Texas Instruments Inc (TXN) — Q3 2020 Earnings Call Transcript

Thanks Dave and good afternoon, everyone. Third quarter revenue was $3.8 billion, up 1% from a year ago. Gross profit in the quarter was $2.5 billion, or 64% of revenue. From a year ago, gross profit margin decreased 60 basis points. Operating expenses in the quarter were $793 million, up 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 23% of revenue. Over the last 12 months, we have invested $1.5 billion in R&D. Operating profit was $1.6 billion in the quarter, or 42% of revenue. Operating profit was up 1% from the year-ago quarter. Net income in the third quarter was $1.4 billion, or $1.45 per share. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.4 billion in the quarter. Capital expenditures were $146 million in the quarter. Free cash flow on a trailing 12-month basis was $5.2 billion. In September, we announced we would increase our dividend by 13%, marking our 17th consecutive year of dividend increases. In the quarter, we paid $825 million in dividends and repurchased $15 million of our stock. In total, we have returned $6.4 billion in the past 12 months, or 123% of free cash flow. Over the same period, our dividends represented 64% of free cash flow, underscoring their sustainability. Our balance sheet remains strong with $5.5 billion of cash and short-term investments at the end of the third quarter. Regarding inventory, TI inventory dollars were down $64 million from the prior quarter, and days were 137. Distribution-owned inventory declined in the third quarter by about $100 million, the eighth consecutive quarter of planned reductions, as we have continued the transition to have fewer distributors and bring more customers direct. As a reminder, as we build closer, direct relationships with our customers, we further strengthened one of our competitive advantages, the reach of our market channels. Tactically and strategically, we are pleased with the progress of the transition and the impact for our customers. For the fourth quarter, we expect TI revenue in the range of $3.41 billion to $3.69 billion and earnings per share in the range of $1.20 to $1.40. Our annual operating tax rate has not changed much, but now rounds up to 14% for the year, and that's what you should use for your models in the fourth quarter. For next year, we expect our annual operating tax rate to remain at about 14%. In closing, we continue to invest to strengthen our competitive advantages and in making our business stronger.

Hi, guys. Good afternoon and thanks for taking the question. Rafael, Dave, my first question is on automotive. You guys saw very strong results in the September quarter. I think you spoke to a 75% sequential increase in revenue in the automotive end market. What's your view on December as it relates to automotive? And how are you thinking about sustainability into the early part of 2021? And then I've got a quick follow-up. Thanks.

I do. Thanks, Dave. My follow-up question is on gross margins in Q3. Rafael, you mentioned that gross margins were down 60 basis points on a year-over-year basis. And I was just trying to better understand what the puts and takes were. Overall revenue, I think, was up 1%. Your mix of businesses improved with Analog up 7% year-over-year, embedded processing down 10%. And 12-inch versus eight, and so I'm guessing, 12-inch was up year-over-year. So I'm just trying to understand what the negatives were on a year-over-year basis that drove gross margins down a little bit. But I appreciate you guys don't run your business for gross margin, but just curious. Thank you.

I'm happy to answer that. On a year-on-year basis, revenue increased by 1%. Gross margin dollars also rose, albeit by about 0.5%. With such large figures, the small difference makes it challenging to assess the pull-through as we typically do. In the grand scheme, both revenue and gross margin dollars saw slight increases. Additionally, I want to highlight that the mix of personal electronics revenue was higher in the third quarter compared to the same quarter last year and even the second quarter.

Yes, thank you. Maybe just a follow-up on the last point on the strength in personal electronics. Really, as you look out to Q4, Dave, how do you feel about inventory versus end demand sell-through? And then as part of that and perhaps other segments as well, how you think about Huawei in terms of perhaps last shipments there and how you're seeing that as you go forward?

Let me begin, and then Dave can respond to the Huawei question or anything else. At the highest level, we are well-equipped to handle any challenges that may arise, whether in personal electronics or other markets. Our inventory strategy has given us the flexibility we've discussed over the past 180 days, and the last two quarterly releases have positioned us remarkably well. This is not just about having a tactical approach; it’s also about our strategic advantage as a supplier of diverse catalog parts that cater to a wide range of customers. With over 100,000 customers and 80,000 different parts, we can build inventory and make informed decisions. If revenue is strong, we can support it; if it isn’t, we can hold inventory slightly longer, which is manageable as it just represents some working capital. Furthermore, we believe that inventory is a vital strategic asset. As mentioned earlier, we are comfortable maintaining high inventory levels. We will provide an update on our inventory range during the next capital management call in February. Dave?

Sure. No, thanks for all the color there. I guess, just how you think about as the business rebounds, just from an OpEx perspective, any puts and takes there for Q4 and into next year?

Nothing significant to highlight. In operating expenses, research and development plays a major role, amounting to about $1.5 billion annually. This is a crucial part of our competitive advantage, as we maintain the most extensive portfolio in the industry. We consistently release high-quality products across automotive, industrial, personal electronics, and the communication market, further strengthening that advantage. Additionally, within operating expenses, we are investing in ti.com to enhance our channel reach. We are continually improving this tool to connect better with customers, keep them engaged for longer, and increase product sales. Overall, operating expenses have been around $3.1 billion to $3.2 billion a year on a trailing 12-month basis. I anticipate this will remain above that level, possibly increasing by 1% or 2% year-on-year, but staying roughly within that range.

Hi guys. Thanks for taking my questions. So the first one, I wanted to touch on the strength from PE. I wanted to know, if you can give us a little more color on how much of that would be PCs versus smartphones? I know that you had talked about some of that strength coming from your ability to satisfy unexpected demand. I assume that was maybe more a PC statement, but any color you could give us on sort of the relative mix and growth of those two sub-end markets would be helpful.

Thank you. I understand that you plan to maintain high inventory levels and high service into Q4 and beyond. Could you provide more details on what this means for your utilization and loading moving forward? I assume your utilization increased sequentially in Q3. Please confirm if that was the case and share your plans for utilization and factory loadings as we approach Q4 and the end of the year.

Sure. Stacy, we typically discuss utilization only when there's a significant change or an unusual circumstance. We mentioned it back in April as we entered the second quarter because many of our competitors reduced their loading, whereas we maintained our levels from the first quarter to keep our options open, which has proven beneficial over the last six months. Since then, we've slightly increased our loadings from the second to the third quarter, and we're likely to continue this upward trend into the fourth quarter as well. While this increase isn't substantial, it allows us to keep our options available and maximize revenue while supporting our customers in case they have opportunities that wouldn't otherwise be supported.

Thanks a lot. I guess my first question is on the share buyback. It was quite small, even lower than in the depths of the financial crisis back in 2008. Yet your business has already snapped back a lot. What's the thinking there? You've always been pretty astute about the intrinsic value of your stock, so how should investors sort of read that? Thanks.

Yes. First, let me take a moment to explain how we approach cash returns. We discuss this during our annual capital management review every February and in our meetings with investors. Our goal regarding cash returns is to distribute all free cash flow to the company's owners through buybacks and dividends. We utilize both methods. Over the last trailing 12 months, which is the best way to assess this, we generated $5.2 billion in free cash flow and returned $6.4 billion. This means we returned $1.2 billion more than what we generated, indicating a strong return relative to our generation. Do you have a follow-up?

I did, I did. So I wanted to double-click just a little bit on the drop-through in Analog. It seemed like the drop-through in embedded was fine, but you're still a little below where the op margin was back in sort of the late 2018 time frame at sort of similar levels. Is there something going on with mix? Is that maybe the PE mix that you were talking about before within Analog? Thanks.

There’s nothing unusual to address. Clearly, analog is our largest segment, so any comments at the company level are likely influenced by analog. They experience a significant impact from personal electronics, especially since embedded contributes very little in that area.

Good afternoon. Great job on the quarterly execution. Can you guys just give us the quarter-on-quarter and year-over-year trajectories by geography? I know they're just shipped to locations, but I think it's still useful as a proxy for demand and overall economic activity, just depending on the breadth of the participation?

Yes. So you guys mentioned last quarter that there may have been some industrial customers that were building some inventory to potentially buffer against future supply chain disruptions and just prudent business continuity planning. Did you guys continue to see that in Q3? Or are these customers starting to work down these inventories, or just sustaining the higher levels as we head into the winter months and flu season?

Yes. Good afternoon, guys. Thanks for letting me ask some questions. Congratulations on the solid results. David, if you look at kind of your guidance over the last two quarters, it looks like you sort of rightfully discounted kind of what the bottoms-up bookings was telling us. You said as much when you guided for the June quarter. And just given the magnitude of beat in September, it kind of feels the same way. And that to me seems to make sense in the midst of a global pandemic. I'm just kind of curious, you're guiding the December quarter to plus or minus about seasonal, inclusive of what sounds like a 200 basis point headwind from Huawei. But, I guess, I could argue maybe phone builds started a little bit later this year that should help December. I guess, as you forecast the December quarter, was seasonal kind of the metric you were going for? And are you discounting kind of your bottoms-up in the December quarter as much in hindsight as you did in June and September?

Yes. Dave, it's fair to say that there's been nothing typical this year, but you and I have talked about this in the past. If you look at the year-over-year growth discrepancy between analog and embedded, it's fairly wide. And I'm wondering now that we're 90 days more into this kind of difference in year-over-year growth, is there a good explanation in your mind? And importantly as we look forward, when do you expect the embedded business to kind of catch up to analog on a year-over-year basis?

Hi, everyone. I wanted to follow up on John's previous question regarding the embedded side. Dave, last quarter, you mentioned that embedded was weak both sequentially and year-over-year, and you pointed out the over-representation in automotive and industrial. However, since automotive saw a 75% sequential increase, I'm surprised that embedded remained relatively flat compared to analog on a sequential basis. Were there any offsets in that business? I know you mentioned a slight decline in industrial, but it doesn't seem significant enough to counterbalance the over-indexing in automotive.

So it doesn't have nearly as much PE or in fact hardly any PE, personal electronics. And personal electronics was a big contributor to growth in third quarter, sequential growth.

Good afternoon. Great job on the quarterly execution. Can you guys just give us the quarter-on-quarter and year-over-year trajectories by geography? I know they're just shipped to locations, but I think it's still useful as a proxy for demand and overall economic activity, just depending on the breadth of the participation?

Yes. So you guys mentioned last quarter that there may have been some industrial customers that were building some inventory to potentially buffer against future supply chain disruptions and just prudent business continuity planning. Did you guys continue to see that in Q3? Or are these customers starting to work down these inventories, or just sustaining the higher levels as we head into the winter months and flu season?

Yes. Good afternoon, guys. Thanks for letting me ask some questions. Congratulations on the solid results. David, if you look at kind of your guidance over the last two quarters, it looks like you sort of rightfully discounted kind of what the bottoms-up bookings was telling us. You said as much when you guided for the June quarter. And just given the magnitude of beat in September, it kind of feels the same way. And that to me seems to make sense in the midst of a global pandemic. I'm just kind of curious, you're guiding the December quarter to plus or minus about seasonal, inclusive of what sounds like a 200 basis point headwind from Huawei. But, I guess, I could argue maybe phone builds started a little bit later this year that should help December. I guess, as you forecast the December quarter, was seasonal kind of the metric you were going for? And are you discounting kind of your bottoms-up in the December quarter as much in hindsight as you did in June and September?

Yes. Dave, it's fair to say that there's been nothing typical this year, but you and I have talked about this in the past. If you look at the year-over-year growth discrepancy between analog and embedded, it's fairly wide. And I'm wondering now that we're 90 days more into this kind of difference in year-over-year growth, is there a good explanation in your mind? And importantly as we look forward, when do you expect the embedded business to kind of catch up to analog on a year-over-year basis?

Hi, everyone. I wanted to follow up on John's previous question regarding the embedded segment. Dave, last quarter, embedded performance was weak both sequentially and year-over-year, and you mentioned the heavy reliance on automotive and industrial sectors. However, given that automotive saw a 75% sequential increase, I'm surprised that embedded remained roughly parallel to analog on a sequential basis. Were there any offsets in that business? I know industrial was slightly down, but it seems unlikely that would be enough to counteract the strong performance in the automotive sector.

So it doesn't have nearly as much PE or in fact hardly any PE, personal electronics. And personal electronics was a big contributor to growth in third quarter, sequential growth.

Good afternoon. Great job on the quarterly execution. Can you guys just give us the quarter-on-quarter and year-over-year trajectories by geography? I know they're just shipped to locations, but I think it's still useful as a proxy for demand and overall economic activity, just depending on the breadth of the participation?

Yes. So you guys mentioned last quarter that there may have been some industrial customers that were building some inventory to potentially buffer against future supply chain disruptions and just prudent business continuity planning. Did you guys continue to see that in Q3? Or are these customers starting to work down these inventories, or just sustaining the higher levels as we head into the winter months and flu season?

Yes. Good afternoon, guys. Thanks for letting me ask some questions. Congratulations on the solid results. David, if you look at kind of your guidance over the last two quarters, it looks like you sort of rightfully discounted kind of what the bottoms-up bookings was telling us. You said as much when you guided for the June quarter. And just given the magnitude of beat in September, it kind of feels the same way. And that to me seems to make sense in the midst of a global pandemic. I'm just kind of curious, you're guiding the December quarter to plus or minus about seasonal, inclusive of what sounds like a 200 basis point headwind from Huawei. But, I guess, I could argue maybe phone builds started a little bit later this year that should help December. I guess, as you forecast the December quarter, was seasonal kind of the metric you were going for? And are you discounting kind of your bottoms-up in the December quarter as much in hindsight as you did in June and September?

Yes. Dave, it's fair to say that there's been nothing typical this year, but you and I have talked about this in the past. If you look at the year-over-year growth discrepancy between analog and embedded, it's fairly wide. And I'm wondering now that we're 90 days more into this kind of difference in year-over-year growth, is there a good explanation in your mind? And importantly as we look forward, when do you expect the embedded business to kind of catch up to analog on a year-over-year basis?

Hi, everyone. I wanted to follow up on John's last question regarding the embedded sector. Dave, last quarter we saw weakness in embedded both sequentially and year-over-year, and you mentioned a reliance on automotive and industrial. However, given that automotive increased by 75% sequentially, I'm surprised that embedded was essentially unchanged compared to analog from a sequential standpoint. Were there any offsets affecting that business? I know you mentioned a slight decline in industrial, but it doesn't seem like that would be enough to counterbalance the strong performance in automotive.

So it doesn't have nearly as much PE or in fact hardly any PE, personal electronics. And personal electronics was a big contributor to growth in third quarter, sequential growth.

Good afternoon. Great job on the quarterly execution. Can you guys just give us the quarter-on-quarter and year-over-year trajectories by geography? I know they're just shipped to locations, but I think it's still useful as a proxy for demand and overall economic activity, just depending on the breadth of the participation?

Yes. So you guys mentioned last quarter that there may have been some industrial customers that were building some inventory to potentially buffer against future supply chain disruptions and just prudent business continuity planning. Did you guys continue to see that in Q3? Or are these customers starting to work down these inventories, or just sustaining the higher levels as we head into the winter months and flu season?

Yes. Good afternoon, guys. Thanks for letting me ask some questions. Congratulations on the solid results. David, if you look at kind of your guidance over the last two quarters, it looks like you sort of rightfully discounted kind of what the bottoms-up bookings was telling us. You said as much when you guided for the June quarter. And just given the magnitude of beat in September, it kind of feels the same way. And that to me seems to make sense in the midst of a global pandemic. I'm just kind of curious, you're guiding the December quarter to plus or minus about seasonal, inclusive of what sounds like a 200 basis point headwind from Huawei. But, I guess, I could argue maybe phone builds started a little bit later this year that should help December. I guess, as you forecast the December quarter, was seasonal kind of the metric you were going for? And are you discounting kind of your bottoms-up in the December quarter as much in hindsight as you did in June and September?

Yes. Dave, it's fair to say that there's been nothing typical this year, but you and I have talked about this in the past. If you look at the year-over-year growth discrepancy between analog and embedded, it's fairly wide. And I'm wondering now that we're 90 days more into this kind of difference in year-over-year growth, is there a good explanation in your mind? And importantly as we look forward, when do you expect the embedded business to kind of catch up to analog on a year-over-year basis?

Hi, everyone. I wanted to follow up on John's last question regarding the embedded sector. Dave, last quarter we saw weakness in embedded both sequentially and year-over-year, and you mentioned a higher focus on automotive and industrial. However, since automotive grew by 75% sequentially, I’m surprised to see that embedded remained consistent with analog from a sequential standpoint. Were there some factors affecting that business? I know you mentioned that industrial was slightly down, but it doesn't seem like that would be significant enough to counterbalance the emphasis on the automotive sector.

So it doesn't have nearly as much PE or in fact hardly any PE, personal electronics. And personal electronics was a big contributor to growth in third quarter, sequential growth.

Good afternoon. Great job on the quarterly execution. Can you guys just give us the quarter-on-quarter and year-over-year trajectories by geography? I know they're just shipped to locations, but I think it's still useful as a proxy for demand and overall economic activity, just depending on the breadth of the participation?

Yes. So you guys mentioned last quarter that there may have been some industrial customers that were building some inventory to potentially buffer against future supply chain disruptions and just prudent business continuity planning. Did you guys continue to see that in Q3? Or are these customers starting to work down these inventories, or just sustaining the higher levels as we head into the winter months and flu season?

Yes. Good afternoon, guys. Thanks for letting me ask some questions. Congratulations on the solid results. David, if you look at kind of your guidance over the last two quarters, it looks like you sort of rightfully discounted kind of what the bottoms-up bookings was telling us. You said as much when you guided for the June quarter. And just given the magnitude of beat in September, it kind of feels the same way. And that to me seems to make sense in the midst of a global pandemic. I'm just kind of curious, you're guiding the December quarter to plus or minus about seasonal, inclusive of what sounds like a 200 basis point headwind from Huawei. But, I guess, I could argue maybe phone builds started a little bit later this year that should help December. I guess, as you forecast the December quarter, was seasonal kind of the metric you were going for? And are you discounting kind of your bottoms-up in the December quarter as much in hindsight as you did in June and September?

Yes. Dave, it's fair to say that there's been nothing typical this year, but you and I have talked about this in the past. If you look at the year-over-year growth discrepancy between analog and embedded, it's fairly wide. And I'm wondering now that we're 90 days more into this kind of difference in year-over-year growth, is there a good explanation in your mind? And importantly as we look forward, when do you expect the embedded business to kind of catch up to analog on a year-over-year basis?

Thanks, Dave. Let me wrap up by emphasizing what we have said previously. At our core, we're engineers and technology is the foundation of our company. But ultimately our objective and the best metric to measure progress and generate long-term value for our owners is the growth of free cash flow per share. Our strategy to maximize free cash flow per share growth has three elements: A great business model focused on Analog and Embedded Products and built around four sustainable competitive advantages; two, discipline in allocating capital to the best opportunities; and lastly, efficiency, which means constantly striving for more output for every dollar spent. While we strive to achieve our objectives, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that's ever changing. And we will be a company that we are personally proud to be a part of and would want as our neighbor. When we're successful, our employees, customers and communities and owners all benefit. Thank you, and have a good evening.