Texas Instruments Incorporated (TXN) Earnings Call Transcript & Summary

Good morning, and welcome to the Texas Instruments 2023 Capital Management Call. I'm Dave Pahl, Head of Investor Relations, and I'm joined by our Chief Financial Officer, Rafael Lizardi. This call is being broadcast live over the web and can be accessed through our website at ti.com/ir. In addition, today's call is being recorded and will be available via replay on our website, along with the complete presentation and prepared remarks for your convenience. 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 our most recent earnings release, as well as our most recent SEC filings for a more complete description. During today's presentation, we'll begin with a recap of our objective, strategy and business model that is built on our sustainable competitive advantage. Next, we'll review our scorecard for 2022 and updates for 2023. Then we'll provide a historical summary of our capital allocation and take a deeper look into specific areas of investments. As we mentioned previously, we'll provide more details about our investments to strengthen our manufacturing and technology competitive advantages, and specifically an update to our long-term 300-millimeter wafer fab road map plans, capital expenditures and depreciation implications, where you'll see we're preparing for higher growth. Then we'll review R&D allocation priorities and our progress on building closer direct relationships with our customers. Next, we'll highlight our free cash flow per share performance. And lastly, we'll wrap up with a review of our cash returns. If you haven't already, we encourage you to review our investor overview which provides insight into our business model and competitive advantages. It is also available on the Investor Relations website at ti.com/ir. The following guiding principles from that overview will help frame today's discussion. At TI, we run the company with the mindset of being a long-term owner. We believe that the growth of free cash flow per share, primary driver of long-term value. Our ambitions and values are integral to how we build TI stronger. When we're successful in achieving these ambitions, our employees, our customers, communities and shareholders all win. Our strategy is comprised of a great business model, a disciplined approach to capital allocation and a focus on efficiency. Our business model is built around 4 sustainable competitive advantages, which are: Manufacturing and technology; broad product portfolio; the reach of our markets channels and diverse and long-lived positions. And after, accretive investments in the business to grow free cash flow for the long-term, the remaining cash will be returned over time via dividend and share repurchases. With that as a framework, our objective is to maximize long-term growth of free cash flow per share, which we believe is the best metric to judge our performance and generates long-term value for the owners of the company. Our strategy to achieve this objective has 3 elements: First, a great business model that's focused on Analog and Embedded products and built around 4 sustainable competitive advantages, advantages that we continue to invest in and make even stronger; second, discipline in allocating capital to the best opportunities. This spans how we select R&D projects, develop new capabilities like ti.com, invest in our new manufacturing capacity, or how we think about acquisitions and returning cash to our owners. And third, striving to constantly increase our efficiency, which is about achieving more output for every dollar of input. Our strategy is designed around 4 sustainable competitive advantages that, in combination, provide tangible benefits and are difficult to replicate. First, at the bottom of the slide, we start with the foundation of manufacturing and technology. This provides us with lower costs and greater control of our supply chain. The advantage of lower cost has always been recognized as a benefit, but the last 2 years have increasingly highlighted the importance of owning and controlling our supply chain. Our second competitive advantage is the broad product portfolio of Analog and Embedded Products. These products provide us more opportunities per customer and more value for our investments. And third, the reach of our market channels, including our field sales force and ti.com. This provides access to more customers, projects, sockets per project, and insight into our customers' needs. We'll provide some insight on our progress with the reach of our channels. And lastly, we have diverse and long-lived positions, resulting in less single point dependency and longer returns for our investments. With that, I'll turn it over to Rafael and he'll review our approach to capital management and our scorecard. Rafael?

Thanks, Dave. We have shared our capital management scorecard with you since 2013. In 2022, we again met our multiple objectives. You can see that the scorecard includes descriptions of our long-term objectives for each metric as well as the target range. The long-term objective provides insight in to how we make decisions and run the business, as opposed to only a number or a range. Capital expenditures were $2.8 billion, about as planned, and cash return was about 130% of free cash flow. We continue to maintain our long-term objective of returning all free cash flow via dividends and repurchases over time. We are pleased with the consistency of these results over time that have been enabled by our business model, discipline in allocating capital and constantly striving to increase our efficiency. For 2023, our long-term objectives remain the same. For 2023, we have 2 updates that you will see highlighted. As we mentioned previously, we're ensuring our capacity is prepared to support higher growth rates. As a result, we expect CapEx to average $5 billion per year from 2023 to 2026, and about 10% to 15% of revenue per year in 2027 and beyond. These are gross CapEx amounts and therefore, do not comprehend benefits related to the CHIPS Act. Regarding inventory, our long-term objectives, such as maintaining high levels of customer service remain the same, and we updated the upper end of our inventory target to better reflect the way we will operate. Before I move into those details, I would like to back up and provide a top-level view into how we allocate our capital overall. In the 10-year period spend in 2013 to 2022, we have allocated about $87 billion of capital. Given that magnitude, you can appreciate why capital allocation is a job we take quite seriously, and one that has a significant impact on owner returns. Our largest category of capital allocation, about 40% of the total, has been investment in critical areas that drive organic growth such as R&D, sales and marketing, capital expenditures and inventory. For reference, capital expenditures have been a little over $10 billion over this 10-year period. The next 2 categories of share repurchases and dividends are similar in size. For repurchases, our objective is the accretive capture of future free cash flow for long-term owners. For dividends, our objective is to appeal to a broader set of investors, and we focus on their sustainability and growth for obvious reasons. And finally, potential acquisitions are evaluated through 2 primary factors that have remained unchanged: It must be a strategic match, meaning catalog analog-focused with high exposure to industrial and automotive. Additionally, it must meet certain financial objectives. For simplicity, we have not included changes in net debt, which over this period decreased $1.6 billion as we have increased cash levels. Now I would like to update you on our progress in strengthening our competitive advantages. To start, I will update you on our manufacturing and technology competitive advantage. We mentioned earlier that for each of our competitive advantages, we work to ensure that they provide tangible benefits and are difficult to replicate. Our investments in manufacturing and technology, particularly in 300-millimeter wafer fab capacity, helped to extend our cost advantage and give us greater control of our supply chain. Today, we will provide an update on our long-term capacity road map that will support growth over the next 10 to 15 years. Let me start with a reminder for those not as familiar with the semiconductor industry of why 300-millimeter wafers matter. A chip, meaning an unpackaged product, made on a 300-millimeter wafer, costs about 40% less than a chip built on a 200-millimeter wafer, the size used by most of our competitors. This translates into a great competitive advantage. The source of this advantage is the area of the wafer. A 300-millimeter wafer has 2.25x more area, which in turn means we can get about 3x more chips, but it does not cost 2.3x more to process that larger wafer. This translates into a structural cost advantage. To understand how a 40% less expensive chip impacts gross margin, it is easiest to use an example. One we have used for some time now, shown on this slide, of a part built on a 200-millimeter wafer compared with a 300-millimeter wafer. This example shows a theoretical part that sells for $1 with a gross margin of 60%. The chip itself would cost about $0.20 if built on a 200-millimeter wafer, and this was reduced to $0.12 on a 300-millimeter wafer. In this example, the remaining costs of assembly and tests are the same, regardless of the size of the wafer. The net result is that gross margin improves 8 percentage points. As this example illustrates, our 300-millimeter manufacturing capability and the resulting cost structure provide a unique competitive advantage for TI. To help the generalist portfolio manager listening who may not be familiar with the semiconductor cycle, this chart is a helpful way to understand how you have to plan for the long-term. Independent of what the semiconductor cycle may be doing in any 1 year. This chart shows semiconductor units shipped on a trailing 12-month basis over the past 30 years as reported by WSTS. While there is much debate that focuses on the cycle in our industry, the more important element is that the grayed line, which shows the long-term trend consistently over time. Our approach is to have a disciplined long-term plan with our capital spending with the gray line in mind. Last year, we introduced a long-term 300-millimeter road map, and the team has been making tremendous progress throughout 2022. We have several 300-millimeter wafer fab projects underway, including RFAB2 in Richardson, Texas; LFAB in Lehi, Utah; and the multi-fab site in Sherman, Texas. Production began at RFAB2 and LFAB in 2022, and construction is underway at the new Sherman site, which we expect to begin production as 2025. These wafer fabs will be targeted for 45- to 130-nanometer technologies that are optimal for Analog and Embedded Products and can go to smaller lithography as needed. Last year, we presented a detailed manufacturing road map that will enable TI to support about 7% growth rate through 2030. We have updated that plan to support approximately 10% annualized growth through 2030. This increase is a reflection of a combination of hirings in semiconductor content growth, particularly in industrial and automotive, our position in these markets and continued strong customer response to our geopolitically dependable capacity. As a reminder, the gray line was the estimated annual CapEx we shared with you 1 year ago. The black line now shows our current estimate of an average $5 billion of CapEx from 2023 to 2026. Beyond 2026, we expect capital expenditures to normalize at about 10% to 15% of revenue going forward and will be a function of our revenue growth rate expectations. As a reminder, these are gross CapEx projections. Underneath the black line, we have highlighted some of the key wafer fab and assembly test projects. For the sake of time I will not go through each of this, but we hope it provides some insight into the detailed planning involved in this road map. Finally, at the bottom of the slide, we have highlighted several key metrics this road map will deliver. The top row shows supportable revenue, meaning this plan can support approximately 10% annual growth through 2030 and beyond. On the second line we currently support about 80% of wafers internally, and this will increase to about 90% by 2030. At the same time, external foundries will continue to be important suppliers. On the third line, you will see that 300-millimeter will increase from 40% of our internal production to about 80% by 2030. This gives some perspective into how a 300-millimeter advantage will grow over time. And finally, while most of the world discusses the importance of wafer fab capacity, assembly capacity is equally critical. We will grow assembly from 60% internal this year to 90% by 2030. In summary, this plan to support higher growth reflects the combination of higher confidence in semiconductor content growth, particularly in industrial and automotive, our position in these markets and continued strong customer response to our geopolitically dependable capacity. As a result, we will continue to increase our allocation toward capital expenditures, as we believe top line revenue growth will be a greater component of free cash flow per share growth over the next 10 to 15 years. Last year, the U.S. government passed the CHIPS Act from which we will benefit. For the purpose of today, there are 2 main provisions in the Act we will mention: the first $39 billion of grants, of which $10 billion is allocated to mature technologies. Any potential benefit is uncertain and not reflected in our estimates, but we are actively seeking funding for any programs that we qualify for as we submit our grant applications in February. The second provision provides a 25% investment tax credit, or ITC, for U.S. semiconductor manufacturing investments, and we expect to this to provide a cash benefit of about $4 billion. With the ITC largely offsetting the higher CapEx levels, our depreciation expectations are consistent with what we have shared with you previously. Therefore, we continue to expect that depreciation will increase from about $1 billion in 2022 by about $500 million per year to around $2.5 billion in 2025. With those details, let me ask Dave to comment on our investments in R&D.

Thanks, Rafael. I'll comment on our R&D investments that we allocate to growth opportunities in order to strengthen our technology and product portfolio while improving our diversity and longevity. On this slide, we summarized the current direction of our R&D investments and our revenue breakdown by end market. For the revenue breakdown, we've provided data for 2013, 2021 and 2022, so you can get a sense of how the product portfolio has changed over the long-term as well as compared to last year. We can find great investment opportunities in all our markets and continue to do so. That said, the direction of our R&D investments, shown in the second column are unchanged from last year. Industrial and automotive investments continue to be up broadly, reflecting our belief that these end markets will be the fastest-growing markets due to growing semiconductor content. Personal electronics investments are up slightly, but we'll continue to be selective. Communications equipment investments are steady, and enterprise systems are up slightly in support of growing cloud and server infrastructure. And other, which is just shown for completeness, is primarily the calculator business where investment is flat but at low levels. Here, you can see the strategic progress we've made in the important markets of industrial and automotive. In 2022, those markets combined represent 65% of TI's revenue compared to 62% in 2021 and just 42% back in 2013. As a reminder, the industrial and automotive markets have high diversity meaning many customers, many sectors and many equipment types. These markets also have high longevity, where they tend to have life cycles ranging from several years to several decades. Success in the industrial and automotive market, therefore, requires a long-term commitment and a willingness to invest broadly across sectors and product categories both which we've done and will continue to do. I'd also like to share an update on our progress of building closer direct relationships with our customers, which serves to strengthen and extend the reach of our market channels. As a reminder, we believe that our customers will increasingly desire the convenience and productivity of online relationships, along with skilled customer and commercial support. This is a broad secular trend and we see it around us in our daily lives. Our multiyear investments in our sales and marketing team, ti.com, business processes and logistics uniquely position TI to lead this transition in the semiconductor industry. In 2022, we continued our progress on building closer direct relationships, averaging about 70% of our revenue transacting direct. This compares to about 1/3 of our business transacting directly in 2019. TI's reach of our market channel advantage results in higher growth through access to more customers, projects, sockets per project, and better insight into our customer needs. ti.com is an important part of the reach of our channels and delivers additional customer convenience with online sales. In 2019, we formed a team dedicated to building our ti.com online business and accelerating investments in this channel. Since that time, we've expanded the number of countries where we support transactions in local currency, where TI is the importer of record, we've added new payment methods and provided new methods for financing. In addition, we've been investing in logistics and highly automated product distribution centers for less than 2-day delivery to customers' doors or to their manufacturing docks. In 2022, we had more than 60,000 unique customers transacting quantities from a single unit to millions of units via ti.com. Revenue in 2022, on ti.com accounted for about 10% of our total revenue. Now tactically, in 2021 and in 2022, ti.com revenue was most likely helped by the market conditions. But we believe the long-term strategic potential of online sales through ti.com is high, given its convenience for customers. With that, I'll turn it back to Rafael to talk about our free cash flow growth and cash returns. Rafael?

Thanks, Dave. Before discussing free cash flow growth and cash returns, it is helpful to consider how our operating cash flows are enabling our long-term investments. Specifically, operating cash flow in 2022 was $8.7 billion, which was about flat to 2021. At the same time, CapEx was at $2.8 billion or 14% of revenue, as we began higher investment levels in 300-millimeter wafer fabs to strengthen our competitive advantages. As we described at the beginning, our overall objective is to maximize long-term free cash flow per share. We believe this is not only the best metric to judge our performance, but it is also the one that we, as owners, ultimately care about. In 2022, free cash flow was $6.47 per share. This was down 5% from 2021, and free cash flow margin was 30% for the year. Since 2004 free cash flow per share has grown 11% compounded annually. As mentioned before, our long-term objective is to provide a sustainable and growing dividend to appeal to a broader set of owners. For 19 consecutive years, we have steadily increased our dividend, including an 8% increase in fourth quarter of 2022. These increases represent 17% for 5-year and 21% for 10-year compounded annual growth rates. In 2022 dividend payments represented 73% of free cash flow, supporting their continued sustainability and growth. As of January 27, 2023, the dividend yield was 2.8%. Our objective in repurchasing shares is the accretive capture of future free cash flow for long-term investors. We focus on consistently repurchasing shares when the intrinsic value of the company exceeds its market value. While the ultimate assessment of return on investment depends on the future cash flow stream, the track record of this approach is encouraging. We have shares outstanding 47% since 2004. We ended 2022 with $21.5 billion in open authorizations, having bought back $3.6 billion worth of stock in 2022. With respect to cash returns, in 2022 we returned $8.64 per share, which represents an increase of 81% versus 2021. In total in 2022, we returned 134% of free cash flow. And since 2004, we have grown returns at a 17% compound annual growth rate. It may be helpful to frame our performance versus others in the S&P 500. Our free cash flow generation puts TI in the 84th percentile, cash returns in the 92nd percentile, and return on invested capital in the 95th percentile when compared to the S&P 500. We believe our strong relative performance versus the S&P 500 is a reflection of our focus on growing free cash flow per share over the long-term and the 3 elements of our strategy: First, business model that is built on our 4 competitive advantages, advantages in which we're continuing to invest and make even stronger; second, discipline in how we allocate our resources, focusing on the best product opportunities as well as areas that strengthen and leverage our competitive advantages; and third, striving to constantly increase our efficiency, which is about achieving more output for every dollar of input. We believe that if we can continue to do these 3 things well, we should be able to grow free cash flow per share for a long time into the future. Let me now wrap up my prepared remarks with a few summary comments. As engineers, it is a privilege to get to pursue our passion of creating a better world by making electronics more affordable though semiconductors. We're fortunate that our founders had the foresight to know that passion alone was not enough. Building a great company requires a special culture to thrive for the long-term, and we continue to build this culture stronger every day. The desires of ESG and sustainable investors are aligned with our long-term ambitions and have been a part of our formula for success for decades. We will remain focused on the belief that long-term growth of free cash flow per share is the ultimate measure to generate value. We will invest to strengthen our competitive advantages with discipline in capital allocation and stay diligent in our pursuit of efficiencies. You can count on us to stay true to our ambitions: To think like owners for the long term; adapt and succeed in a world that's ever changing; and be a way that makes us and our stakeholders proud. When we're successful, our employees, customers, communities and shareholders all win. Thank you. With that, I'll turn it back to Dave.

Thanks, Rafael. Operator, you can now open up the lines for questions. [Operator Instructions] Operator?

[Operator Instructions] We'll first hear from Ambrish Srivastava of BMO Capital Markets.

I want to start out with the topline assumptions guys and Dave, I know you're a student as much as we are, and you probably go deeper into the data, Analog, long-term trend line growth, 6%, [indiscernible] controller at 3%. And if I put that against TI's growth, clearly, in Analog, you guys have been taking share, a 5-year CAGR 9%, 10 year 8%. And I'm rattling off this data, and I'm getting to the question, 5-year embedded is minus 1%, right? 10 years, it's 3%. So how do we believe the 10% number? What's -- what are the underlying assumptions for that, Dave, and Rafael?

Well, first, I'll start with what changed as we mentioned in the prepared remarks. And from last year, we've higher confidence in the semiconductor content growth over the long-term and particularly in industrial and automotive. The second is the position of our products in the market. So the product portfolio that we have, the adoption of that portfolio, and it's just higher today. And I'll also just point out that 65% of our revenue is in the industrial automotive markets, where we've seen structural content growth. So that will be -- as it gets off to a larger percentage of our revenue, that will continue to compound and help us grow faster. And then the third one, as we mentioned, is just increasingly strong customer response to our geopolitically dependable capacity. So that includes our current footprint that we have as well as the road map that we just put out. So -- and back to your -- the specifics of your question, I think that those growth rates aren't that much higher than the numbers that you gave for Analog. We've been talking about the progress that we've made in Embedded and the confidence that we have in that. Long-term, we believe that those 2 segments can grow at similar rates. And I think that even the most recent results show that we're making good progress towards that goal. So things aren't done there, but we are encouraged with the direction. Do you have a follow-on?

Yes, Dave. Just a quick tactical one, the $4 billion on the potential benefits. The timing of that is -- that's an annualized basis, right? If you put in the accruals and the cash grant.

Yes. So let me kind of walk you through that. And yes, you're absolutely right. It's $4 billion that we expect as a decrease in PP&E basis and then we'll lower depreciation, then we'll get the cash. So let me just give an example to try to make it as clear as possible. If we spend $1,000 on U.S.-based CapEx, we would accrue a 25% benefit or $250 under long-term assets on our balance sheet. So then what you would see on the balance sheet instead of $1,000 in PP&E, you would see $750 in PP&E and $250 in other long-term assets. Now you're depreciating only $750 as opposed to $1,000. So that's where you get the lower depreciation. And then eventually, we get the $250 in cash. The way we get that, just based on the current rules that it could change, it's a year after the assets are placed in service. So I could to have that CapEx spend in '22, place in service in '23 and the get the CapEx -- get their cash in '24. In fact, right now, we're not assuming getting any cash in 2023 because of that dynamic. One more tactical point is even though this is all for the ITC, the investment tax credit were so, nothing for the grant. But even though it's called an investment tax credit, this is not going to change the tax rate on the income statement, okay? It's going to work through the balance sheet and income statement, as I just described.

Our next question comes from Vivek Arya of Bank of America Securities.

Do you think, Rafael, that [indiscernible] TI can grow free cash flow per share in the next 5 years as you have done in the last 5 years?

So thanks for that question. I'm glad you framed it over at least 5 years because the way we're thinking about it is long-term. And yes, absolutely, over the long-term, that's exactly what we're doing, is to feed the long-term growth of free cash flow per share. As we have said and we just said on the call, our belief is that over the next 10 to 15 years, the key driver of long-term growth, of free cash flow per share, is the top line, it's revenue. And in order to be able to grow revenue, we need to invest in manufacturing technology, have a manufacturing footprint that's not only there that we own and control, but it's geopolitically dependable, right? And that's, as Dave mentioned, that's one of the key things that our customers are clamoring for. Do you have a follow-up?

Yes. I'm also curious, when you look at your CapEx intensity beyond 2026, I think you raised it to 10% to 15%, right? versus the 10% before. So how does the math work? If your capital intensity is going to these levels, I'm still confused how you can grow free cash flow at the same pace as you were able to do before. Like why is capital intensity going to be much higher even beyond 2026 versus what you thought before?

Yes. So this is purely a function of growth rate expectations over the long-term beyond even the time horizon that we showed you. Remember that you spend the CapEx 1 year, you really don't get the equipment in place and the factories in place until like 3 years later. So what you're seeing in that chart from, say, 2027 to 2030, it's based on expectations on 2030 and beyond. So when we get to closer to that time frame, we'll give you an update based on our expectations. So we just wanted to give you an indication, roughly the 10% intensity correlates to a 7% growth. And the 15% intensity will correlate to about 10% or so revenue growth beyond 2030, okay? Hopefully, that answers that question.

Next, we have from Ross Seymore of Deutsche Bank.

Dave, I wanted -- or Rafael, I wanted to go back to the revenue growth assumption and that pivot to more of a growth-centric strategy. You gave the 3 main reasons why you're more confident in the growth than you were in the past. If you summarize all those up, how much of it is your belief that the Analog and Embedded markets will just grow faster versus the belief that TI will actually take share within those markets?

Yes, Ross, I would say that as we look at markets, like automotive as an example, we look at the possibility that electric vehicle adoption could be faster over the next 10 years than what it's been over the previous 10 years. That -- we think that the possibility of that is there. And we want to be ready for it with the infrastructure to do it. Same thing in industrial, of course, there's 13 different sectors there and hundreds, if not thousands, of different end equipments. But just take one, like factory automation and is it possible that factory automation can be faster in the next 10 years. So yes, there is an assumption that we want to be prepared for that. And then with market share gains, as we've talked about before, they don't move quickly in Analog and Embedded. So the plan is not assuming that there is a change -- a significant change in what our long-term share gains would be. So what I can tell you our confidence that we'll continue to gain share is very high. So do you have a follow-on?

Yes. And the CHIPS Act side of things. Rafael, do you know when you will have more color on the $10 billion? Or just even any framework beyond the ITC side, so people can kind of start to fold that in as when that could be another offset to some of the higher capital intensity that you just discussed.

Yes. So the applications are due this month. So sometime this month, we will turn that in. And we are going to actively persued every -- pursue every avenue that we have related to. And clearly, we fit very well in the criteria and what they're looking for, particularly with the mature -- what they call mature technologies, which is really the sweet spot for auto and industrial. But it's highly uncertain, it's discretionary on the Department of Commerce. So when they tell us, and we know at the appropriate time, we'll let you know.

Next, we'll hear from C.J. Muse of Evercore ISI.

Yes. I guess this is perhaps just a short-term question. As it relates to the timing of getting the cash from the ITC roughly 12-month delay. If -- How are you thinking about free cash flow returns kind of in that -- kind of year 1? Would you include the anticipated refund 12 months hence? Or would you wait until you actually get the free cash flow dollars?

Yes. What I would tell you is that there's no change in how we think about returning cash to owners. Our objective, as we have on the chart that we just showed, is to return all free cash flow to the owners. We do that through both dividends and buybacks. And that's never meant to be any single quarter or every -- even every single year. But over the long-term, we'll return all that cash. I will also point you to the strength of our business model and our balance sheet, so we have a tremendously strong operating cash. You saw that one of the charts had that, as well as about $9 billion of cash that we've had above those higher levels for the last couple of years and plenty of access to debt to support our objectives. Right now, we actually have negative net debt. So we actually have more cash than debt. And we have the -- we're the highest debt-rated company in the semiconductor space. So we have plenty of access there. Do you have a follow-up?

Yes, please. So you've talked for years about the 300-millimeter advantage. And it's interesting, 300-millimeter not depreciated versus fully depreciated 200 millimeter. We just ran over the crossover point for 90-nanometer. And so curious, are you starting to see: A, acceleration potentially in share gains? Obviously, that will take time. But are you seeing anything on that front? And then secondly, it sounds like maybe some competitors are actually considering 300 now too. So how are you seeing the evolving landscape for 300-millimeter for overall kind of Analog?

I'll just comment on that. And Dave, if you want to -- all I'd say, we've been -- I saw the article that you're referring to, we've been investing in 300-millimeter since about 2011 because of the advantage, the long-term advantage that, that provides, and we've been talking about it. But other than that, Dave, do you want to...

Yes. I think that, obviously, we've talked about owning and controlling that manufacturing footprint is important. And the fact that we invest, we're putting in place 300-millimeter, it's going to continue to give us a structural cost advantage. As it relates to market share, we do believe that customers are attracted to the manufacturing footprint just as they have looked at improving their resiliency of their supply chain. And they like the fact that we control that supply chain. They like the fact of where those assets are placed. So that will likely be a tailwind to share gains. But I go back to what I've said for many years now, that share just doesn't move quickly in these markets. That's part of the reason why it's such a high-quality marketplace. There's lots of natural competitive barriers. So we don't expect that there will be a landslide or a significant shift at the rate of picking up share just based on history.

Next we'll hear from Blayne Curtis of Barclays.

I have 2 as well. Maybe just on the cost for a second, it's the same chart, I think you've had on the benefits of 300-millimeter. I guess in the past, you bought equipment kind of opportunistically, and I'm assuming to get the equipment now, you're paying a pretty premium price given the shortages we've seen. So I'm just kind of curious how to fix the math, obviously, then you have the offset from at least the 25% from the CHIPS Act. So I'm just kind of curious, you showed the same slide, but I'm just kind of curious, any thoughts on those moving pieces and how it changes that math.

Yes. I'll just -- that slide is meant to be high level, give you directionally what 300-millimeter does versus 200-millimeter. There are a lot of puts and takes inside of that. You mentioned a few of those. But the bottom line is that 300-millimeter is more cost-effective, structurally speaking, than 200-millimeter. And that's whether you buy the assets, used or new, just because they last so long. And those factories will generate revenue and profit for a long, long time. And the other angle to that is owning and controlling that, right? And have it in geopolitically dependable locations, which all are -- the factories -- the fabs that we are building in the United States. And I'll comment that the assembly tests are in geopolitically dependable locations as well in a diversified fashion. Do you have a follow-up?

I did. I wanted to ask you, on the inventory, it's kind of open ended, just as greater than 200 days. You've been adding inventory kind of at the end of the year. And if you think about -- it's a down revenue year this year. And if you're adding capacity, I think, at like 10% per your chart. So if you kind of match those together, you get over 200 maybe by June. And if you follow it out with Street numbers, you're kind of over 300 days. So I'm assuming you're not going to add that much. I'm kind of curious is it truly open-ended or there are some hard cap on where you would go. Obviously, revenue dependent, but just thoughts on that cap?

Yes. What I would tell you, go back to that slide that we showed, Slide 13, right? So we're managing for the long-term with that grayed line in mind and cycles come and go. But over there, you have seen what the semiconductor space has done, and we're only more excited just given the secular trends in industrial automotive and everything that goes underneath that, energy efficiency, safety, et cetera, that are driving those. So we believe in the long-term trend and we're putting inventory in place to prepare for the next up cycle. And as I pointed out, it's in the scorecard, the objectives for inventory are the same, right? So keep high levels of availability, customer service. And then the last thing I'll point out is, keep in mind, given our strategy, we have a very broad catalog portfolio, so [ a parcel ] to many, many customers in some in some cases, dozens of customers. and they have it in their applications for years, in many cases, decades. And the inventory itself lasts a long time on the shelf. So the risk of obsolescence is very, very low. So that allows us to think about inventory that way and to put it at such upside potential that we can run it the way we describe and have higher levels of inventory.

Next, we'll hear from Harlan Sur of JPMorgan.

As a follow-up on Embedded, it's driven relatively good growth trends post that refocusing of the business, right? A few years ago. And it's certainly holding up relatively well amidst kind of the near-term demand uncertainty. Can the team just articulate what is that new strategy and focus within Embedded? Is it more focused on core auto and industrial markets with application-specific platforms? Or is there more of a shift to general purpose products to go after the large market opportunity in the catalog sector?

Yes, thanks for that question. I'd say it's really the latter and adding in that from the very start are targeted to a broader customer base. And so I think of micro-controllers as an example, that can be used in hundreds of different types of end equipment. So as we've talked about, we want to have that business be a high-quality business, one that's contributing to free cash flow growth over the long-term. And so we didn't set any artificial turnaround dates for that business. And it takes time to build a high-quality business like that. So again, we're really pleased with the progress that we've made there. We're not popping any champagne corks and declaring it done. But we -- the objective is to make that a long-term contributor. Do you have a follow-on, Harlan?

Yes. So one of the -- as you guys mentioned, one of the near-term, newer sort of go-to-market channels has been ti.com, right? Grew strongly in '21, good growth in 2022, about 10% of overall revenues. Wondering if ti.com also has the additional benefit from a business planning perspective and operations perspective of just being a good leading indicator of the demand inflection just because, at ti.com, you guys are seeing customer demand transactions in real time?

Yes. I agree with the summary as well as the conclusion there. We do see customers come of all sizes, from very small customers to very large customers when they have a need, the convenience of having tens of thousands of our products available immediately. We've got that infrastructure in place that we can make a delivery to almost anywhere in the world the next day. And in some locations, we make multiple deliveries a day. So -- and whether you're thinking of a contract manufacturer that -- their margins aren't high. They have to -- got to pay close attention to cash flow needs. So having that convenience, they found, is very, very attractive. So -- but -- and it does give us a better or a real-time outlook on what customers' needs are and will fluctuate with that near-term demand.

Our next question will come from Stacy Rasgon of Bernstein Research.

The first one, I wanted to ask about -- is the driver of this change more around your confidence in the content trends in the businesses, or is it the geopolitics point? Like, are you thinking you're going to see like an acceleration in market share, say, in the out years as this capacity comes online and maybe the geopolitical situation evolves from where it is today?

Yes, Stacy, it's really a combination of the 3 things that we talked about. So the customer response to where we've got capacity today and where it's going. And the fact that we control it as customers are looking to understand resiliency of their supply chain, they find it highly attractive. But it also -- we do have a higher confidence in semiconductor content growth, especially in industrial and automotive. I kind of gave a couple of examples of why we have that confidence. And then the third one is just our great positions in those markets are continuing to get stronger with the product portfolio. So you can see that very clearly in the direction that we're going with Embedded, but it's true as well in our Analog businesses. So yes, and we don't have any inflection in share gain that's played into those numbers. But our confidence in share gains is, like I said before, is very, very high. And just as our 4 competitive advantages, manufacturing and technology, the breadth of the product portfolio, the reach of our channels. As you know, we've got 70% of our revenue direct. That just gives us better insight, access to more projects, just better understanding what their needs are. So all those things lead to the confidence that we have. You have a follow-on?

I do. So you're effectively reinvesting the entire tax credit in higher CapEx, which is fine. I get it. But you haven't baked in any of the direct subsidies, with potential for those. So assuming you get some direct subsidies, how should we think about what you might do with those? Should we think about those as an offset to this profile? Or is the potential there that those -- that some of those or all of them might get reinvested as well?

What I would tell you, at this point, the supportable revenue trend line that we show is how we're thinking about it and we showed you the puts and takes of the -- with the ITC. So we don't have any additional expansion beyond that at this point planned.