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 letting me ask a question. I want to follow up Ambrish’s and talk about gross margin, but on a sequential basis, the gross margin held in better than I expected. It did go down sequentially, but not even as much as it would have if you just took the LFAB expense out of OpEx and put it into COGS. So were there any unique offsets to that? And probably more importantly, any unique offsets we need to consider as we think going forward? And I know, Rafael, you don’t guide to gross margin specifically.
Rafael Lizardi: Yes. No. I would tell you, it was similar to Ambrish’s question, high level, think of the model we’ve given you is 70% to 75% fall-through. But that in any one quarter, even if it’s on a year-on-year basis, but especially sequentially on relatively small changes in revenue, that’s not going to work very precisely, right? So but over a long enough time, that works well. As we just talked about, you had the depreciation. And then in this particular quarter, you have to adjust for the cost that were in restructuring that were for Lehi that now go to primarily to cost of revenue. Now there are other factors that are going to play, for example, and I mentioned it to Ambrish a second ago, but mix is a factor. So you get a quarter with a lot more industrial automotive and less personal electronics, that plays into it.
And the final one, depreciation doesn’t necessarily immediately flow through the P&L because it needs to be matched to inventory. So that generally flows through inventory first and then so that sometimes delays the impact of — the true impact of depreciation to the gross margin. But clearly, depreciation, as I mentioned earlier, it is increasing, so it’s coming. So over a long enough time, multiple quarters, certain years, you need to factor it as we have talked about, right, the fall-through and the increase in depreciation.
Dave Pahl: Do you have follow-up, Ross?
Ross Seymore: Yeah, I do. I’ll just pivot to round up that CHIPS Act question from earlier. Rafael, could you give us an update on what the cumulative accruals are for that? And probably equally importantly, when does that likely flow through the income statement?
Rafael Lizardi: Yes. So stepping back, CHIPS Act has an investment tax credit, ITC, and a grant. There’s two components that have the potential to benefit us. If you go to our capital management document, we talked about those, and we said we are planning on the benefits from the ITC, and we’re accruing those benefits. On the grant, we’re not because the grants are highly discretionary. It’s up to the Department of Commerce. So on those — we’re not counting on those, but we’re applying to those grants, and we’re in the process of submitting those applications and we’re asking for everything we can get there. But right now counting on nothing. Now let me just focus on the ITC, which is the one that we are booking on the balance sheet.
This last quarter, we accrued another $200 million benefit. So that’s on top of the roughly $400 million last year. So now we have a total benefit that we have accrued of $600 million. That number will continue increasing for the rest of the year, and that’s a 25% of qualifying assets in the United States. So we’ll continue to increase that number over the year. And then what happens is we benefit in a couple of ways. One, the P&L that accrual comes out of the PP&E, property plant equipment basis. So now you have a lower basis to depreciate. So their depreciation is going to be lower going forward. We’re already getting a small benefit of that this year, but it’s in a couple of million dollars, but that will grow over time as those — that equipment goes into — is placed in service and now they appreciate at a lower rate.
More importantly, the cash benefit associated with that will get the following year. So anything that we accrue this year and — in ’22 and is placed in service in 2023, we will get that cash at the end of 2024, okay? And we’re — that’s what we’re planning on. I think that answers your question fairly well. Okay.
Dave Pahl: Thank you, Ross. We’ll go to the next caller, please.
Operator: Our next question comes from the line of Chris Danely with Citi. Please proceed with your question.
Christopher Danely: Hey, thanks, guys. Just some color on the inventory correction you’re seeing out there. So do you think that we’re through the worst of it? Maybe talk about where it’s, I guess, lower or where it’s higher? Do you think that it’s getting better at this point or getting worse? Or can we not tell?
Rafael Lizardi: Yes. I think Chris is one of the previous questions, somewhat similar, right? I think you have to look at it by market. Certainly, in personal electronics, being in the fourth quarter of the weakness would indicate you’re probably closer to the bottom. There’s no guarantee of that, but you’re probably closer than in other markets, right? So that just isn’t something that we try to predict. And what we do use to kind of guide how we think about things and where we make investments is that grey line on the chart that we’ve talked about. That’s really what’s important is being ready for the longer-term growth. And that’s where our focus is. Do you have a follow-on?
Christopher Danely: Yes. Can you just talk about the linearity of bookings during the quarter and how your backlog looks now versus, I guess, three months ago? And what does that imply for the second half of the year?
Rafael Lizardi: Yes. So our linearity was stronger in the last month of the quarter. And in backlog, I would say, as you know, we’ve got sales flowing through ti.com. We’ve got sales that are on consignment where we get direct feeds and we don’t actually carry a backlog. So we just don’t put a lot of emphasis on the backlog. Overall, I think compared to many of our peers. But we’ve got really good visibility because of our close relationships with customers. The fact that we’re carrying, we’re owning and controlling that inventory more directly. And so actually we’ve got — we believe that gives us really great visibility on demand. So thank you, Chris. We’ll go to next caller.
Operator: Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.
Joseph Moore: Great. Thank you, guys. I know you were pretty early to signal some of the headwinds that came in China from the COVID lockdowns. What are you seeing now as the economies re-emerge? Are you starting to see that as potential strength going into the rest of the year?
Rafael Lizardi: Yes, Joe, I would say that we continue to believe the best way to look at our revenue and the changes in revenue is more easily understood by looking at end markets, but there wasn’t any significant change that we saw inside of China this last quarter. Do you have a follow-on?
Joseph Moore: Sure. And then the down 30% in personal electronics and in enterprise both. Does that reflect any kind of share shift as — I know that you do have people multi-sourcing more in areas like that in phones and PCs and servers and whatnot. Are you seeing that as any kind of a headwind? Or do you think that’s just what the market was down in the first quarter?
Rafael Lizardi: Yes. I think that as we’ve talked about before, sure, doesn’t move quickly. We’re in a position as we’re building inventory to support higher demand if it was to materialize. So again we think that’s mostly reflective of what’s going on in the market. I think that’s consistent with what you see from customers and other data that you can see that’s out there. Thank you, Joe. And I believe we’ve got time for one more caller, please.
Operator: Our next question comes from C.J. Muse with Evercore ISI. Please proceed with your question.
C.J. Muse: Yeah, good afternoon. Thank you for taking the question. I just wanted to clarify and confirm some of the statements from earlier. So your gross margins came a little better than what we thought for March. And so just curious, are you still on track for that $1.5 billion depreciation for the year? And were there any changes in kind of the timing of installation of equipment? Are you still seeing kind of a tight supply there?
