Texas Instruments : Q1 2022 Texas Instruments Inc Earnings Call Edited Transcript

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Q1 2022 Texas Instruments Inc Earnings Call

EVENT DATE/TIME: APRIL 26, 2022 / 8:30PM GMT

CORPORATE PARTICIPANTS

Dave Pahl Texas Instruments Incorporated - Head of IR & VP

Rafael R. Lizardi Texas Instruments Incorporated - CFO and Senior VP of Finance & Operations

CONFERENCE CALL PARTICIPANTS

Ambrish Srivastava BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst Blayne Peter Curtis Barclays Bank PLC, Research Division - Director & Senior Research Analyst

Christopher Brett Danely Citigroup Inc., Research Division - MD & Analyst

Joseph Lawrence Moore Morgan Stanley, Research Division - Executive Director Ross Clark Seymore Deutsche Bank AG, Research Division - MD

Stacy Aaron Rasgon Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

Timothy Michael Arcuri UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment Vivek Arya BofA Securities, Research Division - MD in Equity Research & Research Analyst

William Stein Truist Securities, Inc., Research Division - MD

PRESENTATION

Operator

Good day, and welcome to the Texas Instruments First Quarter '22 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Pahl. Please go ahead, sir.

Dave Pahl Texas Instruments Incorporated - Head of IR & VP

Good afternoon, and thank you for joining our first quarter 2022 earnings conference call.

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. A replay will be available through the web.

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.

Our Chief Financial Officer Rafael Lizardi is with me today, and we'll provide the following updates. First, I'll start with a quick overview of the quarter. Next, I'll provide insight into first quarter revenue results with some details of what we're seeing with respect to our customers and markets. And lastly, Rafael will cover the financial results and our guidance for second quarter, including the impact from COVID-19 restrictions in China.

Starting with a quick overview of first quarter. Revenue in the quarter was $4.9 billion, an increase of 2% sequentially and 14% year over year, driven by growth in industrial and automotive, as well as enterprise systems. Analog revenue grew 16%, Embedded Processing grew 2%, and our "Other" segment grew 27% from the year-ago quarter.

Now let me comment on the environment in the first quarter to provide some context on what we saw with our customers and markets.

Overall, the quarter came in about as we expected across product segments, end markets and geographies.

The market environment in the first quarter was similar to what we've observed for the last several quarters. Customers continued to be selective in their expedite requests, focusing on products that completed a "matched set" rather than expediting products across the board. This behavior was not specific to any product family, end market or geography.

Moving on, I'll provide some insight into our first quarter revenue by end market from the year ago quarter. First, the industrial and automotive markets were each up about 20% and both were driven by broad-based growth across sectors. Personal electronics was down mid-single digits off a strong compare. And next, communications equipment was up about 10%. And finally, enterprise systemswas up about 35% off of a weak compare, and the growth was primarily from data centers and enterprise computing.

Rafael will now review profitability, capital management and our outlook. Rafael?

Rafael R. Lizardi Texas Instruments Incorporated - CFO and Senior VP of Finance & Operations

Thanks, Dave, and good afternoon, everyone.

As Dave mentioned, first quarter revenue was $4.9 billion, up 14% from a year ago. Gross profit in the quarter was $3.4 billion, or 70% of revenue. From a year ago, gross profit margin increased 500 basis points. As a reminder, we had about $50 million of additional utility expenses in cost of revenue related to the winter storm in the year-ago quarter.

Operating expenses in the quarter were $813 million, about flat from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.2 billion, or 17% of revenue.

Restructuring charges were $66 million in the first quarter and are associated with the LFAB purchase we closed in October of last year.

Operating profit was $2.6 billion in the quarter, or 52% of revenue. Operating profit was up 32% from the year-ago quarter.

Net income in the first quarter was $2.2 billion, or $2.35 per share, which included a 2-cent benefit that was not in our prior outlook.

Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.1 billion in the quarter. Capital expenditures were $443 million in the quarter and $2.6 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $6.5 billion.

In the quarter, we paid $1.1 billion in dividends and repurchased $589 million of our stock. In total, we have returned $5 billion in the past 12 months. Over the same period, our dividend represented 62% of free cash flow.

Our balance sheet remains strong, with $9.8 billion of cash and short-term investments at the end of the first quarter. Total debt outstanding was $7.8 billion, with a weighted average coupon of 2.6%.

Inventory dollars were up $150 million from the prior quarter, to $2.1 billion, and days were 127, up 11 days sequentially but still below desired levels.

For the second quarter, we expect TI revenue in the range of $4.2 billion to $4.8 billion and earnings per share to be in the range of $1.84 to $2.26. This outlook comprehends an impact due to reduced demand from COVID-19 restrictions in China which are affecting our customers' manufacturing operations.

We continue to expect our annual operating tax rate for 2022 to be about 14% and our effective tax rate to be about a point lower.

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 Texas Instruments Incorporated - Head of IR & VP

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?

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) We'll take our first question from Stacy Rasgon with Bernstein Research.

Stacy Aaron Rasgon Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

First of all, I was wondering if you had any feeling for the size of the gap in revenue that's getting impacted by the COVID issues in China. Do you have any view for like what demand would be if you could ship? And like are the customers like getting out of line at all? Or is the overall demand and order environment like kind of where it was, you just can't ship? But any color you can give on the size of that gap would be helpful.

Dave Pahl Texas Instruments Incorporated - Head of IR & VP

Yes, Stacy. I'll comment on that. Our assessment in early April indicated that revenue would continue to incrementally grow again in the second quarter. However, it just became clear that we were experiencing lower demand, particularly due to COVID-19 restrictions in China. And just to be clear, customers' behavior wasn't changing as it related to backlog or cancellations. In fact, we continued to see expedites for deliveries. However, we did see that our customers' manufacturing operations were being impacted.

So as a result, the approach that we took, we just took a tops-down assessment and just reduced the midpoint of second quarter by 10% and so from roughly $5 billion at the midpoint, to the $4.5 billion that you see. And the second thing we did was we slightly widened the range just to comprehend the higher uncertainty that we're seeing overall. Do you have a follow-up, Stacy?

Stacy Aaron Rasgon Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

I do. And that's helpful. Just wondering, the fact that you guys have mostly internal manufacturing and you're trying to go most direct, does that imply that, I mean, do you have to ship more direct to your customers in China? Do you think that these kinds of issues would impact you more than the broader industry? Or do you think this is something that everybody is going to have to be dealing with to the same degree?

Rafael R. Lizardi Texas Instruments Incorporated - CFO and Senior VP of Finance & Operations

Stacy, our sense is this is primarily due to issues with operations at our customers' factories, and it is not related to shipping, to direct or to distribution, or anything of that sort.

Operator

And so we'll take our next question from Vivek Arya with Bank of America Securities.

Vivek Arya BofA Securities, Research Division - MD in Equity Research & Research Analyst

The first one, also related to China. Do you think this is something you can recover? Is this demand destruction, or is this something you can recover? And then, along those lines, how would you characterize demand, excluding your China customers, where there were no other, these kind of restrictions in place?

Dave Pahl Texas Instruments Incorporated - Head of IR & VP

Yes, Vivek. Again, the approach that we took was really just a tops-down 10% assessment of what the impact would be. So I wouldn't look at that as any precision in choosing that number, part of the reason why we widened the guidance. I think trying to get into predictions of what could happen as the quarter unfolds, I think time will tell, and we'll see how that unfolds, and we'll report that when the quarter is over. So that's really the approach that we took at trying to assess what was going on. Do you have a follow-on?

Vivek Arya BofA Securities, Research Division - MD in Equity Research & Research Analyst

Yes. So how are you managing your fab utilization and your inventory? It seems like you're implying gross margins down a few hundred basis points sequentially. So just curious how you are managing fab utilization because I thought I heard Rafael say that you are still below your target inventory level. So do you continue to plan and build more inventory during the quarter?

APRIL 26, 2022 / 8:30PM GMT, Q1 2022 Texas Instruments Inc Earnings Call

Rafael R. Lizardi Texas Instruments Incorporated - CFO and Senior VP of Finance & Operations

Yes. So a couple of things in that question. Let me try to address most of them. We -- our factories are running at high levels of utilization as they have been over the last couple of years really. We've continued -- in fact, we've continued adding incremental capacity, as we have said we would. And the next step beyond incremental will be once RFAB2 starts production in the second half of the year and then LFAB in the first quarter of next year, of 2023, while at the same time, we're breaking ground later this year for the Sherman factory.

So we're going to continue running our production high. We are going to build inventory. Inventory did build about $150 million in this last quarter we just reported, but we're still below desired levels. So our intent is to continue building that inventory that is -- our objective in inventory, as you know, is to maintain high levels of customer service. And roughly, our target is 130 to 190 days, but we want to be at the high end of that and we would not be uncomfortable even above the high end of that range.

Operator

We have our next from Ross Seymore with Deutsche Bank.

Ross Clark Seymore Deutsche Bank AG, Research Division - MD

I guess the China side is weak, and I guess, 10% is as good a number as anyone could come up with. But to the extent there are shortages across the industry and demand elsewhere, it doesn't sound like it's changed, from part of your preamble, Dave. Why wouldn't this allow a little bit of the fungibility of your standard product shipments to just increase to those customers and shortages to make up for the shortfall that you're otherwise going to see in China?

Rafael R. Lizardi Texas Instruments Incorporated - CFO and Senior VP of Finance & Operations

So yes, no, that's a fair question, and that's already embedded in our process to the extent that that is doable. We -- our processes allow for that redirecting of inventory. But keep in mind, we're talking about 100,000 different parts -- 100,000 different customers, 80,000 different parts, so it never quite fits in a perfect situation where the excess in one place can go to the other place neatly, right? And then the other thing I would tell you, just like Dave stressed a couple of times, this is a tops-down estimate assessment on that adjustment; it's not meant to imply precision.

Dave Pahl Texas Instruments Incorporated - Head of IR & VP

Yes. And maybe I'll just add to that too, Ross. The behavior that we've talked about now for a couple of quarters, that we've been seeing, is customers being more focused on matched sets, and that can be symptomatic of growing customer inventory that's out of mix. So even though we might have some parts that are available in one region, customers may not need them in the other. So you've got multiple dynamics at work there. Do you have a follow-on?

Ross Clark Seymore Deutsche Bank AG, Research Division - MD

I do. Since kind of we collectively have given you guys some grief over the last couple of years for not really buying back any stock despite your 100% cash return goals, this quarter you did, and it seems like you got pretty darn close back to that 100% return. What changed?

Rafael R. Lizardi Texas Instruments Incorporated - CFO and Senior VP of Finance & Operations

So Ross, you've known us for a long time, and you know how we think about cash return. But just for everybody else, we talked about this in capital management and every quarter, our objective when it comes to cash return is to return all free cash flow to the owners of the company. We do that through dividends and repurchases. And we've been really consistent in how we do that, and we have a really good track record. So we have done that and are committed to continuing to do that.

Operator

We'll hear next from Chris Danely with Citi.

Christopher Brett Danely Citigroup Inc., Research Division - MD & Analyst

So given all these COVID issues in China and the shutdowns, but then no change in the rest of the world, do you expect the shortage situation at TI and in semis to get better or worse from this? Or do you think there will be no change?