Texas Instruments Incorporated (NASDAQ:TXN) Q1 2024 Earnings Call Transcript

Texas Instruments Incorporated (NASDAQ:TXN) Q1 2024 Earnings Call Transcript April 23, 2024

Texas Instruments Incorporated beats earnings expectations. Reported EPS is $1.21, expectations were $1.06. TXN 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 First Quarter 2024 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 will provide insight into first 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 the second quarter of 2024. Starting with a quick overview of the quarter: Revenue in the quarter came in about as expected at $3.7 billion, a decrease of 10% sequentially and 16% year-over-year. Analog revenue declined 14% year-over-year, and Embedded Processing declined 22%. Our Other segment declined 33% from the year-ago quarter. Now I’ll provide some insight into our first quarter revenue by end-market.

Revenue declined sequentially across all of our end-markets. Our results reflect the current environment, as customers continue to reduce their inventory levels. Similar to last quarter, I’ll focus on sequential performance, as it is more informative at this time. First, the industrial market was down upper-single digits. The automotive market was down mid-single digits. Personal electronics was down mid-teens. Next, communications equipment was down about 25%. And lastly, enterprise systems was down mid-teens. 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 $3.7 billion. Gross profit in the quarter was $2.1 billion, or 57% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and to a lesser extent, higher manufacturing costs associated with reduced factory loadings and our planned capacity expansions. Gross profit margin decreased 820 basis points. Operating expenses in the quarter were $933 million, flat from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion, or 22% of revenue. Operating profit was $1.3 billion in the quarter, or 35% of revenue, and was down 34% from the year-ago quarter. Net income in the first quarter was $1.1 billion or $1.20 per share.

Earnings per share included a $0.10 benefit that was not in our original guidance, primarily due to the sale of a property. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1 billion in the quarter and $6.3 billion on a trailing 12-month basis. Capital expenditures were $1.2 billion in the quarter and $5.3 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $940 million. In the quarter, we paid $1.2 billion in dividends, and in the past 12 months, we returned $4.8 billion to our owners. Our balance sheet remains strong with $10.4 billion of cash and short-term investments at the end of the first quarter. In first quarter, we issued $3 billion in debt.

Total debt outstanding is now $14.3 billion with a weighted average coupon of 3.8%. Inventory at the end of the quarter was $4.1 billion, up $84 million from the prior quarter and days were 235, up 16 days sequentially. For the second quarter we expect TI revenue in the range of $3.65 billion to $3.95 billion and earnings per share to be in the range of $1.05 to $1.25. We continue to expect our 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 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.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Timothy Arcuri with UBS. Please proceed with your question.

Timothy Arcuri: Thanks a lot. Rafael, I’m wondering if you can give us an update on any CHIPS Act money that you may have gotten. I know, basically all the money for the advanced nodes has been allocated and has been announced, but there is still like $9 billion outstanding for mature nodes. So can you kind of talk about that for us?

Rafael Lizardi: Yes. No, happy to do it. First let me address the grants, which I think is what you’re referring to. On that, frankly we don’t have an update to give. We’re still going through that process. Submitted our application late last year, we are working through the details with the CHIPS Program Office. As we said before, we believe our investments in manufacturing in both Texas and Utah are well-positioned with the objectives of the CHIPS Program Office. Now let me give you an update on the ITC, the Investment Tax Credit. To-date, we have accrued about $1.5 billion on that credit, and based on the recently released regulations, we will be receiving the ITC cash benefit throughout the year in 2024 and beyond. And starting next quarter, so in second quarter, we expect to receive about $300 million and a total of $1 billion for all of 2024. Okay, do you have a follow-up?

Timothy Arcuri: I do, yeah. I wanted to ask about factory loadings and sort of where you think inventory goes for June. If I look at your guidance, the gross margins implied pretty flat ex-depreciation. So it seems like loadings have sort of leveled-off in June. Is that right? And kind of what do you expect for inventory in June? It seems like it should start to come down a tick maybe in June. Thanks.

Rafael Lizardi: Yes. Sure. Of course we give a guidance. We give a range on revenue, we give a range on EPS, and then 90 days from now, we’ll discuss that more or less. But for now, I’ll tell you that in first quarter, we adjusted factory loadings, as we neared our desired inventory levels. And as we said during the prepared remarks, we grew inventory about [$80-some million] (ph). And then for second quarter, we are going to adjust those loadings depending on future demand.

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

Operator: Our next question is from Stacy Rasgon with Bernstein Research. Please proceed with your question.

Stacy Rasgon: Hi guys. Thanks for taking my question. I wanted to follow up on that. If and when revenues begin to recover, how do we think about what that would imply for your factory utilization given your current inventory position, as well as additional capacity coming online, which I guess sort of just naturally gives a downward bias to utilization anyways? Like I guess, how long would you need to take utilizations up? Or how much revenue growth would you need to start taking utilizations up given your positioning on inventories and capacity additions?

Rafael Lizardi: Yes. So Stacy, it’s a good question, but it’s a complex question and is — at the end of the day, it is going to depend. It’s going to depend on a number of factors, what kind of revenue profile you – we are faced with and not just in one quarters or two quarters but really over a longer horizon. Maybe the best thing I can tell you is don’t expect a significant or even any drain on inventory because just given our business model and how we want to run the company, keeping lead time short and also the upside potential that we have with having this inventory and the capacity in place, is so much higher than the downside risk. So hopefully, that gives you some — some good insight into how we’re thinking. Do you have a follow-up?

Stacy Rasgon: I do. Thanks. I was wondering if you could talk a little bit about pricing. So I think last quarter, you’d suggested that pricing was sort of resuming historical trends, which — I think, it suggests it was down — I think, it was low to mid-single digits. Is there any update on what you are seeing in terms of the pricing environment? Is that still the environment that we are in? Are things better — are things worse? Like where do you see that going as we go forward?

Dave Pahl: Yes. Stacy, I’ll comment on that. And as I said last quarter, really we began seeing things change mid-last year — in the back half of last year as we began discussions with customers for their demand in the following year and out in time, whatever those pricing windows would open up. And those are really just going back to what we’ve seen in the last 10 years, 20 years kind of pre-pandemic. So describe it roughly in the low to very low single-digit declines over time. And I would say, just generally that’s what we are continuing to see.

Rafael Lizardi: Let me add one more thing, Stacy. I want to give you a bonus answer. You always ask about OpEx. So you are not asking, but I’m going to give you OpEx. Remember that second quarter has a full three months of raises whereas first quarter only had two months of raises. So it’s something for your modeling.

Stacy Rasgon: Thank you.

Dave Pahl: Thank you Stacy. We will go to the next caller please.

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