Texas Instruments Incorporated (TXN) Earnings Call Transcript & Summary

Great. I think we'll go ahead and get started. Thank you all for coming. I'm Toshiya Hari. I cover the semiconductor and semi cap equipment space at Goldman Sachs. Very honored to have Rich Templeton, Chairman, President and CEO from Texas Instruments with us this morning. Rich, thanks for making the trip out.

It's pleasure to be here.

We appreciate you spending the time with us. I was hoping we could kick off with a question on the cycle. 2019 was a challenging year for the industry. It was a challenging year for TI, obviously, given how big you guys are. Now that you lived through this past downturn, how would you compare and contrast this downturn that we kind of went through versus past downturns? Any similarities, differences? Did you feel like the industry weathered this downturn better than past cycles? Any comments there?

I think in general that there's always commonality. And as we talked, I think, even during several of the earnings calls, they're typically 4 or 5, in this case, it's probably 5, maybe 6 quarters because that's a human time constant of inventories build up during '17 and '18 because people were worried about getting product. And then it takes about a year to get that stuff blood down and comparisons get easier in that year timeframe. So we saw it and we're most of the way through the earnings cycle, I think everybody is -- if you look through the reports, everybody is either seeing stabilizing or improvement, and I think it all goes back to people who just drain down the inventory they built up those 2 years.

Okay. So really nothing kind of specific to the cycle that was different from your past experience?

This one is actually as expected, much more moderate than some of the exciting ones, if you look over 3 years, but those were best left behind.

Too easy for you guys. So I guess, on the near term, and you touched on this a little bit. But TI, along with your peers, spoke to stabilization in the near-term and signs of a potential recovery into 2020. I know TI, you guys participate across a multitude of regions, obviously, in multitude of applications. But do any regions or end markets kind of stand out as being kind of the drivers into 2020?

In the context of that question, Toshi, just 2020, no, because I think when inventories build, they kind of build across the board and when they drain, they drain across the board. And then when it recovers, it will be pretty proportional. But as you know, and Dave and Rafael covered it on the Capital Management call last -- or 2 weeks ago, whatever, you look out over longer term, it's just hard to not be excited about where the industrial and the automotive markets are going from a semiconductor content point of view. But again, that's a longer term, not the 2020 context.

Right. And when you think about kind of the sustainability of the stabilization and potential recovery, how confident or how comfortable are you? And I ask the question because when we look across your end automotive customers, some of the industrial companies, it feels like their results, what they're reporting is still relatively muted. But at the same time, maybe not so much TI, but the rest of the semiconductor space, it feels like the sentiment has improved dramatically. So that disconnect worries me and us a little bit. So how...

Perhaps, it's insight to why you hear a more balanced tone out of Dave and Rafael. Let's see what 2020 is going to do before you decide is it exciting or not exciting. And I know in your business of trying to forecast the near-term future, that's not a fun thing to -- what do you mean wait, your job is to guess it.

That's educating us in...

I don't have to. Make sure you've got an operating plan that can handle the range that you could face. And it's why I think we used very careful words of things stabilizing. And we should now, basically, during '20 go back to what consumption is. And as you just alluded to, now you can debate what consumption is going to be. And we'll just have to see what that looks like. That's why I don't -- I really just do not spend that much time. The biggest thing we do is make sure we can handle the range of outcomes and if we can, we don't spend a lot of time worried about it.

And then on the coronavirus, it's not a particularly fun topic to be talking about, but it is top of mind for many investors and then corporates as well. It's been a couple of weeks since you guys reported your quarter and gave guidance for the March quarter. What are you seeing out there? Any supply chain disruptions or any changes to demand signals from customers or customers' customers, what are you seeing in China?

I think it's -- if anybody says they've got all the answers, I'd like to meet them, and I think they'd be jumping the gun right now in terms of what it looks like. So I think you've seen things come back from Chinese New Year, come back a little slower, and that's not a TI comment but just watch as factories turned back on in China. I think we've got to see it play out to really get a better determination of what the implication is.

Okay. So it's still too early to really say anything. Okay. That's fair. You talked a little about automotive and industrial being the more interesting parts of your business long term. In terms of automotive content growth, can you kind of level set the audience in terms of what you see today per car in terms of automotive semiconductor content? And how do you see that evolving over the next, call it, 3 to 5 years? And are there any specific applications you feel like there could be significant outperformance relative to that average number?

Yes, we don't make a -- spend that much time trying to either analyze or project. I think you can get third parties, they've probably got better data even than us. So I think you're in the mid or upper $300 per vehicle range. That number over 25 years has probably been growing 7%, 8% on an annualized basis. And to me, that's the great news as you could even have 1% or 2% SAAR growth. And if you have content, trying to grow at 5%, 6%, 7%, the multiplication of those 2 numbers is a decent mid- to upper single percentage growth rate. And I don't think there's anything that's going to slow that down. And while everybody talks, electrification, which is a wonderful story, just when you look at the dollar intensity of semiconductors for a pure electric vehicle versus combustion engine, but going to the technologies that are going to make cars safer and there's high dollar content. Look at what will happen with lighting, look at what will happen with new 48-volt systems that are going to run inside the vehicles. So while the areas of battery EV or the areas of autonomous get a lot of visibility, there's not a subsystem inside automobiles where they're not looking at electronics to make the car safer, easier to use, lighter weight, use less power. Those are all good things for us.

Okay. So I guess, unlike some of your smaller peers, you're not necessarily making kind of sharp bets on specific applications. You continue to be fairly broadly focused or broadly based...

We're making many sharp bets.

Right. You're not talking about those.

No, I just -- we -- you just look up and down, go from bumper to bumper of a vehicle, and think about what it takes to make a car better. And it's where -- it's very easy to get excited about being a semiconductor supplier. And then -- and I really think and, Toshi, I know you follow this closely, look at the automotive results that we've put up for, pick a number, 7, 8, 9 years. And it's not because we've picked one application or one part, it's -- as Dave will remind you every time, we break it into 5 sectors, and we've got teams grinding way on those. We do that on a global basis across the top-tier car companies across the Tier 1, Tier 2, Tier 3 suppliers. And that breadth of engagement is really the secret of making sure you're going to outgrow the market year after year. And that's why we feel pretty good about what we've done, but also about what we've got the potential to do.

You talked about, obviously, the content growth opportunity in automotive. I have a feeling you spend very little time worrying about global SAAR projections, but to the extent you do, do you feel like a flattish environment is kind of a fair assumption to be making from a business planning perspective over the next 3 to 5 years? Do you have a view on where autos are headed?

Don't worry over 3 to 5 years. And if you sit back over 10, I think most people feel, 1% or 2% SAAR is probably -- when you just look at vehicle per million persons, you look at diffusion based on the major geographies and what those numbers can look like over 10 and 15 years. It's not too hard to look at 1% or 2% SAAR rate. But even without that, you'll have heard it decent, you know the numbers pretty well. And that's why you used to get excited about it. Any SAAR growth is going to followthrough really well.

Right. And then I guess similar questions for the industrial segment. Again, it's a diversified end market, you guys are diversified internally. It's really hard for us to try to get our arms around...

Isn't it a wonderful thing?

It's a good thing. But again, similar question. Any 1 or 2 or 3 applications that you're particularly excited about on a 3- to 5-year view?

No, because it's kind of the same thing. And we laugh a little bit that Dave has recorder play. When you guys bring up industrial, it's 13 sectors we grind through it. But that's what's -- that's what so exciting. And even inside of those 13, you've got to drop down to different end equipments and different customer bases, and that's where you really have to target and have to focus. It's the advantage being our size and with our reach and scale that we really can get teams of people working at all these levels in a very detailed way and play it for the long term, and it's why we're able to grow our industrial business consistently better than a lot of our competitors on that front. I think we've got -- we keep doing it. We'll be able to do that in the future. The generic description is the easiest one to give, and that is look across those industrial markets, they are mostly systems that have used electrical or electromechanical implementations. And so you sit back and look at these electrical or electromechanical systems, and you say, I want to make that system weigh less or use less power or be smarter or be easier to service remotely or be safer. And what are you going to do? You're going to have to put intelligence in it. Okay. And by the way, that's going to be low-power microcontrollers and sensors and analog power and everything that goes with that. And so it is not a coincidence, when you think of that description with what we've designed our product portfolio look like plus the channels that we've got uniquely designed for that, why we get excited about that opportunity long term. And it's -- while it's tough for you to analyze, it's even more difficult for competitors to attack it because you've got to go after so many things. And we keep doing that, we'll enjoy it.

Great. The messaging on automotive and industrial is very consistent across you guys and your peers, it's a great market, there's content growth. We're investing in the business. The one area where there's quite a bit of a gap is comms. There's a lot of excitement around 5G, the transition from 4G to 5G and how that brings about a significant content opportunity for Analog and processing. What is your view on that market? It feels like you see that as more of a cyclical market as opposed to a cyclically growing market. Am I right in kind of interpreting your view there?

I think that's fair. And if you monitor what we've said over time, we made some changes, 5, 6, 7 years back, where we very decidedly said from an embedded and a processing point of view, basically -- primarily because of what we served in the base station market, that if phone companies are not going to grow capital expenditures for equipment, then to pretend that there's going to be semiconductor growth is crazy. And -- but yet, while we were taking that down, we said there is an incremental opportunity in Analog, just because as you go to 5G, you're going to end up with more sophisticated antennas that have to be able to comprehend that different architecture and that different system. So we said very clearly that we'll bring one of those down. And we think the analog opportunity is a nice one. But you sit back and you look at it over the long term, and I've watched from first generation to 2, 2.5, 2.75G, 3G. And if you do not believe the capital expenditure is going to grow by the operators, once that diffusion of 5G and tenant complexity gets in, there's not going to be a lot of dollar growth on that either. So we'll do well in it. We enjoy it. We'll play that, but you said over a 10-year period, it's hard to see that as a secular growth.

All right. And I guess a similar question for personal electronics. It's a 22%, 23% business for you, I believe, as of 2019. I think the view there is you want to be selective. And again, not too aggressive in going after everything. How do you manage that business going forward and try to be selective?

Yes, I think, carefully is the right answer, but we do that with everything. And if you think about it, we've really gotten away from predominance or a lot of custom single customer devices and if you think about it, very logical, because in personal electronics, a device is probably going to live for, pick a time frame, 12 or 18 months, depending on how long that handset or generation handsets live. And if you can make investments that could live for 5 years or 10 years, those are going to have much better returns than if you're living for one product cycle. And so we've been more selective. I think we're doing a good job of finding where we can make those investments and still participate in those markets, but get longer life out of some of the things we do, some of the intellectual property, sell across multiple customers. And I'm pleased with the maturing of our team of finding a good balance doing that.

Okay. That's great. In terms of the competitive landscape, you guys have been very successful in gaining share through cycle. It's not necessarily every year, but through a cycle, you guys gained 30, 40 basis points of share. Scale is important, but what else? What else works for TI when you guys think about your ability to gain share across Analog and MCU?