Texas Instruments Incorporated (NASDAQ:TXN) Q4 2023 Earnings Call Transcript

Texas Instruments Incorporated (NASDAQ:TXN) Q4 2023 Earnings Call Transcript January 23, 2024

Texas Instruments Incorporated beats earnings expectations. Reported EPS is $1.49, expectations were $1.46. Texas Instruments Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Dave Pahl: Welcome to the Texas Instruments Fourth 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.

I’d like to provide some information that’s important for your calendars. Next week, on Thursday, February 1, at 10 a.m. Central Time, we’ll have our Capital Management Call. Similar to what we’ve done in the past, Rafael and I will summarize our progress and provide some insight into our business and our approach to capital allocation as we prepare for the opportunity ahead. Moving on, today we’ll provide the following updates. First, I’ll start with a quick overview of the quarter. Next I’ll provide insight into fourth quarter revenue results with some details of what we’re seeing with respect to our end markets. I’ll then provide an annual summary of revenue breakout by end market. And lastly, Rafael will cover the financial results and our guidance for the first quarter of 2024.

Starting with a quick overview of the quarter. Revenue is $4.1 billion, a decrease of 10% sequentially and 13% from the same quarter a year ago. Analog revenue declined 12% year-over-year and embedded processing declined 10%. Our other segment declined 25% from the year-go-quarter. Now I’ll provide some insight into our fourth quarter revenue by end market. Our results reflect increasing weakness in industrial and a sequential decline in automotive as customers work to reduce their inventory levels. Similar to last quarter, I’ll focus on sequential performance as it’s more informative at this time. First, the industrial market was down mid-teens as we saw that increasing weakness. The automotive market was down mid-single-digits after 3.5 years of very strong growth.

Personal electronics was about flat. And next, communications equipment was down low-single-digits. And lastly, enterprise systems grew low single digits. In addition, as we do at the end of each calendar year, I’ll describe our revenue by end market. As a percentage of revenue for 2023, industrial was 40%; automotive was 34%; personal electronics 15%; communications equipment 5%; enterprise systems 4%; and other was 2%. In 2023, industrial and automotive combined made up 74% of TI’s revenue, up about 9 percentage points from 2022, and up from 42% in 2013. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive. Our industrial and automotive customers are increasingly turning to analog and embedded technologies to make their end products more reliable, more affordable, and lower in power.

These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth, compared to our other markets. Rafael will now review profitability, capital management, and our outlook.

Rafael Lizardi: Thanks Dave, and good afternoon everyone. As Dave mentioned fourth quarter revenue was $4.1 billion. Gross profit in the quarter was $2.4 billion or 60% of revenue. From a year ago, gross profit decreased primarily due to lower revenue, higher manufacturing costs associated with planned capacity expansions, and reduced factory loadings. Gross profit margin decreased 650 basis points. Operating expenses in the quarter were $898 million, up 4% from a year ago and about as expected. On a trailing 12-month basis operating expenses were $3.7 billion or 21% of revenue. Operating profit was $1.5 billion in the quarter or 38% of revenue. Operating profit was down 30% from the year-ago quarter. Net income in the fourth quarter was $1.4 billion or $1.49 per share.

Earnings per share included a $0.03 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. Capital expenditures were $1.1 billion in the quarter. In the quarter, we paid $1.2 billion in dividends and repurchased $65 million of our stock. We also increased our dividend per share by 5% in the fourth quarter, marking our 20th consecutive year of dividend increases. In total, we have returned $4.9 billion in the past 12-months to owners. Our balance sheet remains strong with $8.6 billion of cash and short-term investments at the end of the fourth quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%.

Inventory at the end of the quarter was $4 billion, up $91 million from the prior quarter and days were 219, up 14 days sequentially. Now let’s look at some of these results for the year. In 2023 cash flow from operations was $6.4 billion. Capital expenditures were $5.1 billion. Free cash flow for 2023 was $1.3 billion or 8% of revenue. Our free cash flow reflects the strength of our business model, as well as our decisions to invest in 300 millimeter manufacturing assets and Inventory to support our overall objective to maximize long-term free cash flow per share, which we believe is the primary driver of long-term value. Turning to our outlook for the first quarter, we expect TI revenue in the range of $3.45 billion to $3.75 billion and earnings per share to be in the range of $0.96 to $1.16.

We now expect our 2024 effective tax rate to be about 13%. 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 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?

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Q&A Session

Operator: Thank you. And at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question. My first question is on your Q1 outlook, I think at the midpoint you’re guiding revenue down 12% or so which is you know clearly well below what we consider to be typical seasonality. Any end markets or regions or device types that you can call out that’s driving that view? Or is it broad-based weakness across all applications?

Dave Pahl: Yes, I’ll take that, Toshiya. Thanks for the question. In fourth quarter, we did see weakness in industrial, increasing weakness there. We saw the sequential decline in automotive. And as the guide would suggest, we believe that we’ll just continue to operate in a weak environment and one where customers are continuing to rebalance their inventories overall. So, but nothing specific to comment on. You have a follow-up?

Toshiya Hari: I do, thanks Dave. Just on gross margins, I think you guys did a good job in explaining what’s driving it. Still, I’m a little bit surprised with the year-over-year, kind of, drop through, if you will? Gross margin dollars essentially dropping as much as your revenue. I understand the underutilization, the increase in depreciation. But what are you seeing from a pricing perspective? Is it more pricing than volume that’s driving the revenue decline and the decline in gross margins? Or if you can kind of speak to your strategy from a pricing perspective, what you’re seeing in the marketplace? That would be helpful. Thank you.

Dave Pahl: Yes, Toshiya and I’ll remind everyone else, I know you know the industry well, but you know pricing just doesn’t move quickly in our markets overall and nor is it the primary reason why a customer chooses our products. So and as we’ve mentioned before our pricing strategy hasn’t changed and of course, we’re always regularly monitoring the market and pricing our products appropriately. And as we’ve talked about now for I think a couple of quarters, as we expected supply and demand to come more in balance, that we would expect pricing to revert back to how it’s behaved over the last 10 or 20 years. And over the last six months or so, that’s what we’ve seen. So somewhat of a low-single-digit decline is what we’re expecting out in time and wouldn’t describe that as unusual. Thanks for the question.

Toshiya Hari: Great. Thank you.

Dave Pahl: We’ll go to the next caller please. Thanks.

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

Timothy Arcuri: Thanks a lot. I wanted to ask about factory loadings. Dave, gross margin was down maybe 250 basis points. It’s kind of implied to be down 250 basis points. Even if I strip out depreciation, it’s down about 100 basis points for March. So it seems like utilization is coming down a bit. And CapEx also came in a little bit lower too for December. So the first question on that is, can you talk about loadings? Is March going to be the bottom in loadings and we should see inventory begin to come down also in March? And then I had a follow-up on that too.

Rafael Lizardi: Yes, so, no, thanks for the question. So step back in third quarter, at the end of third quarter, we talked about this. As we have near our inventory levels, then we have adjusted our factory loadings accordingly. So in third quarter, we did some of that and that had an impact on gross margins on underutilization. Fourth quarter adjustment was bigger than third quarter. And now going into first quarter, we’re taking that adjustment further. So the first quarter adjustment on underutilization will be bigger. But we continue to have an upward bias on inventory as we continue to build the right buffers for the right parts to be ready on the other side of the cycle. So, follow-up?

Timothy Arcuri: I did, yes. So then on CapEx, can you talk about that? It was a little lower. It’s running actually quite a bit below the $5 billion run right now. So are you actually cutting CapEx now since you’re bringing down factory loading? Thanks.

Rafael Lizardi: No, we’re not. In fact, CapEx came in as expected $5.1 billion, and we’ve been talking about $5 billion per year. So it was right on target. And you should expect, and we expect, to continue running at about $5 billion per year through 2026 as we complete the investment plans that we’ve been talking about.

Dave Pahl: Great. Thanks, Tim. We’ll go to the next caller, please.

Operator: Our next question comes from the line of Chris Danely with Citibank. Please proceed with your question.

Chris Danely: Hey, thanks guys. Just a follow-up on the utilization rates. So is the target, I guess, inventory level. Has that not changed for you guys? And so do you expect utilization rates to bottom in Q1? Or do you think you might have some more inventory adjustments going into Q2 for TI?