Texas Instruments Incorporated
Q4 2020 Earnings Call Transcript

Published: 26 Jan 2021

[Operator:]

Good day everyone and welcome to today's Texas Instruments Q4 2020 Earnings Release Conference Call. At this time, I would like to turn things over to Dave Pahl. Please go ahead, sir.

[Dave Pahl:]

Good afternoon. Thank you for joining our fourth quarter and 2020 earnings conference call. Rafael Lizardi, TI’s Chief Financial Officer, is with me today. 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.

[Rafael Lizardi:]

Thanks, Dave, and good afternoon everyone. Gross profit in the quarter was $2.6 billion, or 65% of revenue. From a year ago, gross profit increased primarily due to higher revenue. Gross profit margin increased 230 basis points. Operating expenses in the quarter were $786 million, down 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 22% of revenue. For the year, we have invested $1.5 billion in R&D, an important element of our capital allocation. We’re pleased with our disciplined process of allocating capital to R&D, which we believe will allow us to continue to grow our top-line over the long term. Acquisition charges, a noncash expense, were $47 million in the fourth quarter. Acquisition charges will remain at about this level through the third quarter of 2021. Operating profit was $1.8 billion, or 44% of revenue. Operating profit was up 45% from the year ago quarter. Other income and expense was $162 million in the quarter due to a one-time benefit related to the signing of a multi-year royalty agreement. Net income in the fourth quarter was $1.7 billion, or $1.80 per share, which included a $0.16 benefit that was not in our prior outlook, primarily due to the royalty agreement we just mentioned. 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 $212 million in the quarter. Free cash flow on a trailing 12-month basis was $5.5 billion, down 5% from a year ago. In the quarter, we paid $937 million in dividends. We have increased our dividend per share by 13%, marking our 17th year of dividend increases. We repurchased $15 million of our own stock for a total return of cash to owners in the fourth quarter of about $1 billion. For the year 2020, we returned $6 billion, consistent with our strategy to return all free cash flow to our owners. Over the same period, our dividend represented 62% of free cash flow, underscoring its sustainability.

[Dave Pahl:]

Thanks, Rafael. Operator, you can now open the lines up 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 go first today to John Pitzer with Credit Suisse.

[John Pitzer:]

Yes, good afternoon guys. Thanks for letting me ask the questions. Congratulations on the solid results. David, Rafael, I'm wondering if you could talk a little bit about just the current demand backdrop. I mean, clearly, we are hearing about lead time stretching out in the semi industry, many of your peers are talking about raising pricing. I guess, specifically to you guys, can you help us understand what your lead times are doing? What you guys are thinking about doing around pricing? And I guess more importantly, given your inventory strategy and the fact that you ran your fabs a little bit fuller last year, do you think the current results represent your ability to gain some incremental share as some of your peers just are having a harder time supplying customers right now?

[Dave Pahl:]

Yes, John, let me take – you covered a lot of ground with that first question. So, let me take some pieces of it. Rafael if you want to add anything and if I miss anything, John, we'll give you a chance for the follow-up. But the first one is certainly we've read the same reports, and seeing the same releases from our peers on the supply constraints in raising prices. The short answer – we doing that, the short answer is no. And, I think, that that brings us to one of our foundational competitive advantages is manufacturing and technology, and that really provides two benefits. One, is the obvious, which is lower cost; but the second is greater control of our supply chain. So, it's really times like this and really throughout 2020, that greater control of your supply chains really becomes a great advantage.

[Rafael Lizardi:]

Yes, I will just add on the inventory angle of your question, John. Remember our long-term objective for inventory, as we have talked about in many capital management calls is to maintain high levels of customer service, while we minimize inventory obsolescence. Now, part of the reason we can do that is that we are strategically positioned the way we run the company, our business model and competitive advantages where we – our parts are mainly catalog parts that sell into industrial and automotive. Our focus is on those with very long product life cycle, so we can build inventory ahead of demand, we can position that inventory well that served us well in 2020 and will continue to serve us well from a business model standpoint in order to maintain those high levels of customer service with our customers. So, I think, we got most of the pieces, John, you have a follow-up or other pieces we can touch on?

[John Pitzer:]

Yes, just a quick follow-up Rafael. Rafael, I know you don't specifically guide gross margins, but I was wondering if you give us some parameters around OpEx for the next couple of quarters. I mean, we're heading into strong cyclical recovery in revenue off of what was kind of an unusual expense year last year with COVID. And so, as we think about the March quarter, can you help us kind of frame the period costs around SG&A and R&D that we should be thinking about? And if you want to give us a gross margin target, that would be great. But I know you tend to avoid that.

[Rafael Lizardi:]

Yes, on a gross margin like we have said before, just think of 70% to 75% fall through. So, you figure out what revenue, incremental revenue you want to play in and just follow that through at 70% to 75% and you'll get a good place over the long-term right, any one quarter can be a little higher to the lower, right.

[Dave Pahl:]

Between 20% and 25%?

[Rafael Lizardi:]

Yes between 20% and 25%.

[Dave Pahl:]

Right. Okay. Thank you, John. And we'll go to the next caller, please.

[Operator:]

That will come from Vivek Arya with Bank of America.

[Vivek Arya:]

Thank you for taking my question. Congratulations on the strong growth. Just wanted to follow-up on the demand question. And I'm curious, even if you are able to supply because of your very strong, strategic capacity, do you think your customers, especially on the automotive side, might be constrained with other parts of the bill of materials that they get from others and maybe those become bottlenecks? I'm just trying to reconcile the very strong demand backdrop that we are hearing from your results and your outlook, versus all the news around auto supply chains facing more constraints. What is the true sense of kind of supply and demand across your customer base would be very helpful to hear your views?

[Dave Pahl:]

Sure Vivek. Yes, I think, that's a great question. We see the same reports that you are seeing. And, I think, the best way to maybe describe what we're seeing in the automotive market is a just in time supply chain that's restarting from essentially a full stop that happened in second quarter. And just as a reminder, what we saw in third quarter was a 75% sequential increase followed by this last quarter with a 20% sequential increase. So, what I'll say is, is that those reports are fairly widespread, but we aren't seeing demand signals that would show us that there is anything that's consistent with any of those constraints that you are pointing out or that are in press releases. Do you have a follow on?

[Vivek Arya:]

Yes. Thank you, Dave. Good to see the growth in the Embedded segment and I know you made some changes in that business last year. Do you think we will start to see the benefits of that in 2021, because they also tend to be somewhat stickier markets, so I'm just curious if you could give us an update on what are you doing specifically to regain market share? And do you think we can start to see your Embedded business start to grow in line with your Analog business this year? Thank you.

[Dave Pahl:]

Yes. I'll give you a feel on those ones. So first, we're pleased with the progress we're seeing in Embedded. Our plan has called to first stabilize the business and then start to prove that we can resume our long-term consistent growth. We're leveraging our competitive advantages, particularly building a broad-based, a more diverse product portfolio that can then deliver long-term sustainable growth.

[Operator:]

We will hear next from Craig Hettenbach with Morgan Stanley.

[Craig Hettenbach:]

Yes. Thank you. Dave, just following up on your comments around autos, and particularly the just-in-time inventory angle, certainly 2020 was a challenging year for the supply chain and we're dealing with some of those repercussions now. But do you think you'll see some changes to that over time in terms of how they operate from an inventory perspective or something that, it might be difficult for the next couple of quarters, but kind of gets back to that just-in-time?

[Dave Pahl:]

Yes, Craig. I don't want to speak for our customers or how they're managing their inventories. I think as you've seen us and how we've managed our business and our operations. We’ve just worked very hard to try to have capacity in place to support our customer's needs. You saw the decisions that we made earlier in the year to try to keep high service and optionality in place. And we'll just continue to try to support our customer's needs, whatever their supply chains look like so and whether that's in the automotive market or the other market. So we will try to make them happy. That's what we're trying to do. Do you have follow-on?

[Craig Hettenbach:]

I do thanks. And then just looking at Analog up 25% year-over-year, I know that comes off of a difficult year and coming out of a down cycle. And so that's some of it, but just curious at a high-level just to get your thoughts of just the type of strength you're seeing and how you feel about what the demand is out there?

[Dave Pahl:]

Can you clarify that a little bit for me, Craig? Just so I make sure I answer the right question.

[Craig Hettenbach:]

Yes. So just with the Analog business up 25% year-over-year, that's coming off of an easy comp, if you will, coming out of the down cycle, so I think that's some of it. But just curious, I know in some of these calls you talked about just your view of just, our supply and demand equilibrium, or how you feel like demand is relative to how your businesses is trending right now?

[Dave Pahl:]

Well. Yes. I think that when you look at where that business is, I think that we've just come through a – from a cyclical indicators and those types of things. You'd even have to go back to 2018 when the industry had reached the cyclical peak then you throw-in, sprinkle on top. COVID-19 and it was really at the beginning of -- or at the end of last year, the beginning of 2020 that we had begun to seeing signs of stabilization before COVID had hit. So, inventories really weren't a problem at that point in time. And we had said at that point in time that our shipments were beginning to reflect what customers were beginning to ship overall. So again, I think that what we are shipping today is reflective of what customers are asking us to ship. We have a good availability of product, because of the decisions that we've made. And our lead-times have remained stable. That doesn't mean, of course that we don't have hotspots that we're working. And we always have hotspots, but that's kind of where we are today. Thank you, Craig. And we'll go to the next caller please.

[Operator:]

We will hear next from Harlan Sur with JPMorgan.

[Harlan Sur:]

Good afternoon. Congratulations on the strong execution. Amidst the strong demand environment, as we all know, foundry capacity is pretty tight both leading edge and lagging edge. And I know that TI outsources about 20% of its wafer requirements most of it with your embedded products, MPUs, MCUs. So because of the foundry tightness, is the team also somewhat constrained on your Embedded products either Q4 or here in Q1 and also the same thing from an assembly and test perspective, or I think about 40% of your assembly and test requirements are outsourced to the sub-cost. Is this constraining, maybe some of your shipments near term?

[Dave Pahl:]

At a high-level, we have long-term agreements with these suppliers like we do with other suppliers. Even though we only outsource relatively small part of our loadings. We're still being a big company that’s still a good amount of loadings raise. So we still get some decent leverage. So we're seeing some hotspots here and there, but to the largest degree we're getting what we need.

[Harlan Sur:]

Yes.

[Rafael Lizardi:]

And I would say, having 80% of our wafer sourced internally, almost all of our analogs sourced internally and that is a great advantage for us. So overall, as we've talked about the lead times, lead times have remained stable. So that has been a huge advantage for us. Do you have a follow-on Harlan?

[Harlan Sur:]

Yes, absolutely. Yes. Thanks for the insights there. Can you guys just provide us with the shipment trends quarter-over-quarter, year-over-year by geography? I know it's shipped to location, but I think it's still useful to kind of understand the breadth of the overall demand profile you guys are seeing ?

[Rafael Lizardi:]

Sure. So, in the quarter and thank you for the preamble there, so I won't repeat it. But year ago, Asia was up and all of the other regions were either flat or down and sequentially all the regions except for the U.S. were up. And just as another point of color on where we ship our products, 90% of our revenues come from shipments outside of the U.S. and we've got about 20% of our revenues that are based by customers in China. So just a little bit more color on the comment that you made there earlier. So thank you, Harlan. And we'll go to the next caller, please.

[Operator:]

We’ll hear now from Timothy Arcuri with UBS.

[Timothy Arcuri:]

Thanks a lot. Rafael, I guess I asked this question last quarter too, but you, again bought back next to no stock, and I totally get that you were running a -- kind of a plan in the first half, and you were certainly a head of the 100% for the full-year, but you also have a pretty strong intrinsic value model for the share repo and you were pretty good at buying back the stock. So I guess maybe I'll ask you again to just sort of comment on that. Is there anything that we can read into that, given that it's the second quarter in a row?

[Rafael Lizardi:]

You know, what I would tell you is that as we talk about doing capital management, our goal is to return all free cash flow to the owners of the company. We generated in 2020; $5.5 billion of free cash flow and we generated $6 billion of free cash flow, so clearly well above the cash flow generation. So following...

[Timothy Arcuri:]

Okay. And then I guess, yes, yes, yes, I do. I guess, can you give us an update on the 300 millimeter, the new FAB and sort of the timing around that, and I guess on that, can you qualify for some of these subsidies coming from the government or is that mostly going to be leading edge? Things.

[Rafael Lizardi:]

Yes, sure. So the update on the factory is the same, nothing has changed as far as our expectation. The new factory is being built. We expected to be completed in 2022; so next year. In fact, we should have some form – some level of output in the second half of next year. So that's all going in as per plane. When it's fully equipped, it has the potential for revenue of about $5 billion per year. On your question on the incentives that a lot of that remains to be seen, there are two legislations, one, one that was approved, but was not funded; another one hasn't been approved. The chips, I think is the one that hasn't been approved, but the one that was approved was not even funded, so – and there's a lot of uncertainties on that depending on how that comes out. So when that comes out, we'll look at it and we'll decide if it makes sense for us. But the biggest or the highest level we think semi-conductor is a foundational technology and anything that the government can do to strengthen that and to keep us at a level playing field companies in the United States versus other countries that would be a good.

[Dave Pahl:]

Okay. Thank you, Tim. And I think we've got time for one more caller, please.

[Operator:]

That will come from Tore Svanberg with Stifel.

[Tore Svanberg:]

Yes. Thank you and congratulations on the results. First question for Rafael, I typically wouldn't ask you this because I know you get a lot of these, but the royalty this quarter was pretty material $162 million. Can you maybe add any color on that and should we expect sizeable things like that going forward as well?

[Rafael Lizardi:]

Yes. So it was about, inside that $162 million, it was more – most of that $162 million and we recognize it based on accounting rules. The cash actually comes in, not quite like that. It comes in over time, but it's just – it's a licensing agreement. We've had those for many years. They have become the minimums in the – at the highest level, frankly. So I don't expect that to change from a cash standpoint is about $100 million a year. So from the revenue or the income recognition standpoint, sometimes they come in as pops as what you saw, but they've passed, which is really what matters is more stable than that. And again, like I said, it's about $100 million a year and I don't expect that to change much.

[Dave Pahl:]

Yes, follow-on Tore?

[Tore Svanberg:]

Yes. Thank you, Dave. So I know your long-term goal is to grow CapEx at 6% – well to spend 6% of your revenues and CapEx. I think last year you said it was 4.5%; was there sort of any COVID related issues that slowed things down? And as we look at 2021, do you think it will come in close to that, that, that range sort of 6%?

[Rafael Lizardi:]

Yes. So I'll go ahead and take that. So, yes, our guidance is 6%. Our guidance continues to be 6% CapEx has presented revenue. That's a long-term guidance includes everything that goes into CapEx as far as building and equipment. Now of course that number can fluctuate, right? Like you pointed out, it just – it just fluctuated down in 2020 to 4.5%. So I wouldn't be surprised if it is a little higher than 6% for a year or two, but for your models I would suggest you stick with 6% out into the future. It's just – it's simpler that way, and it gets the point across.

[Tore Svanberg:]

Okay. Thank you so much.

[Rafael Lizardi:]

Thank you, Tore.

[Dave Pahl:]

That concludes the call. So let me finish with a few comments and key items that we believe deeply. First, we run the company with the mindset of being a long-term owner. We believe that growth of free cash flow per share is the primary driver of long-term value. Our ambitions and values are integral to how we built TI stronger. When we're successful in achieving these ambitions, our employees, customers, communities, and shareholders, all win. Okay. And thank you all for joining us. The replay of this call will be available shortly on our website. Good evening.

[Operator:]

And again, that will conclude today's conference. Thank you all for joining us.