Good day, and welcome to the Texas Instruments Q2 2021 Earnings Release Conference Call. Please note that today's call is being recorded. At this time, I would like to turn the conference over to Dave Pahl. Please go ahead.

Good afternoon, and thank you for joining our second quarter 2021 earnings conference call. 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. Our Chief Financial Officer, Rafael Lizardi, is with me today, and we'll provide the following updates. First, I'll start with a quick overview of the quarter. Next, I'll provide insight into second quarter revenue results, with more details than usual by end market, including some sequential performance since it's more informative at this time. And lastly, Rafael will cover the financial results, some insight into one-time items and our guidance for the third quarter of 2021. Starting with a quick overview of the second quarter. Revenue in the quarter was $4.6 billion, an increase of 7% sequentially and 41% year-over-year, driven by strong demand in industrial, automotive and personal electronics. On a sequential basis, Analog grew 6% and Embedded Processing grew 2%. On a year-over-year basis, Analog grew 42% and Embedded grew 43%. Our Other segment grew 30% from the year-ago quarter. Moving on, given the current environment, again this quarter, I'll provide some insight into our second quarter revenue by end market and comment on our lead times. First, the industrial market was up mid-teens sequentially and up about 40% from the year ago. The strength was seen across most sectors. The automotive market grew sequentially following a strong first quarter 2021 and more than doubled from a weak year-ago compare. Personal electronics was about even sequentially and up about 25% compared to a year ago. The strength was broad-based across sectors and customers within personal electronics. Next, communications equipment was up low-single digits sequentially and was down upper teens from the year ago. Enterprise systems grew upper teens sequentially and was about even from the year ago. Regarding lead times, the majority of our products continue to remain steady. However, the growing demand in the second quarter of 2021 again expanded our list of hot spots, which required extending some lead times. As planned, we continue to add incremental capacity in 2021 and first half of 2022 with additional support from the startup of our third 300-millimeter wafer fab, RFAB2, that will come online in the second half of 2022. As discussed during our Capital Management review in February, our competitive advantage of manufacturing and technology delivers the benefits of lower cost and greater control of our supply chain, which really shows through in a market environment like this. Rafael will now review profitability, capital management and our outlook.

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, second quarter revenue was $4.6 billion, up 41% from a year ago. Gross profit in the quarter was $3.1 billion, or 67% of revenue. From a year ago, gross profit margin increased 290 basis points. Operating expenses in the quarter were $816 million, up 5% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were 19% of revenue. Over the last 12 months, we have invested $1.6 billion in R&D. Acquisition charges, a non-cash expense, were $48 million in the second quarter and are related to the National Semiconductor acquisition. These acquisition charges will remain at about this level through the third quarter of 2021 and then go to zero. Operating profit was $2.2 billion in the quarter, or 48% of revenue. Operating profit was up 80% from the year-ago quarter. Net income in the second quarter was $1.9 billion, or $2.05 per share, which included a $0.06 benefit that was not in our prior outlook, due to the signing of a royalty agreement. 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 $386 million in the quarter. Free cash flow on a trailing 12-month basis was $6.5 billion. In the quarter, we paid $942 million in dividends and repurchased $146 million of our stock. In total, we have returned $3.9 billion in the past 12 months. Over the same period, our dividend represented 56% of free cash flow, underscoring its sustainability. Our balance sheet remains strong with $7.4 billion of cash and short-term investments at the end of the second quarter. Regarding inventory, TI inventory dollars were down $34 million from the prior quarter and days were 111, which are below desired levels. In the second quarter, we signed an agreement to acquire Micron's 300-millimeter fab in Lehi, Utah. This investment continues to strengthen our competitive advantage in manufacturing and technology and is part of our long-term capacity planning. The Lehi fab will be our fourth 300-millimeter fab, joining DMOS6, RFAB1 and soon-to-be completed RFAB2 in our wafer fab manufacturing operations. We continue to believe that our competitive advantage of manufacturing and technology will be of growing importance in owning and controlling our supply chain. For the third quarter, we expect TI revenue in the range of $4.40 billion to $4.76 billion and earnings per share to be in the range of $1.87 to $2.13. We continue to expect our annual operating tax rate to be about 14%. In closing, we continue to invest to strengthen our competitive advantages and in making our business stronger. With that, let me turn it back to Dave.

Thanks, Rafael. Operator, you can now open the lines up for questions. In order to provide as many of you as possible the opportunity to ask your questions, please limit yourself to a single question. After our response, we'll provide you an opportunity for an additional follow-up. Operator?

Thank you. We will go first to Vivek Arya of Bank of America.

Thanks for taking my question. Rafael and Dave, when I look at the last few quarters, your reported sales have been significantly above your guided range. I mean between 5% to 13% above your original outlook and that’s making it very hard to interpret your guidance, because even now you’re guiding to a flattish outlook into what is supposed to be a seasonally stronger quarter. Should we take that to be conservatism? Should we take that to be a peaking in the cycle? And how is the demand so strong when you’re increasing supply but yet your sales outlook is flattish? I think it's a very confusing message and I would love your insights into how to interpret your guidance. Are we reading them in the right way?

Yes, Vivek, thanks for the question. I think, first, I would say perhaps normal seasonal patterns may not be the best measure to look at things in periods like this. Certainly, the last few quarters have been an unusual period that we've gone through and as we continue to move through it. So, as you said, the last few quarters have been exceptionally strong. Second quarter was certainly strong, both sequentially and year-over-year. So, if you look at our guidance, it would suggest that next quarter will again be a very strong quarter. As you know, our guidance is the best estimate that we have at this time. So that's what we try to do and try to give you that insight. Do you have a follow-up?

Yes. Thanks, Dave. So from what you said, I assume that you are implying conservatism unless you suggest otherwise. My real question is, when I look at the share buyback activity, it's been very low in the last few quarters. There are a few reasons why that would be, right? One is the simplest reason that maybe the stock is perhaps not attractive at these valuations, or it could be that you're preparing for some M&A, or is it some large CapEx or some caution about macro? I'm trying to understand why there is such a material shift in your return of free cash flow strategy. We understand the dividend part has been very strong, but the share buyback activity has been very low over the last almost a year now. So we would appreciate your views as to why you are not buying back your stock at the pace at which you have historically done so. Thank you.

No, I’m happy to address that one, Vivek. First, let me take you back to how we think about cash return. You've followed us for many years, and you've heard us talk about this year in and year out. Our objective when it comes to cash return is to return all free cash flow to the owners of the company. We do that through dividends as well as buybacks. Now that has never meant and doesn't mean that every single quarter or even every single year that the return is going to be exactly 100%. If you look at our history over 15-plus years, it has been actually above 100%. So that shows our commitment to that and that commitment has not changed. We are committed to returning all free cash flow to the owners of the company over time.

Great. Thank you, Vivek. We'll go to the next caller, please.

And the next caller will be Toshiya Hari of Goldman Sachs.

Hi, guys. Thanks so much for taking the question. I had two as well. One clarification, Dave. I think when you talked about automotive, you said up sequentially in the second quarter. Did I hear that right? Did you not give a specific number for automotive?

That's correct. It was up low single digits, Toshi. Do you have a follow-on?

Yes. So in terms of gross margins, I realize you guys don't run the business to gross margins. But clearly, you had a very strong quarter in Q2, and I know you don't guide gross margins going forward. Based on how you're thinking about utilization rates in your factories, given what you know about pricing in your business, both on the Analog side as well as the Embedded side going forward, how are you thinking about gross margins and the OpEx leverage going forward in your business? Thank you.

Yes. First, let me emphasize a point you made. We do not focus on gross margins in how we run the business. Our focus is on free cash flow generation, in fact free cash flow per share, and how we can grow that over the long term, because we think ultimately that is what drives value for the owners of the company. You can do that at 67% margin, at a lower margin, or a higher margin; it depends on a number of factors. To answer your specific question, as we have always guided, over the long term—not just one quarter or one year—but over the long term, 70% to 75% fall-through is the right way to generally model the company as we go forward. So as you put whatever revenue expectation you have there and apply that fall-through rate, you'll be in the ballpark.

Okay. Thank you, Toshi. I will consider that two questions, if that's okay. And we'll move on to our next caller.

And the next caller is going to be Stacy Rasgon of Bernstein Research.

Hi, guys, thanks for taking my question. So now you don't think about running the business to gross margins, but I'm going to ask a gross margin question anyway. You were at 65.2. Obviously, you did very strongly with this quarter. But you said you had $0.06 of royalties that was unexpected. That should have been about 1.4 points of gross margin as I understand it, if I do the math. And then I think you had something like $50 million in Austin costs last quarter that should have rolled off this quarter. That would have been another 100 basis points, give or take. So I'm actually wondering why gross margins were what they were—in fact, if I take out the royalties, they would have been up only 60 basis points, with 100 basis points of cost that should have rolled off with a massive revenue increase—what happened with gross margins in the current quarter given all of that?

So, Stacy, let me address that. First, regarding the royalty, it used to be included in revenue and gross margin years ago. We moved that to other income and expense about three or four years ago, and it has been in that line since. It is a relatively small amount and averages about $100 million a year. In the big scheme of things, given our revenue level, it's a relatively small amount and we expect that to continue to be small going forward. On the other part of your question, last quarter we had about a $50 million hit to our gross margins because of the winter storm in Texas. We mentioned that during the last call and that was all in gross margin. So yes, you can adjust for that when you analyze the margins and look at trends.

Okay, that's helpful. So my follow-up: you're guiding revenues flat, and you're guiding EPS down slightly. So either gross margins are going down or OpEx is going up, although typically seasonally into Q3 gross margins would be down a few points. Are you expecting any sort of different OpEx trends into Q3 than you would normally see, or is there something else going on because normally OpEx is down sequentially?

The reason EPS at the midpoint moves is because of the royalty we just discussed. If you take out that $0.06 from the EPS we delivered, you get to a more normalized EPS without that royalty and then compare that to the next quarter. You'll see that there's nothing unusual there. We only give revenue and EPS ranges; if there was something unusual in between the lines we would point it out, and there's nothing unusual. Nothing's changing much between the other lines.

Okay. Thank you, Stacy. We'll go to the next caller, please.

And next we have John Pitzer of Credit Suisse.

Yes. Good afternoon, guys. Thanks for letting me ask the question. Dave and Rafael, I just want to go back to the revenue guidance, sort of flat at the midpoint with part of the range implying down sequentially. I'm trying to wrap my head around the fact that your deficiencies kind of increased in the June quarter; you said your hot spots went up. It sounds like demand is still relatively strong, and yet there's a part of your guidance that could be down sequentially. Why the down sequential? I have to go back a long time to see you guys have a flat to down sequential Q3.

John, when you say down sequentially, just to clarify, are you saying that part of our range would imply it could be down and the other part would imply it will be up? If so, yes. If there's something unusual going on within an end market, region or product area, we've always provided insight into that to help understand an outlook or something that happened in a current quarter. I'll just say that there's nothing unusual we feel we would need to explain. As I mentioned earlier in response to Vivek, seasonality probably isn't the best thing to be looking at over the last few quarters. That range implies the revenue will still be strong.

Yes, just as my follow-up on RFAB2 and the proposed purchase of Lehi: should we think about RFAB2 coming online as planned? Should we think the pilot line is going on as planned but capacity at RFAB2 slowed, or how do we think about your mix of capacity as Lehi comes in next year? What does that mean for CapEx and the ramp of RFAB2?

Let me address that. First, our objective when it comes to CapEx is to invest to support new technology development and revenue growth, specifically extending our low-cost manufacturing advantage, primarily 300-millimeter. RFAB2 will be the third 300-millimeter factory. Lehi will be our fourth. RFAB2 will become operational sometime in the middle of next year when the shell will be completed and then we will be deploying equipment there. We are incurring CapEx because of that. CapEx as I said at the last call will be higher, both in absolute dollars and as a percent of revenue because of RFAB2. On top of that, Lehi is now part of the plan. That's a $900 million purchase price, which will run through CapEx, but the factory is ready for production once we qualify it, at relatively low volumes. We still have to add CapEx to take it to the volumes we want and that will happen over time. Think of that CapEx as probably going to run about half of what RFAB2 CapEx will run, and I'm talking over years as we deploy equipment there. Both of those will strengthen our competitive advantage in manufacturing and technology with two more 300-millimeter factories.

Okay. Thank you, John. We will go to the next caller please.

And that will be Blayne Curtis of Barclays.

Hey, thanks for taking the question. I just want to ask on, I know you're not going to probably guide December, but any feel you can give for that quarter. Obviously, seasonality has been out the window; typically it's a down quarter. Just trying to get a better handle on the back half of the year: anything you can throw out there for December?

Yes, Blayne. Certainly, there is a lot of speculation on how long the strong demand will last. We've read the ranges that it will end soon and others that say it will continue for quite some time. We are not going to forecast the fourth quarter or comment on how long the cycle lasts because we don't know; I don't think anyone knows. What we can do is frame the actions we've taken and our approach through the cycle. In the first phase, we accelerated into the widely anticipated decline and that enabled us to gain ground. In the second phase, we're working to ensure we gain strategic ground, particularly in industrial and automotive, and those gains will reward us for years to come. Independent of that, we are investing for the long term. Some visible actions are the new manufacturing investments in RFAB2—if you're down in Texas you'll see cranes up over the building. The additional Lehi purchase, and some less visible ones are the R&D investments and new capabilities on ti.com. Those investments are continuing. We will go through cycles. We won't be able to predict them, but we can make the company stronger and continue to invest in our competitive advantages. Do you have a follow-on?

Thanks. Yes, I just wanted to ask you on inventory levels. Obviously, days of inventory are way down at these sales levels, but your ability to grow the absolute amount and if you're able to do that in September?

I'll start and Dave can follow up. First, our objective on inventory is to maintain high levels of customer satisfaction while minimizing obsolescence, which frankly is not an issue given our business model. We are clearly below desired levels, as we said in the prepared remarks. We are running about 111 days and our target is 130 to 190 days. That's part of the reason why we have the hot spots we talked about. Going back to the second quarter last year when the pandemic started in March, many competitors decreased inventory levels and slowed down factories. We went the other way; we maintained and in fact increased our production levels and inventory went from about 140 days to the 160s or 170s. That along with our business strategy and model helped put us in a great position and helped us do significantly better than our competitors over the last three or four quarters. But we have gotten to a point where inventory is below desired levels. We will continue to add incremental capacity in all of our factories, especially RFAB1, and the next bigger tranche of capacity will come with RFAB2 as discussed earlier. Once operational sometime next year, that will add a significant amount of capacity and shortly after that Lehi will also contribute additional capacity.

I would add that whenever things do slow we will use that period to rebuild inventories in those positions to support future growth.

Both RFAB2 and Lehi are long-term plays to strengthen our manufacturing advantage by owning our manufacturing. This has proven important during the pandemic. They will help in the medium term, most likely, but if things slow down that's fine with us. The reason we are equipping and buying Lehi is for long-term positioning to support long-term revenue growth in both Analog and Embedded.

Okay. Thank you, Blayne. We will go to the next caller please.

And next we will go to Ambrish Srivastava of BMO.

Hi. Thank you very much, Rafael and Dave. I had a question on free cash flow per share. I don't look at it on a quarterly basis. If I look at the last two years, free cash flow per share in 2020 was down 3%. 2019 it was flat. I know that on a trailing 12-month basis it is up double-digits this year, but it has lagged over the last two years. What's the right way to think about the lag over the last two years and how should we think about it going forward?

Most financial metrics can be choppy over short periods. If you want to look at this over the long term, any one quarter or year could be a little choppy. You mentioned a couple of years where the trajectory does not represent the longer term, and arguably the same thing for 2021 and the trailing 12-month number you quoted. If you look at this over the long term, that's how we look at it and that's what's going to ultimately drive value for the owners of the company.

Do you have a follow-up, Ambrish?

Yes. With all the tightness and constraints, and given the way you have managed the business, the share shift probably wouldn't show up that quickly because designs are long lasting and don't change on a dime. Are you seeing any discernible change in your design activity as a result of what we've seen from your peers with the tightness and you managing your lead times and inventory much better than some peers? Thank you.

I'll start and Rafael can add. We started the journey to closer direct relationships with customers about seven to eight years ago with investments in ti.com, sales, applications teams, processes and structure. Last year we took a major step of doing more customers direct and transacting through ti.com. That, combined with virtual sales during the pandemic, has positioned us well strategically, especially in industrial and automotive where we want to gain strategic ground. Supply shortages started showing up in early 2020 and reaccelerated after that. There are cases where customers redesign boards because of availability; I would describe those as outliers. More commonly we see designs being iterated as they come through. Our sales teams are engaged from production all the way back into engineering and that visibility is a great strategic advantage that will pay rewards for a long time. I think we've got time for one last caller.

And that caller will be Chris Danely of Citigroup.

Thanks, guys. Dave, by the way thanks for the other analysts going first and beating you up on the flat guidance so I don't have to. My question is on the auto revenue. If we look at headlines and talk to folks in the auto supply chain, there's still a lot of shortages out there. I think your automotive revenue was only slightly up sequentially. Can you explain that discrepancy? It seems like it would be up more if so many folks are clamoring for parts.

I would point out it more than doubled from a year-ago, Chris. So it's a bit more than slightly up—over the year the growth is substantial. You're pointing to the sequential. Last quarter it was up over 25% from pre-pandemic levels. I don't think we are shipping 25% more cars from pre-pandemic levels. Our shipments into automotive are up significantly and we continue to add capacity and we believe we are gaining share. You have a follow-on?

Yes. On the hot spot question: you said you're seeing a few more hot spots last quarter. Do you think the situation gets a little worse this quarter or does it get better? When do you think you'll start to get a handle on these supply issues?

Chris, it will depend on demand. On the supply side, we are adding capacity incrementally and will continue to do that. The bigger tranches of capacity don't come in until about a year from now with RFAB2 and then Lehi about six months after. So it will be a while before we have big tranches of capacity coming online. Ultimately, demand is the deciding factor and we don't fully control that—it's a macro situation. We are better prepared than our peers because of the tactical decisions we've made during the pandemic and, more importantly, our business model and owning our own manufacturing. That has been key, and we are doubling down on those investments.

Thank you, Chris. Rafael, do you want to wrap up?

Yes. Let me emphasize what we've said previously. At our core, we are engineers and technology is the foundation of our company. Ultimately our objective and the best metric to measure progress and generate long-term value for owners is the growth of free cash flow per share. While we strive to achieve that objective, we will continue to pursue our three ambitions: act like owners who will own the company for decades, adapt and succeed in a world that's ever changing, and be a company we are personally proud to be a part of and would want as our neighbor. When we're successful, our employees, customers, communities and owners all benefit. Thank you and have a good evening.

This concludes today’s call. We thank you for your participation. You may now disconnect.