Welcome to Texas Instruments Second Quarter 2022 Earnings Release Conference Call. Today’s call is being recorded. I’m Dave Pahl, Head of Investor Relations, and I’m joined by our Chief Financial Officer, Rafael Lizardi. 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. Today, 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 some details of what we are seeing with respect to our customers and markets. Lastly, Rafael will cover the financial results and our guidance for third quarter 2022. Starting with a quick overview of the quarter. Revenue in the quarter was $5.2 billion, an increase of 6% sequentially and 14% year-over-year, driven by growth across markets. Analog revenue grew 15%, Embedded Processing grew 5%, and our Other segment grew 19% from the year-ago quarter. Now let me comment on the environment in the second quarter to provide some context of what we saw with our customers and markets. As we spoke about in our last earnings call, April started out weak from COVID-19 restrictions in China. As those restrictions began to ease towards the latter part of May and into June, customers began to pull product generally consistent with their prior demand forecasts at the start of the quarter. Moving on, I’ll provide some insight into our second quarter revenue by market from the year-ago quarter. First, the industrial market was up high-single digits and the automotive market was up more than 20%. We saw weakness throughout the quarter in personal electronics, which grew low-single digits. Next, communications equipment was up about 25%. Finally, enterprise systems was up mid-teens. Rafael will now review profitability, capital management and our outlook.

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, second quarter revenue was $5.2 billion, up 14% from a year ago. Gross profit in the quarter was $3.6 billion or 70% of revenue. From a year ago, gross profit margin increased 240 basis points. Operating expenses in the quarter were $836 million, up 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.2 billion or 17% of revenue. Restructuring charges were $66 million in the second quarter and are associated with the LFAB factory that we purchased in October of last year. Operating profit was $2.7 billion in the quarter or 52% of revenue. Operating profit was up 23% from the year-ago quarter. Net income in the second quarter was $2.3 billion or $2.45 per share. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.8 billion in the quarter. Capital expenditures were $597 million in the quarter and $2.8 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $5.9 billion. In the quarter, we paid $1.1 billion in dividends and repurchased $1.2 billion of our stock. In total, we have returned $6.2 billion in the past 12 months. Our balance sheet remains strong with $8.4 billion of cash and short-term investments at the end of the second quarter. We retired $0.5 billion of debt in the quarter. Total debt outstanding was $7.3 billion with a weighted average coupon of 2.7%. Inventory dollars were up $139 million from the prior quarter to $2.2 billion and days were 125, down two days sequentially and below desired levels. Accounts receivable for this quarter ended at $2.2 billion, up from $1.6 billion a year ago. This increase primarily reflects the higher proportion of shipments made near the end of the quarter, as COVID-19 restrictions were lifted in China and customers began pulling product. For the third quarter, we expect TI revenue in the range of $4.90 billion to $5.30 billion and earnings per share to be in the range of $2.23 to $2.51. This outlook comprehends the weaker demand we see, particularly from customers in the personal electronics market. We expect our 2022 effective tax rate to be about 14%. Lastly, we and our customers remain pleased with the progress of our expansion of manufacturing capacity, which was outlined in our February Capital Management Call and will support the long-term secular trend of increased semiconductor content per system. We broke ground on the Sherman manufacturing complex in May and work continues at RFAB2 and LFAB to prepare for production output. In closing, we will stay focused in the areas that add value in the long-term. We continue to invest in our competitive advantages which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long-term. With that, let me turn it back to Dave.

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

Thank you. We’ll take our first question from Stacy Rasgon with Bernstein Research. Please go ahead.

Thank you for taking my questions. I wanted to ask about gross margins. They were very strong but they declined sequentially from Q1 to Q2 even as revenue grew. I know you don’t provide guidance on gross margins for next quarter, but it seems like they might be projected to decrease more than revenues. I’m curious if there’s anything happening, either with costs or pricing in this environment, that could be affecting gross margins.

Yeah. Stacy, I’m happy to address that. So first, as you pointed out, our gross margin in second quarter was about 70%. We are pleased with that performance. The fall through on a year-on-year basis was almost 90%. I would also point out that you can see this on our cash flow statement, depreciation increase sequentially by about $30 million and that’s a direct result of the investments in manufacturing capacity. On your second part of your question on a go-forward basis, as expected, depreciation is going to increase. We’ve talked about that in the February call. To help you, I’ll tell you that for 2022 expect depreciation to be about $1 billion for the full year. Do you have a follow up?

I do. Thank you. It sounds like you had a surge in demand at the end of Q2, as everything opened up. So I guess that’s leading into Q3. I’m just wondering if the shape of the revenue the linearity through Q3 kind of looks the reverse of what we saw in Q2, we had a weak start and a strong finish in Q2, do you think we have like a strong start and then maybe a weaker finish into Q3, just given that, I guess, the demand surge that we’ve got going into it?

Yeah. Stacy, this last quarter, obviously, was unusual in it because of the COVID restrictions that we had talked about, right? So those shipments were scheduled earlier in the quarter. So really were reflective of the restrictions lifting and our ability to and customers' ability to be able to receive that product. So you have that noise going into it. But as we said, in the prepared remarks that we did see weakness in the personal electronics market and that weakness is comprehended in the guidance in the third quarter. So, thank you, Stacy. We’ll go to the next caller, please.

We’ll take our next question from Vivek Arya with Bank of America. Please go ahead.

Thanks for taking my question. First one, I think, you mentioned, Q3 is below seasonal, because of pressure on the consumer. I’m curious, what about the other segments, automotive, industrial, comm. equipment, enterprise and so forth? Do you see their demand is seasonal or different than that?

Yeah. Vivek, I would say that as you know, we don’t forecast the out quarter by market, with the exception when there’s something significant that’s an outlier and hence that’s why we’re highlighting personal electronics. So I would just leave it at that. That’s where we’re seeing really most of the weakness. Do you have follow-on?

Thank you, Dave. My follow-up question is about free cash flow. In 2020, TI’s free cash flow was 38% of sales, then last year it decreased to 34%. Currently, on a trailing 12-month basis, it stands at 30%. You're guiding for Q2 to be below seasonal levels, and Q1 and Q4 are also expected to be lower. You've mentioned a commitment to your CapEx plans. Is it accurate to say that we should anticipate free cash flow margins to remain at the lower end of the target range in the near- to medium-term?

I’ll address that question from a few perspectives. First, regarding the second quarter, as we noted, a significant portion of revenue arrived late in the quarter. This resulted in much of the cash being tied up in accounts receivable, which I mentioned in my prepared remarks. Consequently, this will somewhat distort your cash flow trends. On a broader scale, we are very enthusiastic about our investments in manufacturing and technology. These investments will strategically position us for long-term growth by providing the necessary manufacturing foundation to support revenue expansion, which will lead to an increase in capital expenditures, as we discussed in February. At that time, we projected an average capital expenditure of $3.5 billion per year from 2020 to 2025. For this year, we expect to spend around $2.5 billion, which aligns with our expectations, though it may be slightly higher. Since the average is $3.5 billion, you would anticipate that the following years will exceed that figure.

Okay. Thank you, Vivek. We’ll go to the next caller, please.

We’ll take our next question from Ross Seymore with Deutsche Bank. Please go ahead.

Hi, I wanted to ask about the supply side. You have several new facilities that are starting operations, including RFAB2 and LFAB, in addition to breaking ground in Sherman. Could you clarify when we can expect that capacity to positively impact revenue and how we should consider the depreciation from these facilities, especially since Rafael mentioned an anticipated $1 billion for depreciation this year?

We are very excited about our investments in RFAB2 and LFAB. RFAB2 is expected to support production in the second half of this year, while LFAB is set to launch in early 2023. We recently broke ground on the Sherman facility, and we anticipate that the first factory there will contribute to revenue starting in 2025. Regarding depreciation, I mentioned earlier that we expect $1 billion for this year. Looking ahead, I previously indicated in February that we expect around $2.5 billion in depreciation by 2025. You can estimate that increase from $1 billion to $2.5 billion occurring linearly between the end of 2022 and 2025.

Do you have follow-on Ross?

Yeah. Thanks for that color. I guess the final topical side, the Chips Act in the equivalent thereof in Europe. All the numbers you just gave, I assume are exclusive of those government policies? How should we think about TI taking advantage of those policies or not and maybe lowering some of those impacts financially on your company?

The figures we provided over the past six months did not account for any advantages from those bills. Regarding the Chips Act, it is encouraging to see strong bipartisan support for U.S. semiconductor manufacturing, which will enhance domestic chip production and strengthen our competitiveness in the industry. This provision will be significant and align with our manufacturing strategy. The bill has yet to be passed, but once it does, we will assess the benefits it offers. We expect to gain from both the grant portion and the investment tax credit portion, and we will share updates on the benefits as they become relevant.

Great. Thank you, Ross. We will go to next caller.

We’ll take our next question from Joe Moore, Morgan Stanley. Please go ahead.

Great. Thank you. I guess going back to the guidance that you had given in April when you talked about kind of maybe demand to support $5 billion in Q2 and then but you were taking it down to $4 billion or $5 billion, because of China lockdown. Can you just give us some sense of how much of that $500 million? Did you end up capturing how much of this upside reflects upside in other regions? Just put this in the context of that original adjustment?

Yeah. I would say, as we said in the prepared remarks, Joe that customers were generally pulling with their original demand forecasts, right? So meaning that as we looked at what was going on, we started the quarter, we’re tracking lower. But as we talked about last quarter, customers weren’t canceling orders. They weren’t rescheduling. They still wanted to have that product. So that’s really what made up the majority of that, where we came in for the quarter. Does that help?

Yeah. That does. And then if you could just characterize your customers kind of mentalities around inventories at this point. Obviously, we’ve been dealing with hotspots and tight conditions for a while, do you feel like your customers in industrial, automotive markets are looking to build buffer stock inventory, so that this is tempered? Again, just kind of how are people thinking about that?

Yeah. I think many have reported and we can see in the filings that our customers have had, that there’s clear signs of inventory being built over the last several quarters. And there is discussions on how much inventory do they hold more permanently and those types of things. We’ll see how that behavior changes over time. I think there’s some places where that probably will stick and probably some places where it won’t. But I think the most important thing when we look at it, because we won’t manage our customer’s inventory, but we can manage what we do. And we’ve long believed that owning and controlling our inventory is really a strategic advantage. So you’ve seen us take those actions over time. We finished the quarter with just a little over $2 billion of inventory. So whenever things do weaken, we’ll take that time to replenish inventories that will keep lead times stable and low. And those are the best things that we can control and what we’ll do as we move through the next few quarters. So thank you, Joe. We’ll go to next caller, please.

We’ll take our next question from Chris Danley with Citi. Please go ahead.

Hey. Thanks, guys. So, with the weakness in PE, but also the strength in auto and industrial, are you or can you take some of that capacity from the weaker parts and allocate it towards the stronger parts and if so, how long does that take?

We constantly make adjustments at a high level. The capacity is somewhat flexible, although there are specific nuances for each technology or part. Overall, yes, we have been modifying our capacity over the last two months to optimize its use and align with our long-term strategic plan.

Do you have follow-up, Chris.

For my follow-up, in relation to that line of questioning, have you discussed shortages and extended lead times throughout the year? Are we seeing any improvement, or do you expect any improvement before the end of the year?

Yeah. I’ll comment and Rafael if you want to jump in, please do. Our lead times haven’t changed much from last quarter. I think as we look in the out quarters, it really depends on how demand begins to shape up. We will have capacity coming online as we’ve talked about, but in any given quarter, sequentially, that’s not going to make a huge difference. But we lap a year or several quarters and it really will make significant difference in the capacity that we’ve got available.

I agree that our focus is on increasing our supply, which is under our control. We will achieve this with RFAB2 coming online soon, followed by LFAB shortly after, and then in 2025, the first of the four factories in Sherman. This will enhance our ability to meet market demand. Additionally, we just reported $5.2 billion in revenue and have grown our inventory for the fourth consecutive quarter, which illustrates our increased capability to supply the market.

That’s right.

That’s a good point.

Thank you, Chris. Now we’ll go to the next caller, please.

We will take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.

Hi. Thanks so much. I had to as well. First, on your pricing strategy going forward, just curious with RFAB2 ramping and LFAB ramping over the next 12 months to 18 months and your peers much more supply constrained than you are and they’re all sort of facing inflationary pressures from their foundry partners. Is there an opportunity for you to be a little bit more aggressive than then historical trends and for you to pursue market share or would you look to follow suit and raise pricing along with your peers going forward?

Yeah. Yeah. Toshiya, thanks for that question. I would say, as you’ve seen us behave in the past, our approach to pricing hasn’t changed. These pricing decisions are made at the product line level. We’ve got about 65 different product lines. They’re close to customers, close to the market, understand what their peers in the industry are doing. So, and to your point, many of our peers in the market that are outsourced, they do have to take action, when they see pricing increases from their suppliers. So I think that just emphasizes the competitive advantage we have in manufacturing and technology, and continues to highlight that, part of the reason why we’re continuing to invest to strengthen that competitive advantage. Do you have follow-on?

I do. Thanks, Dave. Regarding OpEx, over the past four months, your OpEx budget has only increased slightly, around 1%, which is quite remarkable considering the inflationary environment. I'm interested to know what the offsets have been during this period and how we should view the sustainability of your model with OpEx rising at a low single-digit rate while revenue is growing at strong double digits. Thank you.

Yeah. No. Happy to address that. We are pleased with how we’re allocating our investments to R&D and SG&A to the best opportunities and that is primarily industrial and automotive. As we have talked about also initiatives, such as Ti.com that ultimately strengthen our competitive advantages and maximize our ability to grow free cash flow per share over the long-term. On the last part of your question, on an absolute basis, I would expect to increase investments over the next several years as we continue to see strong market opportunities.

Thank you.

Thank you. Appreciate it.

We will go to next caller, please.

We will take our next question from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon, guys. Thank you for taking my question. On unfinished goods inventory, which is where your direct customer consignment inventory resides. They are still 30% below pre-pandemic levels. They’re down 3% versus last year. They are down slightly sequentially. Is it fair to assume that this is a reflection that your direct customers continue to pull at a very strong rate just given their demand profiles and can you guys get to your target inventory days exiting this year especially with RFAB2 ramping?

Yeah. What I would tell you, given our manufacturing process, the process at web, then they go to kits, then they go to finish good. Overall inventory has been greatly pointed out over the last four quarters, this last quarter $140 million. Harlan, as you said, finished goods is still lean. Our goal is for inventory to continue to grow. We have talked about a target of 130 to 190 days and as I have said before, I will not be uncomfortable to be at the high end of that range, because ultimately that inventory gives us just tremendous optionality, puts us in a really good position to support customers and just given our business model, the risk on the inventory is nil, because that inventory goes to support products that sell to many, many customers and have very long lives. So we feel comfortable increasing inventory for that reason.

Yeah. And let me just add that, Harlan, part of your question was, is that a reflection of direct customers and just remind that we have 70% reductions last year, around 70% of our revenues direct, that includes revenue going through TI.com, which we still believe is going to be a significant strategic asset for us as we move forward. And what goes through distribution to my prior comment, we long believed that owning and controlling that inventory is important. We’re probably running two weeks or less than that inside of that. So, when we ship revenue, because we’re owning and controlling that inventory, it really is reflective of what customers want inside of that quarter. So you have a follow on?

Yeah. Thanks for the insights there. So I know it’s shipped to location, but wanting to know what the year-over-year profiles look like for the different geographies? Thanks.

Yeah. So inside of the quarter compared with a year ago, all the regions were up. That’s the year-on-year and sequentially they were all up as well. So we did see those trends in both year-on-year and sequentially. So, thank you, Harlan, we’ll go to the next caller, please.

Thank you.

Yeah. Thank you.

We’ll take our next question from C.J. Muse with Evercore. Please go ahead.

Yeah. Thank you for taking the question. I guess first question, revisiting an earlier question around the $560 million revenue beat versus the midpoint of your guide for June and the $500 million haircut that you took when you initially guided? So I’m curious, given that you started to see recovery in May? Is it safe to say that maybe you went above and beyond kind of the run rate, and therefore, you recaptured all of that $500 million or was it just a portion of that? And then as part of that, where do you see upside relative to where you guided before, was that isolated to industrial or auto or any particular end market?

Yeah. C.J. can you help me with the first part of your question? I’m not sure I quite got it. Could you just ask it…

So if I look at the midpoint of your guidance versus what you actually did, it was about $560 million better and in your initial guidance…

Yeah. Yeah.

... you told us a $500 million China uncertainty haircut. So really trying to understand, how that $560 million came in better? Was it all China or were there other drivers within that?

I would say that the adjustment was mainly due to the COVID restrictions. As those restrictions eased, customers returned to our original forecasts, so we didn’t see anything unexpected for the beginning of the quarter, aside from the weakness we mentioned in personal electronics. Do you have a follow-up?

Please clarify the depreciation estimate for the year, which is about 35% higher half-on-half. Specifically for RFAB2, depreciation will start when the wafers are qualified and revenue begins. Is an estimate around $925 million or $950 million reasonable? I'm trying to understand the details, especially since wafer qualification and revenue seem to be pushed to later in Q4.

It is an estimate and it could come in a little lower or a little higher. But right now, I would say $1 billion is a fair estimate. Additionally, you can think about it roughly linear from 2022 to $2.5 billion of depreciation in 2025, which should help you create a good model for 2023 and 2024.

Thank you, Rafael.

Thank you, C.J. And we’ve got time for one more caller, please.

We’ll take our last question from Ambrish Srivastava with BMO Securities. Please go ahead.

Hi. Thank you very much. David I had a question. David and Rafael, I had a question on pricing. Industry pricing has been up high single-digit, low double, last couple of quarters. Did the second quarter see a similar benefit from pricing, Dave? I know last quarter you had acknowledged that you did see the benefit from pricing. So I was wondering, what was the impact and do you expect that to continue over the next couple of quarters?

Yeah. We did see a benefit in the second quarter, Ambrish. And again, our pricing practices haven’t changed. So, we’ll continue to price aggressively. And to ensure that we’re gaining share and so no changes from that standpoint. So we’ll just see what happens in the marketplace.

Dave, just a sorry, just a clarification. As imperfect, the SIA data is, is it the reasonable proxy to use to ascertain what pricing advantage TI got from whatever the SIA data spits up?

We are cautious about providing a specific number as we evaluate the situation. If you simply take the units and divide by the revenue, that gives an average price, similar to what SIA is doing. Our customers purchasing through TI.com appreciate the convenience of having products available immediately, and in some areas, we are shipping more than once a day to those customers' docks. This convenience comes at a higher price. Additionally, there are other factors to consider, such as the variety of products we ship. We offer products that sell for just a few cents and others that cost thousands of dollars each, and depending on where we fall within that range, it can affect the average selling price. That being said, in the current environment we've experienced over the last few quarters, customers have seen price increases for similar products, which has been beneficial as well. I apologize for not being able to provide a specific figure. Do you have a follow-up question?

Okay.

Okay. Thanks, Ambrish. So let me wrap up by reiterating what we have said previously. At our core, we’re engineers and technology is the foundation of our company. But 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 our objective, we will continue to pursue our three ambitions. We will act like owners who will own the company for decades. We will adapt and succeed in a world that’s ever changing. And we will be a company that we’re personally proud to be a part of and would want us our neighbors. When we’re successful, our employees, customers, communities and owners all benefit. Thank you and have a good evening.

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation. You may now disconnect.