Q2 2019 Earnings Call
Good day and welcome to the Texas instruments to Q1 9 earnings release Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr., Dave Pahl. Please go ahead Sir.
Good afternoon, and thank you for joining our second quarter 2019 earnings conference call.
Rafi I was already tea ice Chief Financial Officer is with me today.
For any of you missed the release you can find it on our website at <unk> Dot Com Slash IR.
This call is being broadcast live over the web and can be accessed through our web site.
A replay will be available through the web.
This call will include forward looking statements that involve risks and uncertainties that could cause T.I.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 tea ice most recent SEC filings for a more complete description.
For today's call, let me start by summarizing what Raphael and I will be reviewing.
I'll be covering the following topics.
First a high level summary of the financial results for the second quarter.
And second some details by segment and end market.
Rafael will then review profitability capital management results and then the outlook.
After that we'll open the call for Q and a.
Starting with high level summary of our second quarter financial results.
The quarter progressed about as we expected with revenue decreasing 9% from a year ago due to broad based weakness.
In our core businesses analog revenue declined 6% in embedded processing revenue declined 16% compared with the same quarter a year ago.
Both businesses year on year growth decelerated.
Earnings per share were $1.36, including a seven cents benefit for items not in our original guidance.
The benefit includes four cents due to the previously announced sale of our Grinning, Scotland fab.
But the balance is primarily due to discrete tax benefits.
With that backdrop I'll now provide details on our performance, which we believe continues to be representative of the ongoing strength of our business model.
In the second quarter, our cash flow from operations was $1.8 billion.
As we know each quarter, we believe that free cash flow growth, especially on a per share basis is most important to maximizing shareholder value in the long term.
We remain committed to returning all of our free cash flow to owners.
Free cash flow for the trailing 12 month period was $5.9 billion up 3% from a year ago.
Free cash flow margin for the same period was 38.9% of revenue up from 36.6% a year ago.
We continue to benefit from the quality of our product portfolio that is long lived in diverse and the efficiency of our manufacturing strategy. The latter of which includes our growing 300 millimeter analog output.
We believe that free cash flow will only be valued if it is productively invested in the business or returned to owners.
For the trailing 12 month period, we returned $8 billion of cash to our owners through a combination of dividends and stock repurchases.
Demonstrating our confidence in our business model and our commitment to return all of our free cash flow to owners.
Moving on I'll now provide some details on the second quarter by segment and end market.
For the year ago quarter analog revenue declined 6% due to declines in high volume power and signal chain.
Embedded processing revenue declined by 16% from a year ago quarter due to declines in both product lines processors and connected microcontrollers.
Next I'll provide some insight into this quarter's performance by end market versus a year ago.
Industrial and automotive together declined upper single digits due to broad based weakness.
Personal electronics declined low double digits also due to broad based weakness.
In communications equipment revenue declined sequentially, but was about even from a year ago versus a very weak compare.
And lastly enterprise systems declined.
In summary, we continue to focus our strategy on the industrial and automotive markets, where weve been allocating our capital and driving initiatives to strengthen our position.
This is based on a belief that industrial and automotive will be the fastest growing semiconductor markets.
They have increasing semiconductor content and also provide diversity in longevity.
All of this translates to a high terminal value of our portfolio.
Rafael will now review profitability capital management and our outlook.
I feel.
Thanks, Dave and good afternoon, everyone.
Gross profit in the quarter was $2.36 billion or 64.3% of revenue.
From a year ago gross profit decreased due to lower revenue.
Gross profit margin decreased 90 basis points.
Operating expenses in the quarter were $810 million.
Down about 2% from a year ago and about as expected.
On a trailing 12 month basis operating expenses were 21.1% of revenue within our expectations.
Over the last 12 months, we have invested $1.57 billion in R&D, an important element of our capital allocation.
We are pleased with our disciplined process of allocating capital at the R&D, which we believe will allow us to continue to grow our top line over the long term.
Acquisition charges and noncash expense were $80 million.
Acquisition charges will be about $80 million per quarter through the third quarter of this year, then decline to about $50 million per quarter for two remaining years.
Restructuring charges slash other was a credit of $36 million due to the sale of our granite Scotland facility.
Operating profit was $1.51 billion or 41.1% of revenue.
Operating profit was down 12% from a year ago quarter.
Operating margin for analog was 43.7%.
Down from 47% a year ago.
For embedded processing was 33.5% down from 35.4% a year ago.
Our focused investments on the best sustainable growth opportunities.
With differentiated positions will enable both businesses to continue to contribute nicely to free cash flow growth overtime.
Other income and expense was 52 million dollar benefit of 28 million, primarily due to investment gains and tax related items.
Net income in the second quarter was $1.31 billion or $1.36 per share, which included a seven cents benefit for items that were not in our prior outlook as we have discussed.
Let me now comment on our capital management results, starting with our cash generation.
I saw for operations was $1.8 billion in the quarter.
Capital expenditures were $284 million in the quarter.
Free cash flow on a trailing 12 month basis was $5.93 billion.
In the second quarter, we paid $722 million in dividends and repurchased $863 million of our stock for a total return to owners of $1.59 billion.
In total we have returned $8.01 billion in the past 12 months.
Consistent with our strategy to return all of our free cash flow.
Over the same period, our dividends represented 47% a free cash flow underscoring their sustainability.
Our balance sheet remains strong with $4.22 billion of cash and short term investments at the end of the second quarter.
Total debt is $5.8 billion with a weighted average coupon of 2.91%.
Inventory days were 143 up eight days from a year ago and down one day sequentially.
We are pleased with the progress we have made replenishing inventory of low volume devices and implement than the next phase of our consignment programs with our distributors.
Work in both of these areas will continue into third quarter.
We believe there is strategic value in owning and controlling our inventory and we'll manage it with our long term objectives in mind.
Turning to our outlook for the third quarter, we expect revenue in the range of $3.65 billion to $3.95 billion and earnings per share to be in the range of $1.31 to $1.53, which includes an estimated $10 million discrete tax benefit.
We continue to expect our annual operating tax rate to be about 16% for COVID-19.
In closing we have just completed our third quarter of year on year declines for <unk>.
As we stated last quarter. If you look at the last 30 years of history or industry cycles are always different but typically you could see four to five quarters of year on year and declines before year on year growth assumes.
Again, we're not trying to forecast the cycle, but simply offer some historical perspective.
Given our experience we will stay focused on making the stronger for the long term, we continue to invest in our competitive advantages, which our technology and manufacturing portfolio breadth market reach and diverse and long lived products.
We will continue to strengthen disadvantages through disciplined capital allocation and by focusing on the best products analog and embedded processing.
And the best markets, industrial and automotive, which I believe will enable us to continue to improve and deliver free cash flow per share growth for a long time to come.
With that let me turn it back to Dave.
Thanks, Rafael operator, you can now open up the lines for questions in order to provide as many of you as possible an opportunity to ask your questions. Please limit yourself to a single question.
After our response, we'll provide you an opportunity for an additional follow up operator.
Thank you if you'd like to ask a question. Please signal that pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Once again that is star one if youd like to ask a question, we'll take our first question from Vic area with Bank of America. Please go ahead.
Hi, Thanks for taking my question. So my first one when you reported down three months ago. I think things are looking somewhat more downbeat and I was curious profiler day, how would you characterize the current environment is it similar is it better is it worse I'm just trying to put your Q3 outlook fixes for three or 4% to 3% to 4% sequential growth, it's below seasonal trend, but it's still up sequentially. So I'm just trying to get a better sense of how you are seeing the broader environment or worse at six months ago.
Yeah, I'll start and the profit wants to add anything. He is welcome to you know I think as we stated the quarter came in about as we expected and that was really across the across the board I really all the end markets performed about as we had expected.
We've just completed our third quarter of year on year decline 40, I, you know and I think that if you look at history things are always a different when you look at the cyclicality, but I think things are performing is as we would expect that the only thing I would add is though we're ready for any scenario.
The economy strengthens we're ready or if it runs sideways over the weekend and we're ready and that's both a strategic common Oh, we position the company.
Focus on auto and industrial and and catalog products inside of that but also operationally we have our inventory strategy and other things that we're doing to continue to spend to the company you have a follow on to that.
Yeah. Thanks, Dave So for my follow on on curious the sales to China, How's the environment I'm dead I.
I assume that you know you don't have a lot of direct specific exposure to walk away.
But whats the demand environment, I guess can China and outside of China that are conditions better outside of China, and then but in China, how is the demand environment outside of Florida.
Yeah. So I you know I think we've said before that a walk away, it's about a 3% to 4% of our revenue overall.
It's a mix of coms equipment, and some handset in there and some other products.
And if you look at comps equipment overall, it's a 11% of <unk> of our revenue.
You know, we had seen some nice growth and.
And our five key products as we've talked about before and Ah and if you look from a regional standpoint, I'd say, there's nothing unusual going on we've talked about that in the past when there was and you know certainly if you look at where we ship product that's not always indicative of actual end demand or and look through to to those economies. A meeting we may ship into one region and that may get packaged up and ship to you know to another region before it's actually consume so.
Overall by the regions that came in as we are as we expected and nothing unusual.
We didn't see anything unusual this quarter. So thank you for that and we'll go to the next caller. Please.
Hey can you hear now from Toshiya Hari with Goldman Sachs.
Okay, great. Thanks, very much for taking my question Gods <unk> based on the comments that you just made it appears as though your view on the cycle hasn't really changed.
Over the past couple of months that said I think you guys decided to delay the new fabs. So so just curious what kind of.
Thought process went into the decision to push the fab.
Yeah. So you know just to clarify you know we said back in our February capital management call really have been saying since then.
That we plan to begin building that are that next factory and.
The next few years and that hasn't changed.
There was a filing and it was a a proposed amendment to a local tax abatement schedule.
That has caused some confusion on that on that topic, but just to say again, you know as we said back in February .
You know those plans hadn't hadn't changed.
You have a follow on.
I do thanks, Dave and then just going back to the the U.S., China situation I realize your business tends to be very sticky, but but but but does has the backdrop impacted your ability to conduct business in China at all or.
Have you sensed any any shifts to to marketshare in your business. Thank you know not there's Rafael no I'm not at all.
Yeah, and I, just say that our markets because their diverse than you see market share doesn't move around quickly.
You know, they're just good quality markets and and one of our competitive advantages being diversity and longevity I think helps us in markets like this and situation, but in particular so.
Okay. Thank you. So she will go to the next caller. Please.
Thank you we'll take our next question from Ambrish, sorry about that stuff out, but the CMO.
Hi, Thank you very much I had a question on gross margin.
Flow through a fall two and especially as it relates to a utilization then inventory so free cash flow 12 months trailing but you're always point understood correctly, which was.
Kind of in the same ballpark that you had last quarter, but the inventory is down and.
Then you fall through to margins is much higher incrementally and I know, it's not the same every quarter, but I was just curious if there's something going on there.
<unk> what are the puts and takes that plus the.
Incremental flow through it to be higher.
Yeah, I'll take that a you know from a the way you want to think about it is Ah our fall through as we have said before its about 70 to 75 person a and you want to look at that on a year on year basis, and and even then you know this is a complex is a little less a little more a bullet, but that's the right way to look at it and this quarter is actually right between that's 70 and 75% and the other thing I would mention is over the long over a longer time period over the last many years and we expect this to continue.
You are seeing the benefit of 300 millimeter of any factor in that is a part of our competitive advantage.
Any factor in technology.
And as we have talked about before is just oh.
Got a structural cost advantage of because of the the geometry of the wafer and the relatively small incremental cost that goes into a interpret is in that 300 millimeter wafer versus the 200 millimeter wafers. So we would expect that benefit to continue to accrue do a gross margins and and ultimately a free cash flow margin, which is the one that drives value for the owners of the company.
A follow on Ambrish I guess it did and this is more a blocking and tackling and I know you guys if.
Correct, you refrain from causing a cycle because everyone. Its track record, including my own is absolutely wrong on that front.
But bookings cancellations and lead times, where whether it'd be on these metrics. Thank you.
Yeah, I think if you look at those are those metrics overall.
Our.
I'd say that the inventory in the channel you know and more broadly I think you're looking at kind of the cyclical metrics that you look at it.
Inventory and channel was down about to about a day.
Still about four and a half weeks and has been steady at that for a couple of quarters now order rates. When we looked at those are those are you know look to normal as they came through yeah cancellations were down a little bit from last quarter, but really didn't change much and then our lead times are overall have remained stable.
Certainly they were stable as a.
Things got a.
More heated in the industry.
But and of course, there's always areas that we would still be tight on today, but in general the lead times have remained very stable. So.
Thank embraced and we'll go to the next caller. Please.
Thank you we'll take our next question from Stacy Stacy Rasgon with Bernstein research.
Hi, guys. Thanks for taking my questions first just on on how hallway U.S. you answered I'm sort of generally but specifically what do you have embedded in your guidance I'm regarding claw way are you still contemplating selling product to them or are you not what's what's in the guidance regarding regarding that customer.
Yeah. So I you know I'd say Stacy just over this past quarter, we obviously had halted shipments when when the order was given.
Since then we've resumed shipments of the products that we've determined we could ship you know that are in compliance with the U.S. regulations.
So overall and this quarter things came in as we expected as I stated before that would be inclusive of communications equipment, where we're well away would set so you know in our guidance are we.
Obviously, you know half that have that in for the quarter.
And if there was something unusual that we were keeping out our practice has been to to call that out and.
There is nothing unusual that we're planning on.
Yeah, if I won.
Yes, I do thank you.
The stockpiling and consignment to put those trends that you've been doing it's been going on for a while how much do you think that is increased utilization over the last few quarters as you've been rolling that out and how much longer do you anticipate.
I'm driving that strategy before it reaches completion.
Let me, let me start and then Ah Dave you want to if you want to comment but.
You know we've Uh huh.
We've had an inventory strategy for for many years, a would just continue to do to tweak it overtime make it better stronger and a and as the cycle started in third quarter. So then oh.
We deploy some specific tools during that time too. So then take advantage of a of that that situation and use a well we caught our wafer stars we devoted.
An increasing share of that due to the low volume.
Inventory strategy, we have built a lot of that but it's not complete but incrementally there's going to be less going forward than what he was in the in the last few quarters, because we get do obviously diminishing returns or at some point on that yeah, and I'll I'll point out that obviously you saw our inventory dollars were down sequentially. They are actually down year on year inventory days were down sequentially, even with those.
Planned to build of those low volume parts and we feel really good about being able to do that.
In our operations. The second part of your question. There was a what is the impact of consignment have on on utilization. It really has no impact at all.
Basically it optically and.
And by definition, just puts more inventory on our books.
But even if the inventory didn't change in the channel it just wouldn't put pressure.
An optically put a pressure on on our inventory and that's going on as well.
Yeah, I want to I want to make one more comment on this topic remember what inventory is about right. What is the objective, even though it's not about maximizing utilization or or gross margins or anything like that it's about maintaining high levels of customer service. So what we have done is deployed our cash to inventory and as they say, but theyre actually decreased so, but we think that decrease we built some inventory of low volume parts that now puts us in a great position as we move into the third quarter and beyond who have that inventory a a low volume that is generally difficult to bill we have been ready. So then we'll be able to serve our customers on the other side of that is a very well.
Okay. Thanks, Stacy will go to the next caller please.
Thank you, we'll hear now from Ross Seymore with Deutsche Bank.
Hi, guys. Thanks for letting me ask the question wanted to stick on that consignment topic, but just a slightly different spin.
I think you've said in the last calls last few calls that it's upwards of two thirds of your revenues go through consignment that's increased substantially over the last three 510 years why do you think your year over year revenue performance is so similar to your broader peer group. If you are controlling that inventory I would think all else being equal you wouldn't have to deal with the distribution channel burning inventory in weighing on your revenues during a period like that.
I'll give you one one common and ER and Dave you want to chime in what I would tell you is maybe take into account the last.
But four quarters or so five quarters, we have gone into that next phase of of consignment and we have added a once a 30 to 40 million of revenue through that program per quarter during that time for a total of.
Both the 200 million and we probably still have one more quarter to go a word that is or what that's going to happen and maybe through the end of the year, but but it is getting to the minutes study mentioned Boeing but that is you know revenue that from the BNL has sort of disappeared, but obviously the demand hasn't changed the end demand really hasn't changed it's just that now it goes into our inventory.
And the revenue is delayed but it just puts us in a much better position to do then.
Ah Onez inventory distributed better where it's needed or work, we've our manufacturing facilities better due to determine what needed to be built Florida to replace a replenish that inventory. So it's just a better way to operate yeah and I'll just add that when you think of one of our competitive advantage, which is the reach of our market channels.
This is just one component of what we're doing to have a.
A closer or more direct relationship with our customers and we think that ultimately servicing them better with product will will benefit them.
And therefore benefit US you have follow on Ross.
Yeah, one that's a little bit more housekeeping, Dave from an end market point of view you went through and didn't gave the year over years.
So could you give the quarter over quarters beyond the com side and was there any reason you put industrial and automotive together, saying they were down upper single digits year over year, usually you split that no yeah sure. So the first is they performed Oh.
The similarly industrial was a little weaker auto was a little less week, but in the same Zip code.
And that was the same for the sequential.
Together they grew low single digits in that same profile was was was the same.
Personal electronics grew high single digits.
With broad based seasonal growth.
Coms equipment as I mentioned earlier had declined.
And then enterprise systems actually grew sequentially.
So.
Okay. Thank you Ross and we'll go to the next caller. Please.
Thank you, we'll hear now from Harlan sur with JP Morgan.
Good afternoon. Thanks for taking my question I'm looking at the most recent survey data April may sales were down about 10% year over year for the global analog signal then while you guys were only down 6%. He clearly outperformed the analog was saying that last year as well so outside of the end market mix I eat better com equipment sector can you guys just help us understand any product areas, where either capturing market share or.
Seeing strong dollar content growth.
Well yeah. So.
First herlin I'd always be careful to.
Read too much into a.
Any of those numbers in the short term I think when you look at the share gains, we just really need to be measured or even over several year period and I think that's a you know even in that case I think we come out very well.
You had a you know I think, especially we continue to do well in industrial and automotive.
As I mentioned earlier that is we believe that those will be the.
Most important markets to semiconductors and industrial in particular.
And we've got a lot of programs and a lot of thought going into how to get better and get stronger.
To be able to service those markets you have a follow on.
Yeah, Thanks for the insights there.
I know we have to be careful on how we interpret this number but can you guys just tell us what the book to Bill ratio was for the June quarter.
Yes. So you set me up a perfect there because I always have the preamble that I'll give it a debated honestly, whether I should continue to give it but I will.
Just because we do.
But you know there is a lot of noise that that's in it. So it was <unk> 0.94, and it was a 1.06 a year ago 1.99 last quarter, So and I'll just remind everyone that we have.
You know the majority of the revenue on consignment. So we don't get orders in advance for that.
We've got backlog in the consignment the orders in the backlog are all consistent with the guidance that we gave.
So thank you Harlan and I believe it will go to the next caller. Please.
Thank you will hear now from Chris Danely with Citigroup.
Hey, Thanks, guys can you just talk about the linearity of orders during the quarter and I guess more specifically have you seen any.
Change in.
Customer or channel behavior since the wawa reinstatement in the I guess the threat of $300 billion of additional tariffs was taken away a few weeks ago.
Yeah, Chris really no changes on that front I think when we look at the linear already it came in fairly normal.
Minus the that does the stop shipment to to walk away.
But once we determine that we could continue to presume most of those products. It really got back to normal pretty quickly you have a follow on.
Yeah.
You know given we're in this I guess, you know mildly depressed or sluggish or flat or whatever you want to call it kind of environment.
Have you guys changed your thoughts on.
You know kind of long term capex.
Oh the short answer is no. We are as we said in our capital management strategy or our guide on Capex or is the 6% and will continue to be a fix for that and that's without buildings. So far as as we've talked about we Oh, we announced the new a factory or will they need to be fundamentally their factory. There will we build in Richardson, Texas in the next few years outside of that will be running at about 6%.
Okay. Thank you, Chris and operator, I think we've got time for one more call.
Thank you we'll take our next question from Mark what Asus with Jefferies.
Hi, Thanks for taking my question can you hear me okay.
You can mark.
Okay. The they meet your inventories declined in dollars Sunday. So what do you think happened this year inventories on your balance sheet in the September quarter, and Dave on the inventory.
Commentary I believe you said you characterize channel inventories kind of in a stable range would you would you call them stable in a normal and healthy level or would you characterize some of somewhat differently.
Let me start and David if you want to jump in but let me first step back through the objective for inventory to remind everybody and as I said earlier in the call is to maintain high levels of customer service. We also want to minimize obsolescence of that inventory and improve after the decision, but the main thing is due a to maintain high levels of customer service and our target.
Is 115 to 145, so a lots of last quarter or two quarters ago. We may we went above that target to 152, but then last quarter, where a 144 in one first quarter and then second quarter. We just finished at a at 143. So both of those inside of our or target, yeah, and I'll just add again that even inside of those numbers. We've made really good progress of executing to building those low volume parts and we believe that that's important so we can continue to service customers well.
And the second part of your question Mark was yeah. It was down.
A little bit sequentially on a days basis in in distribution.
Still at about four and a half weeks.
You know that's a that is a healthy level and I would say that that number will structurally kind of work its way down as we're implementing more of this.
Revenue on consignment.
And that's a great thing for our distributors, it's a great thing for our customers.
And it does require that we will be carrying some more inventory on our balance sheet, but we think that that's a good investment in working capital you have a follow on Mark.
Hi, Yes. Please thank you on the follow up is have you have you been noticed seen since the since the U.S. and China trade.
Debate have you been noticing any shift in the supply chain from standpoint of where things are being manufactured not you're not your own Texas instruments supply chain, but where you're shipping to are you shipping more outside of China or is or is everything fairly stable. Thank you.
Yeah, Yeah, I'll take that a you know it's too early to tell we've read some of the same read every bores anecdotal comments that people make on that front, but but it's too early to though so we'll watch how things evolve on that front over the next few years.
Hey, so a I'm going to finish with a few comments on key items for everybody to remember we will remain focused on analog and embedded the best products and industrial and automotive the best markets.
We will continue to be disciplined in executing our capital management strategy and remain committed to returning free cash flow to the owners of the company.
And finally, we continue to believe growing free cash flow per share dollars over the long term is what will maximize value for the owners of the company.
Thank you for listening to a replay will be available on the web and have a good night.
Thank you that does conclude today's conference. Thank you all for your participation you may now disconnect.
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