Texas Instruments Incorporated (NASDAQ:TXN) Q3 2023 Earnings Call Transcript

Texas Instruments Incorporated (NASDAQ:TXN) Q3 2023 Earnings Call Transcript October 24, 2023

Texas Instruments Incorporated beats earnings expectations. Reported EPS is $1.85, expectations were $1.82.

Dave Pahl: Welcome to the Texas Instruments Third Quarter 2023 Earnings Conference Call. I’m Dave Pahl, Head of Investor Relations, and I’m joined by our Chief Financial Officer Rafael Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today’s call is being recorded and will be available via replay on our website. This call will include 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 updates: First, I’ll start with a quick overview of the quarter. Next, I’ll provide insight into third quarter revenue results, with some details of what we are seeing with respect to our end markets. Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for our fourth quarter 2023. Starting with a quick overview of the third quarter: Revenue in the quarter came in about as expected at $4.5 billion, flat sequentially and a decrease of 14% year-over-year. Analog revenue declined 16%, Embedded Processing grew 8%, and our Other segment declined 32% from the year-ago quarter. Now I’ll provide some insight into our third quarter revenue by market. During the quarter, automotive growth continued and industrial weakness broadened.

Similar to last quarter, I’ll focus on sequential performance, as it is more informative at this time. First, the industrial market was down mid-single digits, with weakness broadening across nearly all sectors. The automotive market continued to grow and was up mid-single digits. Personal electronics was up about 20% off of a low base. And next, communications equipment was down upper teens. And finally, enterprise systems grew upper-single digits. Given where the market is right now, it is a good time to remind everyone of our plan and areas of strategic investment. First, our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive, remains high, and we are well positioned in these markets.

Second, our long-term 300 millimeter manufacturing roadmap provides our customers with geopolitically dependable capacity. To support these buildouts and enable future growth, we continue to expect associated capital expenditures to be about $5 billion per year through 2026. In addition, we made good progress on our inventory replenishment, consistent with our long-term objectives to support growth and provide high levels of customer service. Rafael will now review profitability, capital management and our outlook. Rafael?

Rafael Lizardi: Thanks Dave, and good afternoon everyone. Third quarter revenue was $4.5 billion, down 14% from a year ago. Gross profit in the quarter was $2.8 billion, or 62% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with planned capacity expansion and reduced factory loadings. As a reminder, LFAB-related charges transitioned to cost of revenue in the fourth quarter of 2022. Gross profit margin decreased 690 basis points. Operating expenses in the quarter were $923 million, up 7% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion, or 20% of revenue. Operating profit was $1.9 billion in the quarter, or 42% of revenue, and was down 29% from the year-ago quarter.

Net income in the third quarter was $1.7 billion, or $1.85 per share. Earnings per share included a $0.5 benefit for items that were not in our original guidance. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.9 billion in the quarter and $6.5 billion on a trailing 12-month basis. Capital expenditures were $1.5 billion in the quarter and $4.9 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.6 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $50 million of our stock. In September, we announced we would increase our dividend by 5%, marking our 20th consecutive year of dividend increases. This action reflects our continued commitment to return free cash flow to our owners over time.

In total, we have returned $5.6 billion in the past 12 months. Our balance sheet remains strong with $8.9 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%. Inventory at the end of the quarter was $3.9 billion, and days were 205, down two days sequentially. Inventory was up $179 million in the third quarter, less than half the increase versus the prior quarter, as we near our desired inventory levels. Therefore, we began to lower factory starts in the third quarter, which results in additional charges to the income statement. This impact is comprehended in our outlook. For the fourth quarter we expect TI revenue in the range of $3.93 billion to $4.27 billion and earnings per share to be in the range of $1.35 to $1.57 as we continue to operate in a weak environment.

Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%. As you are looking at your models for 2024, based on current tax law, we would expect our effective tax rate to remain about what it is in 2023. 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. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term. With that, let me turn it back to Dave.

Dave Pahl: 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 an additional follow-up. Operator?

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.

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Q&A Session

Stacy Rasgon: Hi guys, thanks for taking my questions. My first one, I did want to ask about gross margins. So I mean depending on what I assume for OpEx next quarter, I’m getting something like 250 basis points of compression maybe more. I know you talked a little bit about how some of that is the impact of utilization. Can you give us some feeling for, I guess, like the magnitude of the different drivers’ utilization, lower revenue depreciation, pricing, and how we ought to be thinking about that trajectory as we get into the next year? Is there more to go, I guess, is what I’m asking.

Rafael Lizardi: Yes. Thanks, Stacy. Let me try to help you with that. Of course, for the forecast, we give a range of revenue and a range of NPS, not the pieces. But let me go through some of what I said for third quarter, which applies for fourth quarter and beyond. So for third quarter, like I said in the preferred remarks, in third quarter gross profit decreased primarily due to revenue, so that’s the first driver, then to a lesser extent higher manufacturing costs associated with planned capacity expansion, namely depreciation is the main one there, and reduce the factory loadings and that’s the underutilization component. Then as I also said in the prepared remarks, inventory, which is the other side of the coin, as we near desired levels of inventory we will begin lowering factory starts in the third quarter.

So there was an impact in third quarter due to that on the income statement. There will be a bigger impact in fourth quarter due to that. Beyond that, we’re not forecasting, but of course that will depend on revenue expectations well into next year. Do you have a follow-up?

Stacy Rasgon: I do. Thanks. So you gave us a little color on the end market behavior in Q3. Can you give us some thoughts on, at least even qualitatively, what to expect by end market into Q4? And particularly for auto, it sounds like auto in Q3 was so strong. Do you still see that strength continuing in the Q4 in the year end?

Dave Pahl: Yes, Stacy, I’ll take that. When you look at the guidance, it would suggest and we believe that we continue to operate in a weak environment in general. And if there was something significant that was changing from one quarter to the next as our typical practice, we highlight that and we just don’t have anything to specifically call out for — into fourth quarter. So thanks and we’ll go to the next caller please.

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

Timothy Arcuri: Thanks a lot. Dave, I also had a question on autos. It sounds like it’s holding in there despite this broadening strike. And I guess the question is, are more of your customers on consignment in that business or is the split in autos about the same as that, two-third, one-third versus the rest of the company? And I ask because I’m wondering sort of what you’re seeing on the Disti side that you would sell into autos. Do you see bookings at least, weakening that would be more consistent with what we’re seeing in terms of this strike and some of the weak macro numbers that we see?

Dave Pahl: Sure. Yes. And as we mentioned in the prepared remarks, it was up, auto was up mid-single digits sequentially and it was up 20% when you look year-on-year. So obviously that growth had continued. In general, I would say that a market like automotive and personal electronics will have larger customers. Those larger customers tend to be biased to more consignment. So we would have that probably more in automotive than if I contrast it to a market perhaps like industrial. But overall, as you know, we’ve moved to having closer direct relationships with customers, which would include the customers that we have in automotive. And I think we service pretty close to 1,000 or so different automotive OEMs, so there is quite a bit of broadness in who we serve there. You have a follow on, Tim?

Timothy Arcuri: I do, Dave. Yes. So what would it take to — for you to think about cutting CapEx? And I ask because the plan was put into place when revenue was quite a bit higher than where it is today. Is there kind of a line in the sand for revenue where you would reconsider the plan? I know you’ve actually increased the plan. Well, revenues continue to weaken, but is there some like tree around, is there some — if it weakens to this point, you would consider cutting CapEx. Just wondering any comments there. Thanks.

Dave Pahl: Yes, let me comment on that. We’re very pleased with the progress on our manufacturing expansion. They will provide geopolitically dependable capacity to support customer growth for the coming decade. And as you know, semiconductor content continues to increase. And to provide us the ability to grow at that 10% growth rate that we talked about at the last capital management call, if the market requires that, we’ll continue to make those investments. So we continue to expect $5 billion of CapEx per year in 2023, 2024, 2025, and 2026. So you should count on that. Let me also give everyone, as a reminder, these CapEx numbers are gross, meaning they do not include benefits from the ITC or grants from the CHIPs Act. So we’re actively working through the grant application process with the CHIPS program office, which we believe will be meaningful to our manufacturing operations in Texas and Utah and will help support semiconductor growth for decades to come.

And funding from the CHIPS Act grants was comprehended in our decision making for these investments.

Timothy Arcuri: Great.

Dave Pahl: Thank you, Tim. We’ll go to the next caller, please.

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

Ross Seymore: Hi, guys. Thanks for asking a question. In the third quarter I think it was the first time in a few years that you guys just came in at the midpoint of your guidance. Usually you beat it by 2%, 3%, 4%, something like that. So I guess my question is, anything strange in the linearity in the quarter, either by end market, just aggregate bookings, any color on that you could provide?

Dave Pahl: Nothing strange. Ross, I’d say that the revenue built as we went through the quarter. And I’d say just in general, it’s reflective of a weak environment that we’re operating in, which is obvious from the guidance that we’re giving. Do you have a follow on?

Ross Seymore: I do. On the end market side of things, you said automotive was up about 20% year-over-year. I know oftentimes you go between giving sequentials or year-over-years, but could you give us year-over-years by the end markets, please?

Dave Pahl: Certainly, certainly, yes. So industrial market was down mid-teens. I mentioned automotive was up about 20%. Personal electronics was down about 30%. Comms equipment was down about 50%. And enterprise system was down about 40%. So I think consistent with that weaker environment that we talked about. So thank you, Ross. We’ll go to the next caller, please.

Operator: Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.