Texas Instruments Incorporated (TXN) Earnings Call Transcript & Summary

You were the only ones that actually decided to keep running on COVID. Everybody else shut down. It was a problem, right?

Correct. I don't think it was well received at the time, but all we wish right now even more, right? And that's what guides are current inventory investment, which is the right part because we have the right data to know chart. And we think it's going to step up very well, especially if the surge is in [indiscernible]. And at least I prepare at least similar historical surges. Stacy, if you look at units. I know you look at the unit you take a unit spend, forget about TI. Look at the market without memory, we're below [ 2019 ] growth, right? Are there more stock for every end equipment? There are. How come we are lower than the [indiscernible] It's going to catch up. It always does.

[indiscernible] Versus 2019 was the last industry downturn, 23% was a downturn. Non-memory revenues in '23 were down about 2% year-over-year. It wasn't a bad younger, but units were revenue -- units were down almost 20%. The only other [indiscernible] year-over-year unit growth was 2001.

Correct.

And units [indiscernible] were below the prior downtown 2019. ASPs were 30% higher for the industry and [indiscernible].

Yes. We started the history as well and by the way, we look at what in WTS come with soon in a couple of days for April. But I will tell you that I think we're going to break a new record of [indiscernible] on unit given versus the [indiscernible] and model [indiscernible]. To me, we have to prepare because that thing gets us up. No one believes it during the [indiscernible] when you see it, it's too late.

So let's talk about that. Broadly, it's been a weird cycle, right? I mean it's been very asynchronous and we've had different end markets [indiscernible] peak and trough and leveled off over the different points. Does it like industrial [indiscernible] has rolled over really hard. And I think we've crossed a lot of the times were down 40% or whatever peaking revenue. Auto starting to -- It's no lapsing, I wouldn't say, but it's starting to roll over. It looks like broadly for most -- you and your peer people calling Q2 was the bottom. And you talked about like sort of like hopeful signs of recovery I think there's still some controversy over the shape and trajectory that [indiscernible]. But like what are you seeing in, I guess, in the near term. I'm looking into the second half and maybe in the [indiscernible]. Are we seeing actual signs of like robust recovery yet? Or is it V-shaped or U-shaped or L-shaped, or like and I know you guys usually don't talk about cycle. In this form, I don't usually like to like drill a ton into short-term questions. Especially if you're actually looking for a recovery and preparing for you, what are you in terms of where that recovery might actually be starting now?

Look the duration of the down cycle was because of this synchronous nature, I think you're right. And we just see a [indiscernible] behavior on everything. If you look at markets, call it fee first in, call it...

It's kind of stabilized for you guys.

Now it's gained momentum. Yes. So it's driving growth or is year-over-year growth and it's accelerating. And you can see that, I believe, I mean, we'll have [indiscernible] could be here in [ 2024 ]. You think about geographies, China first, we have up cycle. [indiscernible] down cycle. Are we seeing some signs in China that things can recover we mentioned [indiscernible]. I think that's going to look better as we go. Industrial, to your point, [indiscernible] to maybe [indiscernible]. But in a different, different levels. So Industrial a very strong correction. Over there, I don't think it's still just inventory over building and now just in -- I will say that automotive, I'm excited about for revenue for TI, I mentioned 10 to 2013 to 2023, 10% growth for industrial and automotive is 15%, which I believe [indiscernible]

[indiscernible]

[indiscernible] actually 34 and growing. So if you think about last year grew 17%, if you think about Q1 declined year-over-year for the first time, at minus 2%. So very low single digit. But I think we are seeing a very shallow trough. So and I think it's related to [indiscernible] growth in automotive. Second, our position, I think our position is good. So I'm excited about automotive. I think we see momentum building sooner than later. So that's on the automotive side. And yes, we've guided mid-single digits, I think, for Q2. I think in some areas, as I mentioned, consumer earnings may be enterprise and [indiscernible] following. And I think industrial will be the last to correct. Because it declined more or less -- the tough sector in industrial decline during the end of last year. Last point I will make on industrial and you know it's hundreds of end equipment. Not everyone is the same. Power tools and thermostat, call it, appliances, building automation and are already looking to gain momentum. Factory automation, [indiscernible] still in the correction phase. So every end equipment has its own -- now you asked about the -- when the market goes back up, when all these -- immediately when I see a decline, I'd like to count to 4 quarters when all these markets go through one year of inventory correction, we are somewhere at the end of '24 when it's done. So we can think about an opportunity moving forward.

Is it fair to say that you guys clearly do a lot more in-house on even more control, everything you're doing is you have more control over your own destiny. But you don't have as much of a channel, you don't have as much of a buffer. Is it fair to say that you're what you're seeing is likely closer to what your end customers are actually seeing versus having that buffer between [indiscernible]. People look at you as the first actually start to see the decline, right? Maybe for that reason. People wonder -- is that a...

[indiscernible] valid cause. And we can see it mainly when we go just in time to customers. So not only we are direct, some of the customers work with consignment. We built a buffer and that could they consume it real time. So I believe we can see real-time behavior of customers and automotive is a great example. Most of the customer bases [indiscernible]. And I think you get real time signal. On the industrial side, there is a heavier reliance on the channel, on the distribution. Our footprint is not large...

Distribution revenue mix that's not that high, anymore.

25% in '24 [indiscernible]. Yes. So 25 -- And yes, probably going to put around that 25% may be a little bit lower over time. But we also are excited about the investment in the other part of the dual channel, we call it, which is our website or ti.com for e-commerce. That's something that we are modernizing and we like the investment we're making there.

What are your sales going through there, by the way? You gave some numbers on the cash a couple of years only happen...

I mean it did very well in -- during the upturn because that's what customers want when you need the immediate availability. I think stabilized to a lower level, but it's still much more significant versus pre-COVID. So -- and it can establish -- and we are making investments over the [indiscernible] data, information that can use bigger [ worlds ] are going to start in the future. We think this last mile as we call it, is kind of messy in our industry. And why not modernize it and take advantage of the IT development in the world to serve our customers better. I think our customers expect that and those who are getting on that modernized channel are excited about that.

I guess it gives you like an early view to what customers...

It's always [indiscernible]. It's always [indiscernible].

Do you want to talk about China?

China, yes.

So even beyond TI, like a lot of investors, I mean, they see just a ton of capacity coming on in China as well. [indiscernible] is going to go into those fabs. It's all lagging edge because they can't do it again. So people clearly worry about potential for like local Chinese replacement particularly [indiscernible] another lagging edge technologies. And I think you guys have, I don't know, 50% of your revenue goes into China though. I don't think that a lot of that's multinationals. I guess what's the local consumption in China? Do of you have 20%?

So I think you quoted a ship 2 number. [indiscernible] about our largest customer. That's China. I think it's not reporting that [indiscernible] as relevant. So we are now reporting -- we are reporting a headquarter in China revenue. The customer headquarters in China. I think we see Q1 is 17% like, 17% equals higher during COVID. But also, as I said, China was [indiscernible] down cycle, and I think it's probably going to be -- usually it's [indiscernible] see that. And just on the China side, let's put things in perspective of capacity, China is about 17% to 20% of GDP. So in the market opportunity related to GDP we think [indiscernible]. It's still a very important viable market that we want to complete it. And they have enough capacity to serve them and more, because they're built up of lab and is not, I think, for China. They have ambitions to get into [indiscernible] I think about big parts sitting in our servers, in our medical equipment, in EVs. I'm not excited about it. I'm not sure the U.S. government is excited about it. I know that my customer is excited about it. So this is where this geopolitically dependable capacity is coming in big role on the future of Chinese. And I think it's very, very important to [indiscernible] the parameters of our customers make decisions. So that capacity, again, we complete, we see in China, China mainly. We see subset of competitors have less or predominantly stablish and we compete. Luckily, the set of competitive advantages that we've built over the years [indiscernible] technology and manufacturing, as we said, relying on our sales cost advantage. The breadth of the portfolio, which is very unique versus the set of competitors in China. The China advantage, the reach, [indiscernible] touch so some of them very small that the local players don't even know. And [indiscernible] is the position we've built in industrial and on automotive. It's very similar in China, also close to 80% of our revenue in China in [indiscernible] automotive, I give ourselves a good chance to compete, but it is becoming more competitive, and that's what's going on high level over there.

Do you think the pricing trends in China are different from what you've seen elsewhere in the world? Like you can be harder in China versus where you have to compete up?

I do because I think the local -- or the emerging competition in China is highly accepted in China. So -- and I think TI can gain premium over there because we have the breadth, we have the quality being a trusted supplier for many years, especially in industrial and automotive. There is some moats around this type of market. But these guys are capable. I don't want my team to saying they can do only a very simple part because I've seen these people building more and more complex set of solutions. And we need to compete across the board, not -- on the catalog type of more general purpose cards, but also on the application specific [indiscernible] people higher. And of course, the market price is set by them. But it's not a walkaway market price [indiscernible] the cost competitiveness as we play that game.

I guess to touch on that concept is due for [indiscernible] capacity. How important is the Chips Act [indiscernible]. If it wasn't for the Chips Act, would you be pursuing the same CapEx into the year revenue?

Yes, I think we talked about it last year and look, you -- every time you make an investment, you look at the probabilities and affordability, and it's always a set of parameters. And we were very clear that we decided to increase our investment or [indiscernible] on capacity because they got -- also because we got some help from the fact. I think we had a plan at the beginning, hey, let's build for loyal revenue opportunity. And we said, hey, let's take it a step up because we are getting help. Unfortunately, I cannot communicate where we are because we are not done yet. So we have supplied the application. Of course, the ITC is helping. But beyond the ITC after...

ITC, it is actually bigger, right?

I mean, it's expected to be bigger, with 25% of your improvement in the U.S., but the [indiscernible] are also important. And we are waiting to see where that lands and I think we've submitted it end of last year, and we should hear I believe, in the coming month where we landed. So this is definitely helping. But compare that to what China does so there in [indiscernible] health is important for us to complete [indiscernible] other players.

Got it. Got it. I want to ask about a couple of the growth markets that might [indiscernible]. So how much exposure does TI -- because I was -- it's not really, really a joke like I would say that you was happy to sell like the headlight controller of the cars [indiscernible] or anything else, right? It doesn't seem -- you're just playing the general content trend. But like how do we think about EVs and their impact on...

First, let me -- I don't know if it's correction or clarification.

[indiscernible] anything I say.

Automotive, a very complex ADAS process of the tenths of dollars all the way to lighting controllers. So I -- we don't like to brag about radar solutions, the 77 gigahertz [indiscernible] right now. But or [indiscernible] high-speed connectivity, the transit hundreds of millions a year and [indiscernible] controller for onboard charger with our DSP solution but we ship them and ship them at a high volume. But we also ship, as you said, a bunch of catalog parts [indiscernible] automate very proud of, and they all end up with a very significant opportunity in automotive. Automotive, I think, right now in Q1 was the size of industrial already, they were on the same level. And I would say that the breadth of the opportunity is only grow. Now we go to EV, more than 2x, Stacy, when you look at our exposure and our opportunity...

Like how much of your auto revenue today is EV? I don't know if -- you said there's going to be overlap, I'm assuming...

I don't have that right now in front me [indiscernible] But it's significant. And the beauty of it is, EVs are not fully run the risk of reduction, right? So there is room to grow over there. But as I talked about the last decade, it was mainly on [indiscernible]. And I think what the future -- 10 years is mainly on [indiscernible] NAV.

Do you think your content in EV is 2x you said?

Our opportunity on EV and we've done that [indiscernible] and we kind of look at as a dollar opportunity, more than $1,000, and it's...

[indiscernible] how much TI -- what's the average TI content in the average car...

Today, we are shipping hundreds of dollars in some cases, close to $1,000 in some cases lower. But very high content. It depends on the how many cameras, how many screens, it depends in the vehicle [indiscernible]. But if you look at the high [indiscernible] well above $500 a vehicle.

Got it. And then I'd be remiss -- I don't know if you want to hear but I have to ask about AI, like -- is there any -- is there an AI play for TI? Like where do you guys benefit from that?

Yes, a growing opportunity. So let's say, the biggest one I'm excited about is cloud and servers and the compute guys, they are starting to power in level by including the meds, and about a 1,000 going [indiscernible] going into [indiscernible] close to a kilowatt and higher. And if you look at -- just want to be higher, right? So the way you serve that is about, we call it, multiphase convert [indiscernible] many, many parts going and serving these process. So I'm excited about [indiscernible] company today, because this is on the newest technology.

How could we know that Sherman go down to it?

At 65-nanometer, we think we are billing the best [indiscernible] processed on earth. And in terms of the opportunity to server very fast growing market from the U.S. again, because you want these [indiscernible] parts to come from the dependable source. I see growing opportunity, the product portfolio is there. We are talking with all the big ones and [indiscernible]. They are also from platform, but I think they are still kind of [indiscernible] the surface. I think the peak trend -- actually look to it, let me see, close to $1 billion business, if you look at the [ datacom ] in the server and also power, but power is the biggest one, okay. So that's on AI. The second part, and maybe I should have mentioned it even last year when you asked me the question. Think about the edge. We have a good low power processing business, thinking about our DSP days. What are the [indiscernible] network and tiering. These are metric manipulation. We would accelerate that we've developed probably over the years. They sit in our processors. And when you think about inference, TI is there. DMS or driving monitoring systems, we have a leading solution, winning us many, many OEMs and that is using the machine learning accelerator. Think about -- even go to [indiscernible] in new energy infrastructure, TI's DSPs are solving that problem as well. So AI at edge for inference is a growing opportunity for the company. And we have early wins. The last one early, but robotics on content per robot for the company is significant. Tens of micro-controllers, some of them with machine vision capabilities. So that is still -- think about the human -- human robotics, they have a lot of content for...

Do you have humanoid robots?

I know that there is a lot of content per robot. I just know how to serve the end equipment. Calling out how many units will be sold in the future, I was never good enough to guess that. Within the socket is where we are busy.

I wanted to ask a little bit more about like industry structure, particularly on M&A. So like TI has not really participated in like large-scale M&A for quite a while, like you've had some competitors who have. I'd argue have been fairly successful at it. What are your thoughts on that view? Is there, anything -- I guess, do you need like -- have your priorities on what you would be looking for if you were looking for deals? Have those changed at all over the years? Or is that what kind of kept you out of it?

Look, we -- I think nothing has changed there. We are always looking. It's -- we always said it's going to be analog-centric. We always look at the [indiscernible] technology that can complement our portfolio. We don't have a lot there when you look at it, even if -- take an example of a [indiscernible] technology. Like [indiscernible] we are investing this internally. So I think we many times prefer to make versus the buy opportunity. But depending on the right time and also we need to think about affordability. Right now, we are so busy in getting ahead on capacity and getting back to that free cash flow [indiscernible] as we mentioned. that's a priority right now. But as we go back to the trend, maybe opportunities will pop up and TI will make a move. But at least, what I like about our position right now. There is nothing that we really need to build a scale and to set the future for the company.

And I guess talk about the free cash per trend. Free cash flow per share trend. Do you have a number in mind? I know you've given like sort of revenue capacity, like kind of numbers. And if you go back to the [indiscernible] coming out $9. I think it was $11 in '27. And I presume you guys have done the math on, hey, if we cut our CapEx [indiscernible] at the free cash flow for sure goes up. But you have some idea of like what that free cash flow per share trend ought to get you in '26 or '27 or 2030 or like where there is like what are we [indiscernible] for here?

Yes. I thought we were very -- I think we had a slide in capital management...

That why I'm asking. I can't [indiscernible]

Okay. It's 12 in [indiscernible] and 2027 not that I remember, okay. But this trend line -- this trend line...

That was not a target. That was to...

No. But the trend line is [indiscernible], I think like -- or they said it, this is what guides us and that trend line. We haven't shown a trend line 15 years they say, not that I'm picking on you. But we showed a 2004, I think, through 2022 when the extrapolated the trend line through 2030. So when I think about when you get back, it's within that time frame and I don't have 2030 in my brain, okay? I see the modular capacity plan coming in play as a back end of 2015 to '27. And that's the expectation. I mean that's [indiscernible] of course, revenue is to do something during that time. But even if revenue wants to be very poor, then what do you do with CapEx [indiscernible], okay. you let it falls through, and it will fall very nicely. So we have done all kinds of scenarios over there and I'm excited about it and the beauty of where we are, I don't think you put cycles to get that to come into play. So we are -- I think, marching into the next cycle. It's the first time we have predicted or guided for sequential growth after 2 years, I think. 2 years [indiscernible]

Actually down [indiscernible]

Something like that. I guided the first 9 month for [indiscernible]. And it's easier to invest when you have revenue momentum on your side. So I think that's what my when I compare [indiscernible] to a year ago. I see markets joining the inventory digestion. And I think a big part of it is behind us. There is momentum [indiscernible] on revenue, the factor [indiscernible] operating, using a wonderful cost until alternative cost and as revenue growth, I think that still come to fruition very quickly. So I'm super excited about that thing.

That makes sense. Look, we've got about 1.5 minute left. You've kind of been doing it, but I'll give you [indiscernible]. Why should investors buy TI stock today?

Okay. First, I think, and again, the investment, yes, we make equipment thinking like long-term owners. And I think about [indiscernible] 10 or 15 years, but you don't need to wait 10 or 15 years for this investment to come to fruition. We are a very unique supplier in terms of have a combination of enough capacity. The cost competitor or affordable position and very dependable. And as customers tell more and more about it and as revenue starts to build momentum again after a very tough cycle, I think the company could not be in better state as it is today. I'm excited about the future [indiscernible] for us for all of our shareholders. So that would be my short pitch.

And I think that's a good place to leave it [indiscernible]. Thank you so much.

Thank you, Stacy.