Texas Instruments Incorporated (NASDAQ:TXN) Q4 2022 Earnings Call Transcript

Texas Instruments Incorporated (NASDAQ:TXN) Q4 2022 Earnings Call Transcript January 24, 2023

Dave Pahl: Welcome to the Texas Instruments’ Fourth Quarter 2022 Earnings Release 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.

First, you likely saw last week we announced that Haviv Ilan will become President and CEO on April 1st and that Rich Templeton will continue as our Chairman. I’m sure you’ll want to join me in congratulating both of them. Secondly, let me provide some information that’s important to your calendars. Next week on Thursday, February 2nd, at 10:00 a.m. Central time, we will have our capital management call. Similar to what we’ve done in the past, Rafael and I will summarize our progress and provide some insights into our business and our approach to capital allocation. This will include an update of our 300 millimeter capacity expansion plans to support the increasing confidence that we have in our long-term growth. 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 are seeing with respect to our customers and markets. I will then provide an annual summary of our revenue breakout by end market. And lastly, Rafael will cover the financial results and our guidance for first quarter of 2023. Starting with a quick overview. Revenue was $4.7 billion, a decrease of 11% sequentially and 3% from the same quarter a year ago. As expected, our results reflect weaker demand in all end markets with the exception of automotive. A component of the weaker demand was customers working to reduce their inventories. In first quarter, we expect a weaker than seasonal decline, with the exception of automotive, as we believe customers will continue to reduce inventory levels.

Turning to our segments, fourth quarter Analog revenue declined 5% year-over-year and Embedded Processing grew 10%. Our Other segment declined 11% from the year-ago quarter. Now I’ll provide some insight into our fourth quarter revenue by end market. I’ll focus on sequential performance again this quarter, as it is more informative at this time. First, the industrial market was down about 10%. The automotive market was up mid-single digits with strength in most sectors. Personal electronics was down mid-teens with broad-based weakness. Next, communications equipment was down about 20%, and finally, enterprise systems was down about 20%. Lastly, as we do at the end of each calendar year, I’ll describe our revenue by end market for 2022. We break our end markets into six categories that are grouped by their life cycles and market characteristics.

The six end markets are industrial; automotive; personal electronics, which includes products such as mobile phones, PCs, tablets and TVs; communications equipment; enterprise systems; and other, which is primarily calculators. As a percentage of revenue for 2022, industrial was 40%, automotive about 25%, personal electronics 20%, communications equipment 7%, enterprise systems 6%, and other was 2%. In 2022, industrial and automotive combined made up 65% of TI’s revenue, up about three percentage points from 2021 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 smarter, safer, more connected and more efficient.

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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?

Rafael Lizardi: Thanks, Dave. And good afternoon everyone. As Dave mentioned, fourth quarter revenue was $4.7 billion. Gross profit in the quarter was $3.1 billion, or 66% of revenue. From a year ago, gross profit decreased primarily due to lower revenue, increased capital expenditures and the transition of LFAB-related charges to cost of revenue. Gross profit margin decreased 320 basis points. Operating expenses in the quarter were $863 million, up 9% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.4 billion, or 17% of revenue. Restructuring charges were $48 million in the fourth quarter and were associated with the LFAB factory preproduction costs. As production started at the beginning of December, these costs then transitioned to cost of revenue, where they will be reflected moving forward.

In addition, depreciation has begun on these assets. Operating profit was $2.2 billion in the quarter, or 47% of revenue. Operating profit was down 13% from the year-ago quarter. Net income in the fourth quarter was $2.0 billion, or $2.13 per share. Earnings per share included a $0.11 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 $2.0 billion in the quarter. Capital expenditures were $1.0 billion in the quarter. Free cash flow on a trailing 12-month basis was $5.9 billion, down 6% from a year ago. In the quarter, we paid $1.1 billion in dividends and repurchased $848 million of our stock. In total, we have returned $7.9 billion in the past 12 months to owners.

We also increased our dividend per share by 8% in the fourth quarter, marking our 19th year of dividend increases. Our balance sheet remains strong with $9.1 billion of cash and short-term investments at the end of the fourth quarter. In the quarter we issued $800 million in debt. Total debt outstanding was $8.8 billion with a weighted average coupon of 2.93%. Inventory was up $353 million from the prior quarter to $2.8 billion, and days were 157, up 24 days sequentially. Next, to summarize the benefits of the CHIPS Act, we accrued about $350 million on our balance sheet under long-term assets in fourth quarter, in addition to the $50 million accrued in third quarter. These accruals are due to the 25% investment tax credit for investments in our U.S. factories.

This will eventually flow through our income statement as lower depreciation, and we will receive the associated cash benefit in the future. Now let’s look at some of these results for the year. In 2022, cash flow from operations was $8.7 billion. Capital expenditures were $2.8 billion, or 14% of revenue. Free cash flow for 2022 was $5.9 billion, or 30% of revenue. Our cash flow reflects the strength of our business model. As we have said, we believe that growth of free cash flow per share is the primary driver of long-term value. Turning to our outlook for the first 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 $1.64 to $1.90. We now expect our 2023 annual 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 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 will provide you an opportunity for an additional follow-up. Operator?

Operator: Thank you. We’ll first hear from Chris Caso of Credit Suisse.

Chris Caso: Yes, thank you. Good evening. I guess, the first question is, if you could just maybe characterize what you’re seeing going to Q1, you’re talking about that being worse than seasonal. Is that also broadly based in terms of the decline as you’ve seen in Q4? And I know you don’t guide by segment, but any kind of color you could provide by segment as to what you’re seeing and the extent to which customers are burning inventory as you know into the first quarter?

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Q&A Session

Dave Pahl: Yes, Chris, thanks for that question. I’d say that the trends that we saw in the fourth quarter will continue into first, meaning that we expect our end markets to decline with the exception of automotive. So automotive is continuing to be resilient. And we do believe, as you just said, that the customers are continuing to work to get their inventories lower. So you have a follow-on?

Chris Caso: I do. Thank you. I wonder if you could speak about the pace of depreciation expenses as you go through next year. You spoke about RFAB and I know it started production and it’s hitting depreciation now. Is there additional incremental depreciation coming from RFAB as you go through the year. What happens to LFAB as you, I guess, maybe the timing of that when that starts production and start hitting depreciation? And then how should we think about some of the benefits that come from CHIPS Act that tend to decrease depreciation over time. I’m sure you’re going to speak about that on the Capital Day coming up as well.

Rafael Lizardi: Yes. Let me take that, and we’re going to go through all of that, both the CapEx, depreciation and ITC and the CHIPS Act in great detail next week. For now, what I would tell you is, as you said, RFAB2 is in production, Lehi is in production. So both of those are running that cost now is in cost of revenue, and they’re both depreciating and that that is a function of the €“ when the equipment is placed in service, it starts depreciating, right? So as both of those ramps, the equipment goes in service starts depreciating. But big picture, what we told you last year on depreciation was that it would ramp roughly linearly to about $2.5 billion in 2025. And again, we’ll give you an update on that next week, but I do want to say just as I said 90 days ago, that since we talked about this last year, our confidence surrounding our long-term growth prospects have only grown.

And if you alluded to, we’ve had the CHIPS Act also since last year that, that legislation pass in August. So we’ll €“ next week, we’ll give you the €“ all the puts and takes between those trends and we’ll paint a clearer picture at that point.

Chris Caso: Yeah.

Dave Pahl: And maybe just add a small piece that linear ramp will go from about $1 billion a depreciation that we had this year at about $0.5 billion a year till we get to $2.5 billion, so just kind of doing the math for you. So thanks, Chris, and we’ll go to the next caller, please.

Operator: Next, we’ll hear from Chris Danely of Citi.

Chris Danely: All right. It’s the Chris Brothers. Hey guys, so Dave, I believe you said that your confidence in the long-term growth rate has only increased. Maybe just share with us what you’ve seen in the last three months to six months that’s giving you that confidence. Do you expect the, I guess non-auto markets to bounce back this year? And conversely, would you expect auto to cool off or to remain strong all year?

Dave Pahl: Yes. I €“ and I €“ again, that’s €“ thanks for the question, Chris. It €“ the longer-term growth rates are really we’re speaking to how things are going to grow over the next three and five and 10 years. And that higher confidence comes from the higher semiconductor content growth that we’re seeing particularly in industrial and automotive. And the fact that that those two markets now make up two-thirds of our revenue. So just as that structurally grows faster than the rest of the market, we’re convinced more than ever that that will continue to drive our top line and also the products that we have inside of those markets. And I’d say also the strong customer response we’re getting to our geopolitically dependable capacity.