Welcome to the Texas Instruments' First Quarter 2023 Earnings Conference Call. 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. In addition, today's call is being recorded and will be available via replay on our website. 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 some insight into first quarter's revenue results with some details of what we're seeing with respect to our end markets. Lastly, Rafael will cover the financial results and our guidance for the second quarter of 2023. Starting with a quick overview of the first quarter. Revenue in the quarter came in about as expected at $4.4 billion, a decrease of 6% sequentially and 11% year-over-year. Analog revenue declined 14%, embedded processing grew 6%, and our other segment declined 16% from the year-ago quarter. As expected, our results reflect weaker demand in all end markets with the exception of automotive. As mentioned last quarter, a component of the weaker demand was inventory reductions by our customers, which we expect to continue in the second quarter. Now, I'll provide some insight into our first quarter revenue by market. Similar to last quarter, I'll focus on sequential performance as it's more informative at this time. First, the industrial market was about flat. The automotive market was up mid-single digits. Personal electronics declined about 30% as we continued to see broad-based weakness. Next, communications equipment was down mid-teens, and finally enterprise systems was down about 30%. Rafael will now review profitability, capital management, and our outlook.

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, first quarter revenue was $4.4 billion, down 11% from a year ago. Gross profit in the quarter was $2.9 billion, or 65% of revenue. From a year ago, gross profit margin decreased 480 basis points. Operating expenses in the quarter were $929 million, up 14% from a year ago, and about as expected. On a trailing 12-month basis, operating expenses were $3.5 billion or 18% of revenue. Operating profit was $1.9 billion in the quarter, or 44% of revenue and was down 25% from the year-ago quarter. Net income in the first quarter was $1.7 billion or $1.85 per share. Earnings per share included a $0.03 benefit for items that were not in our original guide. Let me now comment on our capital management results. Starting with our cash generation, cash flow from operations was $1.2 billion in the quarter and $7.7 billion on a trailing 12-month basis. Capital expenditures were $982 million in the quarter and $3.3 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $4.4 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $100 million of our stock. In total, we have returned $7.5 billion in the past 12 months. Our balance sheet remains strong with $9.5 billion of cash and short-term investments at the end of the first quarter. In the quarter, we issued $1.4 billion of debt. Total debt outstanding was $10.2 billion with a weighted average coupon of 3.2%. Inventory dollars were up $531 million from the prior to $3.3 billion and days were 195, up 38 days sequentially. For the second quarter, we expect TI revenue in the range of $4.17 billion to $4.53 billion and earnings per share to be in the range of $1.62 to $1.88. Lastly, we continue to expect our 2023 effective tax rate to be about 13% to 14%. 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 up the lines 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?

At this time, we will be conducting a question-and-answer session. Our first question comes from Stacy Rasgon with Bernstein Research. Please proceed with your questions.

Hi, guys. Thanks for taking my questions. For my first one, I just wanted to dig into CapEx and depreciation. So you did CapEx of $982 million in the quarter. Can you just clarify that that's the gross number without any of the tax credits? And I guess assuming that's true, both the CapEx and the depreciation number in the quarter are running well below the run rate there or the annualized number that you would give at the capital management CapEx should have been about $5 billion for the year. Depreciation maybe $1.5 million. So am I right in assuming that implies a fairly substantial ramp into the back half and end of the year for both those metrics, CapEx and depreciation?

So thanks for the questions, Stacy. Good questions there. So it gives us a chance to clarify though. So first on CapEx, we're pleased with the progress that we've made both in 2022 but also year-to-date, first quarter of this year. Everything's in line with expectations as we shared at the call a couple of months ago, we expect CapEx to average $5 billion per year for the next four years. That's just an average. So some years will be lower, especially at the beginning, and other years will be higher. But our expectation continues to be $5 billion per year. Those numbers, that $5 billion is gross. And the $982 million, the one close to $1 billion that you just quoted for the quarter, that's also gross. We are continuing to accrue for the CHIPS Act benefit. I can tell you about that in a follow-up question if you like. But the CapEx numbers have been and will continue to be gross numbers. On the second part of your question on depreciation. So we told you that at the capital management call that depreciation will increase to about $2.5 billion on or around 2025. We expect this year to be below that linear trend. Okay. And that's just the CapEx is coming in as expected, but it's a function of other things. Essentially when you place the equipment in service and when it starts depreciation, the assumptions that we had on that versus how exactly how it's playing out. You have a follow-up?

I do. Thanks. I'm going to let somebody else ask about the CHIPS Act accrual. I want to ask about inventories. So you're at almost 200 days of inventory. And I think the top end of your target was 190 and you said you'd be comfortable above that. And so we're kind of there. Are you done building inventory now, I guess, and if that's the case, what happens to fab loadings, I guess, as we go into the end of the year? I'm assuming you're running pretty full right now. Do those fab loadings need to come down, especially given the revenue trajectory and given inventories are sitting pretty close to 200 days?

So let me start by reminding everybody our objective for inventory. And you can go back to our capital management call. I believe slide seven. You look at the objective there is to maintain high levels of customer service and minimize obsolescence. We have a range there. It's just meant to be informative and it's 132 greater than 200. I just wanted to clarify that versus the number that you mentioned. Now, the more important thing is, you know, I refer you to slide 13 in that deck. And anybody who hasn't seen that, you can download it from our website, go to slide 13. That shows you how we think about planning for the long term. So through semiconductor, the ups and downs of the semiconductor cycle, and that informs how we manage inventory, also informs how we are investing in CapEx. So we're thinking through the cycles over the long term, but certainly inventory is one of those things that we take that trend into account. In the near term, we expect to have an upward bias on inventory as we prepare for long-term growth.

Thank you, Stacy. And we'll go to the next caller please.

Our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Thank you for the question. The first one is specific to industrial and automotive. If I heard you, Dave, I think you said industrial was flattish in Q1. I think it was down 10% in the last quarter. So seems like it's starting to flatten out. But I just wanted to check if that's the right conclusion. I think autos were up mid-single in both Q4 and I said and I thought you said in Q1 as well. So that also seems to be in the right direction. So the specific question is, as we look into Q2, how should we think about industrial and auto? Can they stay at least kind of flattish, or do you think that they are also exposed to the macro weakness?

Yeah. So first confirm that you heard correctly. Industrial market was about flat in the first quarter and automotive was up mid-single digits. And as you know, our practice when we think about guidance by end market, we only provide color if there's something that we need to highlight to explain what's going on. You've seen us do that multiple times, whether it's end markets or it's regions or something specific that's going on. So as you said, at the midpoint of our guidance, revenue is flat. And so when we look strategically at both of those markets, we're very confident that they will continue to add semiconductor content per unit and be great growers for us. So you have a follow-on for that?

Yeah. Dave, I actually wanted to stay on the same question because there is a perception that industrial and auto demand is kind of this last shoe to drop in semiconductors. And when I look at what your competitors, right, peers are seeing in analog and microcontroller markets. They are noticing a level of stability and strength. And that's what I want to confirm with TI, that are you seeing the same thing as you go into Q2? Because, yes, consumer is weak, right? Enterprise is weak. That is well known. But specifically auto and industrial. Do you think they are now trending in the right direction in Q2 or do you think that you are in front of some weakness and inventory adjustment in those markets also?

Yeah. And again we're not trying to provide guidance by specific markets. The overall outlook is roughly flat into second quarter. If we had something specific to call out, we would. And I think our approach to building closer relationships with customers, what we're doing in our channels, our product portfolio continues to strengthen. The capacity that we add are all things that continue to put us in a great position to service customers and service them well over time. But yeah so we're just not going to go into specifics of each market in the second quarter. So thanks for those questions. And we'll go on to the next caller, please.

Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Thanks a lot. Dave, I guess I wanted to ask sort of where you think you are in the cycle because you have less exposure than many of your peers. So in theory, you should be farther along the inventory correction, and you're more connected and real-time to demand. So when you sort of look at your customer inventory levels, where do you think we are? Do you think that we're sort of in the late innings of the correction for you because you are a bit more connected to demand in real-time?

Yeah, Tim, as you know, this is the first time that our markets, as well as the industry, have behaved differently as we entered this cycle. Looking at personal electronics, we started noticing weakness in that area back in the second quarter of last year, so we're now in our fourth quarter of reduced demand. Other markets, except for automotive, began to weaken the quarter before last, so we've been experiencing that for a couple of quarters. Automotive has remained strong through last quarter. Therefore, it really depends on which market you're examining. In personal electronics, we're closer to the bottom than to the top. Our approach is not to predict where the bottom or the top is, but rather to focus on the long-term trends we discussed earlier, which inform our decisions. Do you have any follow-up?

I do, Dave, yeah. So I know the SI data can be noisy and you always say to look at things on kind of a TTM basis and if you sort of roll it back, it looks like your share has gone down in analog roughly 200 basis points versus where it peaked in the early parts of COVID. So as you sort of forensically go back and try to figure out what's happened, do you think that's entirely based on supply? So in other words, if you didn't have the shortages that you did, you think that you wouldn't have lost that share? I'm just kind of wondering, as you look back at the numbers, how you forensically try to explain that share loss relative to the industry data? Thanks.

As we discussed, it's important to view this situation over time. Looking back to the previous year when the pandemic began, we made decisions to keep our factories running and build up long-lived inventory, which turned out to be beneficial. Throughout each quarter, we were able to respond effectively as customers accelerated their orders. This likely helped our numbers when compared to the broader industry. Moving into the next year, we anticipate these comparisons will be more challenging. However, we have implemented several practices that distinguish us from our competitors. For instance, during that time, we moved towards closer direct relationships with our customers, allowing us better insight into their demand both in the short term and long term. Additionally, as many of our customers reduced their inventory to match their needs, we introduced long-term sales agreements and non-cancelable contracts to ensure they only take what they truly need. This approach isn't about gaining market share artificially; rather, we aim to make doing business with us as seamless as possible. We believe these practices will position us well to continue gaining share. Thank you, Tim. Let's move on to the next caller.

Our next question comes from the line of Ambrish Srivastava with BMO Capital Markets. Please proceed with your question.

Hi. Thank you very much. Rafael, I want to clarify whether I understood your answer about depreciation correctly. This obviously affects gross margin. Should we consider the first quarter run rate, as it seems to have a very positive implication? You mentioned it would be lower than the linear projection, but by how much? I believe we were all estimating around $1.5 billion. What is the best way to approach that?

We're not breaking down specifics on that. But if you were going to do it linearly, you would get to the $1.4 billion unchanged and then $500 million plus on top of that every year until you get to about $2.5 billion in 2025. So it's going to run lower than that, yes, this year, and we'll give you an update at the next capital management on subsequent years.

Got it. Got it. Just a clarification and not a follow-up. So if you look at gross margin last year versus this year, the three factors at least. I just want to make sure I'm doing it right is the flow-through and the fall-through that you talk about. And then the offsets would be LFAB is now going from restructuring into COGS and then apples-to-apples add a higher depreciation. Is that the right way? Am I thinking about the right three parts?

Yes, those are the correct three components. This analysis is intended for the long-term perspective. In any given quarter, numerous variables come into play; for instance, the product mix always influences the outcome, as there are differences between automotive and industrial sectors compared to personal electronics. However, at a broader level and over an extended period, those trends are indeed the key factors to consider when modeling this. Thank you, Ambrish. We'll go to the next caller, please.

Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for letting me ask a question. I want to follow up Ambrish's and talk about gross margin, but on a sequential basis, the gross margin held in better than I expected. It did go down sequentially, but not even as much as it would have if you just took the LFAB expense out of OpEx and put it into COGS. So were there any unique offsets to that? And probably more importantly, any unique offsets we need to consider as we think going forward? And I know, Rafael, you don't guide to gross margin specifically.

Yes, I would say it's similar to Ambrish's question. Overall, the model we've presented indicates a 70% to 75% fall-through. However, in any given quarter, even when comparing year-over-year, especially in terms of sequential changes in revenue, this may not be very precise. But over a longer time frame, it tends to work well. As we discussed earlier, depreciation plays a role. In this quarter, we need to account for costs related to restructuring in Lehi that are now reflected mainly in the cost of revenue. Other factors also come into play; for example, if a quarter sees a higher mix of industrial automotive products and fewer personal electronics, this will impact the margins. Additionally, depreciation does not immediately affect the profit and loss statement because it is matched with inventory first, which can delay its impact on gross margin. It's clear that depreciation is on the rise, so we should consider this over a longer period—across multiple quarters or years—when talking about fall-through and the increasing depreciation.

Do you have follow-up, Ross?

Yeah, I do. I'll just pivot to round up that CHIPS Act question from earlier. Rafael, could you give us an update on what the cumulative accruals are for that? And probably equally importantly, when does that likely flow through the income statement?

Yes. To summarize, the CHIPS Act includes an investment tax credit and a grant, both of which could benefit us. In our capital management document, we've mentioned that we're anticipating benefits from the tax credit and accruing those. However, we are not counting on the grant since it is highly discretionary and dependent on the Department of Commerce. We are applying for those grants and submitting applications for as much as possible, but we're not relying on them at this moment. Focusing on the investment tax credit, which we are accounting for on the balance sheet, we accrued an additional $200 million benefit this past quarter, adding to the approximately $400 million accrued last year. This brings our total accrued benefit to $600 million, and this amount will continue to grow throughout the year, representing 25% of qualifying assets in the United States. We benefit in two main ways: first, the profit and loss accrual reduces our property, plant, and equipment basis, leading to lower depreciation going forward. We're already experiencing a small benefit this year, though only a couple of million dollars, which will increase as the equipment is placed in service and depreciated at a lower rate. More significantly, the cash benefits associated with this will be realized in the following year. Thus, any accruals from this year that are placed in service in 2023 will provide cash at the end of 2024. This is what we are planning on, and I believe that answers your question well.

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

Our next question comes from the line of Chris Danely with Citi. Please proceed with your question.

Hey, thanks, guys. Just some color on the inventory correction you're seeing out there. So do you think that we're through the worst of it? Maybe talk about where it's, I guess, lower or where it's higher? Do you think that it's getting better at this point or getting worse? Or can we not tell?

Yes. I think Chris is one of the previous questions, somewhat similar, right? I think you have to look at it by market. Certainly, in personal electronics, being in the fourth quarter of the weakness would indicate you're probably closer to the bottom. There's no guarantee of that, but you're probably closer than in other markets, right? So that just isn't something that we try to predict. And what we do use to kind of guide how we think about things and where we make investments is that grey line on the chart that we've talked about. That's really what's important is being ready for the longer-term growth. And that's where our focus is. Do you have a follow-on?

Yes. Can you just talk about the linearity of bookings during the quarter and how your backlog looks now versus, I guess, three months ago? And what does that imply for the second half of the year?

Our linearity improved in the last month of the quarter. Regarding backlog, we have sales coming through ti.com and some consignment sales where we don’t maintain a backlog, so we don’t place much emphasis on it. Overall, compared to many of our competitors, we have strong visibility due to our close relationships with customers and our direct control over inventory. This gives us excellent insight into demand. Thank you, Chris. Now we’ll move on to the next caller.

Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Great. Thank you, guys. I know you were pretty early to signal some of the headwinds that came in China from the COVID lockdowns. What are you seeing now as the economies re-emerge? Are you starting to see that as potential strength going into the rest of the year?

Yes, Joe, I would say that we continue to believe the best way to look at our revenue and the changes in revenue is more easily understood by looking at end markets, but there wasn't any significant change that we saw inside of China this last quarter. Do you have a follow-on?

Sure. The 30% decline in personal electronics and enterprise reflects any kind of share shift, as I know that people are multi-sourcing more in areas like phones, PCs, and servers. Are you seeing that as a headwind, or do you think it simply mirrors the overall market downturn in the first quarter?

Yes. I think that as we've talked about before, share doesn't move quickly. We're in a position as we're building inventory to support higher demand if it was to materialize. So again, we think that's mostly reflective of what's going on in the market. I think that's consistent with what you see from customers and other data that you can see that's out there. Thank you, Joe. And I believe we've got time for one more caller, please.

Our next question comes from the line of C.J. Muse with Evercore ISI. Please proceed with your question.

Yeah, good afternoon. Thank you for taking the question. I just wanted to clarify and confirm some of the statements from earlier. So your gross margins came a little better than what we thought for March. And so just curious, are you still on track for that $1.5 billion depreciation for the year? And were there any changes in kind of the timing of installation of equipment? Are you still seeing kind of a tight supply there?

Yes, let me address that. First, regarding capital expenditures, we are very pleased with our CapEx performance this quarter, which amounted to about $1 billion. A couple of months ago, we mentioned our expectation of around $5 billion annually over the next four years, understanding that some years may be lower and some may be higher. Therefore, a $1 billion quarterly rate aligns with a $4 billion annual projection, suggesting a range of $4 billion to $5 billion for this year, consistent with our expectations. Regarding depreciation, we previously indicated it might increase to $2.5 billion in 2025. However, we expect that trend for this year to be below linear, predicting a smaller increase than $500 million compared to our starting point from 2022. I think Ambrish has the specific number on that, which we are not disclosing right now, but we reported $265 million for this quarter compared to $249 million in the previous quarter. You can do the math from that information for a reasonable estimate of where we might end up, and we will provide more details in future quarters. Do you have a follow-up?

Yes, please, a longer-term question. One of the overriding themes for the last couple of quarters on the semi-equipment side is the vast spending by lagging edge domestic China with an obvious focus kind of on the 90-nanometer plus. But actually I shouldn't discount the 28-nanometer plus part of the world. So as you think about regionalization and as you think about perhaps a rising kind of competitor in the China landscape looking out over the next five-plus years, how are you thinking about the pros and cons and how you'll compete kind of in that environment? Thank you.

Yes, C.J., thank you for your question. When we examine our products and markets, we have four competitive advantages that we continue to invest in, making us stronger and different from our competitors. We've previously discussed these. The first advantage is our manufacturing and technology, as owning and controlling these assets will become increasingly important globally. We believe this will also benefit us. The second is our extensive product portfolio. Our competitors, particularly in China, usually only compete with us in a very limited segment of what we offer. We have competed with these companies for many years, so this rivalry isn’t new. They are formidable competitors from whom we can learn, and we closely monitor around 75 different competitors worldwide. The third advantage lies in the reach of our market channels. Many smaller competitors in China lack this reach and the diverse portfolio that draws in customers and enhances our insights. Finally, our diversity and longevity mean we are not reliant on a single market or technology for growth. We depend on all of them, and while it may sometimes favor one competitor over another in the short term, we believe that competing across all markets will result in long-term, reliable market share gains. Overall, we are pleased and optimistic about our position against traditional competitors in the U.S. and Europe, as well as those in China. Thank you, and I’ll hand it over to Rafael to conclude.

Yes. Thanks, Dave. 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 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.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.