Texas Instruments Incorporated (NASDAQ:TXN) Q1 2023 Earnings Call Transcript

Texas Instruments Incorporated (NASDAQ:TXN) Q1 2023 Earnings Call Transcript April 25, 2023

Texas Instruments Incorporated beats earnings expectations. Reported EPS is $1.85, expectations were $1.78.

Dave Pahl: Welcome to the Texas Instruments’ First 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 some insight into first quarter’s revenue results with some details of what we’re seeing with respect to our end markets. Lastly, Rafael will cover the financial results and our guidance for the second quarter of 2023. Starting with a quick overview of the first quarter. Revenue in the quarter came in about as expected at $4.4 billion, a decrease of 6% sequentially and 11% year-over-year. Analog revenue declined, 14%, embedded processing grew 6% and our other segment declined 16% from the year ago quarter. As expected, our results reflect weaker demand in all end markets with the exception of automotive. As mentioned last quarter, a component of the weaker demand was inventory reductions by our customers, which we expect to continue in the second quarter.

Now, I’ll provide some insight into our first quarter revenue by market. Similar to last quarter, I’ll focus on sequential performance as it’s more informative at this time. First, the industrial market was about flat. The automotive market was up mid-single digits. Personal electronics declined about 30% as we continued to see broad based weakness. Next, communications equipment was down mid-teens and finally enterprise systems was down about 30%. Rafael will now review profitability, capital management and our outlook. Rafael?

Rafael Lizardi: Thanks, Dave, and good afternoon, everyone. As Dave mentioned, first quarter revenue was $4.4 billion, down 11% from a year ago. Gross profit in the quarter was $2.9 billion, or 65% of revenue. From a year ago, gross profit margin decreased 480 basis points. Operating expenses in the quarter were $929 million, up 14% from a year ago, and about as expected. On a trailing 12 month basis, operating expenses were $3.5 billion or 18% of revenue. Operating profit was $1.9 billion in the quarter, or 44% of revenue and was down 25% from a year ago quarter. Net income in the first quarter was $1.7 billion or $1.85 per share. Earnings per share included a $0.03 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 $1.2 billion in the quarter and $7.7 billion on a trailing 12 month basis. Capital expenditures were $982 million in the quarter and $3.3 billion over the last 12 months. Free cash flow on a trailing 12 month basis was $4.4 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $100 million of our stock. In total, we have returned $7.5 billion in the past 12 months. Our balance sheet remains strong with $9.5 billion of cash and short-term investments at the end of the first quarter. In the quarter, we issued $1.4 billion of debt. Total debt outstanding was $10.2 billion with a weighted average coupon of 3.2%. Inventory dollars were up $531 million from the prior to $3.3 billion and days were 195, up 38 days sequentially.

For the second quarter, we expect TI revenue in the range of $4.17 billion to $4.53 billion and earnings per share to be in the range of $1.62 to $1.88. Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%. 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 up the lines for questions. In order to provide as many of you as possible the 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: At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your questions.

Stacy Rasgon: Hi, guys. Thanks for taking my questions. For my first one, I just wanted to dig into CapEx and depreciation. So you did CapEx of $982 million in the quarter. I just, first, can you just clarify that’s the gross number without any of the tax credits? And I guess assuming that’s true, both the CapEx and the depreciation number in the quarter are running well below the run rate there or the annualized number that you would give at the capital management CapEx should have been about $5 billion for the year. Depreciation maybe $1.5 million. So am I right in assuming that implies a fairly substantial ramp into the back half and end of the year for both those metrics, CapEx and depreciation?

Rafael Lizardi: So thanks for the questions, Stacy. Good questions there. So it gives us a chance to clarify though. So first on CapEx, we’re pleased with the progress that we’ve made both in 2022 but also year-to-date, first quarter of this year. Everything’s in line with expectations as we shared at the call a couple of months ago, we expect CapEx to average $5 billion per year for the next four years. That’s just an average. So some years will be lower, especially at the beginning and other years will be higher. But our expectation continues to be $5 billion per year. Those numbers, that $5 billion is gross. And the $982 million, the one close to $1 billion that you just quoted for the quarter, that’s also gross. We are continuing to accrue for the CHIPS Act benefit.

I can tell you about that in a follow-up question if you like. But the CapEx numbers have been and will continue to be gross numbers. On the second part of your question on depreciation. So we told you that at the capital management call that depreciation will increase to about $2.5 billion on or around 2025. We expect this year to be below that linear trend. Okay. And that’s just the CapEx is coming in as expected, but it’s a function of other things. Essentially when you place the equipment in service and when it starts depreciation, the assumptions that we had on that versus how exactly how it’s playing out. You have a follow-up?

Stacy Rasgon: I do. Thanks. I’m going to let somebody else ask about the CHIPS Act accrual. I want to ask about inventories. So you’re at almost 200 days of inventory. And I think the top end of your target was 190 and you said you’d be comfortable above that. And so we’re kind of there. Are you done building inventory now, I guess, and if that’s the case, what happens to fab loadings, I guess, as we go into the end of the year? I’m assuming you’re running pretty full right now. Do those fab loadings need to come down, especially given the revenue trajectory and given inventories are sitting pretty close to 200 days?

Rafael Lizardi: So let me start with reminding everybody our objective for inventory. And you can go back to our capital management call. I believe slide seven. You look at the objective there is to maintain high levels of customer service, minimize obsolescence. We have a range there. It’s just meant to be informative and it’s 132 greater than 200. I just wanted to clarify that versus the number that you mentioned. Now, the more important thing is, you know, I refer you to slide 13 in that deck. And anybody who hasn’t seen that, you can download it from our website, go to slide 13. That shows you how we think about planning for the long-term. So through semiconductor, the ups and downs of the semiconductor cycle and that informs how we manage inventory, also informs how we are investing in CapEx. So we’re thinking through the cycles over the long-term, but certainly inventory is one of those things that we take that trend into account.

In the near term, we expect to have an upward bias on inventory as we prepare for long-term growth.

Dave Pahl: Thank you, Stacy. And we’ll go to the next caller please.

Operator: Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Vivek Arya: Thank you for the question. The first one is specific to industrial and automotive. If I heard you, Dave, I think you said industrial was flattish in Q1. I think it was down 10% in the last quarter. So seems like it’s starting to flatten out. But I just wanted to check if that’s the right conclusion. I think autos was up mid-single in both Q4 and I said and I thought you said in Q1 as well. So that also seems to be in the right direction. So the specific question is, as we look into Q2, how should we think about industrial and auto? Can they stay at least kind of flattish or do you think that they are also exposed to the macro weakness?

Dave Pahl: Yeah. So first confirm that you heard correctly. Industrial market was about flat in the first quarter and automotive was up mid-single digits. And as you know our practice when we think about guidance by end market, we only provide color if there’s something that we need to highlight to explain what’s going on. You’ve seen us do that multiple times, whether it’s end markets or it’s regions or something specific that’s going on. So as you said, at the midpoint of our guidance, revenue is flat. And so when we look strategically at both of those markets, we’re very confident that they will continue to add semiconductor content per unit and be great growers for us. So you have a follow-on for that?