes, if you look at our results, industrial did decline at the low single digits, automotive...
Speaker Change #124: Continue to decline at mid single digit, that was the third quarter in a row of that decline. Although from an over year perspective it's still doing well, meaning less than 10% of a decline. It declined about 9% in Q2. Yes there is strength in personal electronics and I do see that market, you know, it went through the entire cycle. It dropped some time in the first quarter of 2023.
Rafael R. Lizardi: Yes, there is strength in personal electronics, and I do see that market, you know, it went through the entire cycle. It dropped some time in the first quarter of 2023, and we've seen that market strengthening. And again, it grew mid-teens sequentially, but close to 20% year-over-year. So there is definitely strength over there.
Speaker Change #124: And we've seen that market strengthening, and again, it grew mid-teens.
Speaker Change #124: Dave Pahl, CFO Alphabet and Google
Rafael R. Lizardi: And I would also say that on the enterprise market, again, smaller revenue for us, but we are seeing a recovery over there. And I believe that the inventory correction is behind us. Regarding the other business, it grew thanks to our calculator business, as you mentioned, but also our DLP business, which mainly serves the personal electronics market. Dave, maybe you can add some more color on the sectors as we talk about Q2.
Speaker Change #125: Regarding the other business, it grew thanks to our calculator business, as you mentioned, but also our DLP business, which mainly serves the personal electronics market.
Speaker Change #126: And Dave, maybe you can add some more color on the sectors as we talk about Q2. Yeah, I think as we have seen, even inside of industrial,
Rafael R. Lizardi: Yeah, I think as we have seen, even inside of industrial, we've had sectors behave asynchronously. So when we first began to see weakness in industrial, which really began in the third quarter, that was the peak in the third quarter of Q2. We talked about seeing about half of the sectors.
Dave Pahl: We've had sectors behave asynchronously so when we first began to see weakness in industrial which really began in in the third quarter that was that was the peak in their quarter 22 that was the peak in industrial