Texas Instruments : Q3 2023 Prepared remarks

Q3 2023 Financial Results

Texas Instruments Incorporated

Conference Call Prepared Remarks

Tuesday, October 24, 2023

3:30 p.m. Central time

Dave Pahl, vice president and head of Investor Relations

Welcome to the Texas Instruments third quarter 2023 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'll provide insight into third 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 fourth quarter 2023.

Starting with a quick overview of the third quarter:

Revenue in the quarter came in about as expected at $4.5 billion, flat sequentially and a decrease of 14% year over year. Analog revenue declined 16%, Embedded Processing grew 8%, and our "Other" segment declined 32% from the year-ago quarter.

Now I'll provide some insight into our third quarter revenue by market. During the quarter, automotive growth continued and industrial weakness broadened. Similar to last quarter, I'll focus on sequential performance, as it is more informative at this time.

• First, the industrial market was down mid-single digits, with weakness broadening across nearly all sectors.
• The automotive market continued to grow and was up mid-single digits.
• Personal electronics was up about 20% off of a low base.
• Next, communications equipment was down upper teens.

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• Finally, enterprise systems grew upper-single digits.

Given where the market is right now, it is a good time to remind everyone of our plan and areas of strategic investment. First, our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive, remains high, and we are well positioned in these markets. Second, our long-term300-mm manufacturing roadmap provides our customers with geopolitically dependable capacity. To support these buildouts and enable future growth, we continue to expect associated capital expenditures to be about $5 billion per year through 2026. In addition, we made good progress on our inventory replenishment, consistent with our long-term objectives to support growth and provide high levels of customer service.

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

Rafael Lizardi, senior vice president and chief financial officer

Thanks Dave, and good afternoon everyone.

Turning to revenue results, third quarter revenue was $4.5 billion, down 14% from a year ago. Gross profit in the quarter was $2.8 billion, or 62% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with planned capacity expansion and reduced factory loadings. As a reminder, LFAB-related charges transitioned to cost of revenue in fourth quarter of 2022. Gross profit margin decreased 690 basis points.

Operating expenses in the quarter were $923 million, up 7% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.7 billion, or 20% of revenue.

Operating profit was $1.9 billion in the quarter, or 42% of revenue, and was down 29% from the year-ago quarter.

Net income in the third quarter was $1.7 billion, or $1.85 per share. Earnings per share included a 5-cent 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 $1.9 billion in the quarter and $6.5 billion on a trailing 12-month basis. Capital expenditures were $1.5 billion in the quarter and $4.9 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $1.6 billion.

In the quarter, we paid $1.1 billion in dividends and repurchased about $50 million of our stock. In September, we announced we would increase our dividend by 5%, marking our 20th consecutive year of dividend increases. This action reflects our continued commitment to return free cash flow to our owners over time. In total, we have returned $5.6 billion in the past 12 months.

Our balance sheet remains strong with $8.9 billion of cash and short-term investments at the end of the third quarter. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%.

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Inventory at the end of the quarter was $3.9 billion, and days were 205, down two days sequentially. Inventory was up $179 million in the third quarter, less than half the increase versus the prior quarter, as we near our desired inventory levels. Therefore, we began to lower factory starts in the third quarter, which results in additional charges to the income statement. This impact is comprehended in our outlook.

For the fourth quarter we expect TI revenue in the range of $3.93 billion to $4.27 billion and earnings per share to be in the range of $1.35 to $1.57 as we continue to operate in a weak environment.

Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%. As you are looking at your models for 2024, based on current tax law, we would expect our effective tax rate to remain about what it is in 2023.

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, vice president and head of Investor Relations

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...

[Q&A]

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