Welcome to the Texas Instruments' Second 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 insight into second quarter revenue results with some details of what we're seeing with respect to our end markets. And lastly, Rafael will cover the financial results and our guidance for the third quarter of 2023. Starting with a quick overview of the quarter. Revenue in the quarter came in about as expected at $4.5 billion, an increase of 3% sequentially and a decrease of 13% year-over-year. Analog revenue declined 18%, Embedded Processing grew 9%, and our other segment declined 10% from the year-ago quarter. Now, I'll provide some insight into our second quarter revenue by market. During the quarter, we experienced continued weakness across all markets except Automotive. Similar to last quarter, I'll focus on sequential performance as it is more informative at this time. First, the Industrial market was about flat. Next, the automotive market was up low-single digits. Personal Electronics was up low-single digits after several quarters of sequential declines. And next, communications equipment was down mid-teens, and finally, Enterprise Systems was down mid-single digits. Rafael will now review profitability, capital management, and our outlook.

Thanks, Dave, and good afternoon, everyone. As Dave mentioned, second quarter revenue was $4.5 billion, down 13% from a year ago. Gross profit in the quarter was $2.9 billion or 64% of revenue. From a year ago, gross profit decreased primarily due to lower revenue, increased capital expenditures, and the transition of LFAB-related charges to cost of revenue. Gross profit margin decreased 540 basis points. Operating expenses in the quarter were $938 million, up 12% from a year ago and about as expected. On a trailing 12 months basis, operating expenses were $3.6 billion or 19% of revenue. Operating profit was $2 billion in the quarter or 44% of revenue and was down 28% from the year-ago quarter. Net income in the second quarter was $1.7 billion or $1.87 per share. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.4 billion in the quarter and $7.4 billion on a trailing 12-month basis. Capital expenditures were $1.4 billion in the quarter and $4.2 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $3.2 billion. In the quarter, we paid $1.1 billion in dividends and repurchased about $80 million of our own stock. In total, we have returned $6.5 billion in the past 12 months. Our balance sheet remains strong with $9.6 billion of cash and short-term investments at the end of the second quarter. In the quarter, we repaid $500 million of debt and issued $1.6 billion of debt. Total debt outstanding was $11.3 billion with a weighted average coupon of 3.5%. Inventory dollars were up $441 million from the prior quarter to $3.7 billion and days were 207, up 12 days sequentially. For the third quarter, we expect TI revenue in the range of $4.36 billion to $4.74 billion and earnings per share to be in the range of $1.68 to $1.92. 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-live positions. We will continue to strengthen these advantages through disciplined capital allocations 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 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.

Thank you. At this time we will be conducting a question-and-answer session. And our first question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Thanks for taking my question. I had a high-level question which is when I compare TI's sales growth right down almost 13%, 14% in the near-term down double-digit versus peers, it's significantly below, and when I look at your trailing 12-month free cash flow of sub-17%, if my model is right that is the lowest since 2010. But what point will TI say that something needs to change in the strategy to help close the gap on the growth side and to help free cash flow margins get back to the trend line? So I understand that obviously you're not optimizing the model for just one year, but now we have seen just consistent decline in free cash flow per share, which is your preferred metric. So at what point should we start to see free cash flow get back to historical trends?

Yeah. So, thanks, Vivek. Let me start, and Dave, if you want to chime in. But big picture step back to what we told you during capital management and the investments that we're making are long-term in nature as you alluded to in your question. And we are going to enable revenue growth for the company for the next 10 to 15 years. Okay. So that's how we're thinking about it. And that's why we're making this investment on CapEx, in particular, about $5 billion per year for the next four years, and we are committed to those investments. We're excited about making those investments regardless of the short-term fluctuations of revenue and of course lower revenue means lower operating cash, which now with the CapEx, that's why you're seeing the free cash flow is not unexpected.

Yeah, I’d like to add that, as you know and have followed us for some time, one of our competitive advantages is manufacturing and technology. These CapEx investments are really reinforcing that advantage over time. It's clear that these investments will enable us to produce products at significantly lower costs to meet demand, and managing those assets is increasingly important in today’s environment. Customers can see the investments we’re making, along with the other systems we’ve implemented to make it easier to do business with us. We’re also building inventory to support their growth, and customer feedback has been extremely positive. We believe these will be fantastic long-term investments for all of us. Do you have a follow-up?

Yeah, thank you. I guess maybe to say, ask the same question but in a different way, right? And with respect, I mean, TI had the same strategy two or three years ago also, but we saw sales grow worse than peers last year and sales are again growing worse than peers this year, so it's not one quarter or two-quarter phenomena, sales have been undergrowing your peer growth for almost two years now and CapEx is growing while sales are declining. So that's why I'm questioning whether the strategy is still right whether the results are actually justifying the strategy.

Yeah. I'll start, Rafael, if you want to add. Again, we've talked about is share doesn't move quickly inside of our markets. I think that depending on the peer you're comparing to, oftentimes the market exposure can explain a good portion of it. There's other factors like how much distribution someone is using. As you know, we've transitioned from mostly using distribution to mostly having revenue come direct. So there is inventory that needed to be burned out of the channel as we made that transition. So there are multiple factors. I think going forward, our confidence in being able to continue to gain share is extremely high. Customer reaction to the capacity that they know they need to have wanting to know that they've got capacity runway not from someone's manufacturing supplier, but directly from someone that makes their products resonates really well with customers.

Thank you.

Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Hi, guys. Thank you for taking the question. My first one is on your Q3 guidance. You're guiding revenue up 1% sequentially. Dave, you called out automotive as the one end-market that continues to be healthy. But anything to point out or any standouts as you think about the sequential trajectory from Q2 to Q3 or is it a continuation of what you saw in Q2?

Yeah, I'll just point out that this last quarter we saw weakness across the board in our markets with the exception of automotive like you've called out. And just to point out that continued asynchronous behavior. We had PE weakened back in the second quarter a year ago and the other markets followed, but obviously, the exception of that with automotive continued to be strong and it's up over 20% year-on-year. So definitely very strong growth there. And as we look into the third quarter, we're not expecting to see any significant change in our end markets compared to this last quarter. Do you have a follow-on?

I do. Thanks. So inventory on your balance sheet was up I think 13% sequentially, days grew to 207. I know on your capital management call you revised up the upper range of your target to more than 200. I also appreciate, Dave, the transition from Disti to Direct. But at what point do you think you need to cut production or cut utilization rates and start to manage down the inventory? Are you still comfortable with where things are today?

Yeah. No, thanks for the question, Toshiya. Yes, we are comfortable with where we are. As a reminder, our objective for inventories to maintain high levels of customer service and minimize obsolescence. I would point you to slide 13 at our capital management call. That shows the semiconductor cycle over many years of about 30 some years and what that informs us on what could happen in the future and we're planning for the long-term growth through those cycles, not in any one quarter or even any one year. And of course, inventory levels always depend on demand expectations and for the time being in the near term, they will likely have an upward bias.

Okay. So just to clarify, you're still running your fabs full at this point?

Utilization this last quarter was lower than the previous quarter. That was largely a function of adding capacity.

Okay, thank you.

Thank you, Toshiya. The next caller, please.

Our next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.

Hi, guys. Thanks for taking my question. So my first one is just to follow up on that. You said the inventories have an upward bias. So that means inventory like dollars and days, do you expect to increase again in Q3?

The days are influenced by revenue, but the dollars show an upward trend. Therefore, it's very likely that the dollars will increase in Q3. Additionally, inventory is reflected on the balance sheet at a specific moment, but it is intended to support future growth. Having 200 days' worth of inventory is roughly equivalent to a couple of quarters' supply at various stages of completion.

How many quarters are they going to keep going up for though?

That's going to depend on revenue expectations, and the decisions we make regarding the factory, as we forecast one quarter at a time. Our perspective is long-term, as I previously mentioned to Toshiya. We're managing through the cycles, looking at what we expect to happen over a longer period regarding inventory. On capacity, we are adding resources that will support us for many years, providing ample headroom. Regarding inventory, for those who might not have listened to us often, our inventory has very low obsolescence risk. Much of it has been on the shelf for up to 10 years, but the product life cycles with our customers are very long, and we typically have numerous customers purchasing the product. Hence, the risk of obsolescence in our inventory is quite low.

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

Oh. Was that my question?

What was your second, yes, thank you.

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

Hey, thanks, guys. And by the way, thanks for having a nice, concise conference call. It's unique and semis, much appreciated. My first question is just on lead times and shortages. Given all the capacity you're adding in the inventory, can we pretty much say that TI lead times are the lowest, at least among peers and the shortages are all gone? Are we pretty much, I guess, back to normal? And I mean, are there any metrics that you could share with us sort of now versus three or six months ago on the improvement there?

Yes, Chris, I would frame it by saying that most of our products are available on ti.com for immediate shipment. As Rafael mentioned, when the demand increases, we will have products available along with the capacity to support that demand. Customers can place orders with the usual lead times, which haven't changed significantly over the cycle. For most products, they can have them ready if needed sooner. While we will always have some areas with demand and supply imbalances, those gaps are closing rapidly. As Rafael highlighted, we are adding capacity every quarter, which enhances our flexibility to meet customer needs, although availability can still vary. Do you have a follow-up question?

Yes, earlier in the call, and in a bunch of the calls, you keep talking about your advantages in manufacturing and given you have more internal manufacturing and more 300-millimeter than the competitors, are you, I guess, are you guys getting a little more aggressive on price? Are you able to price below the competition? Is this something that has happened recently? Some of your competitors have, I guess, complained about TI getting more aggressive in price recently. I just wanted your response to that.

Yes. Yes. Thanks for the question, Chris. Our pricing strategy hasn't changed. And of course, we regularly monitor the pricing of all of our products, and we may maintain the goal to continue to gain share over time. But there's nothing unusual going on with pricing today. And I'll point out the fact that when we opened up our Fab 1, we had 75% of the tools needed inside of that factory, and there was handwringing back then if you remember that we were going to do something unnatural. And what we talked about was putting in place that capacity to support growth, and that's what it did. So thank you, Chris, we'll go to the next caller.

Thank you.

Our next question comes from the line of Harlan Sur with JPMorgan. Please proceed with your question.

Thank you. Good afternoon. Up until the March quarter, the team had experienced three consecutive quarters of rising cancellations and delays, which is typical customer behavior in a weak demand environment. Did the team continue to observe cancellations and delays increasing in the June quarter, or are there signs of stabilization?

Yes. The way I describe that is the cancellations remain at elevated levels. And we believe that customers are continuing to work down inventories to get that more in line with their demand. Do you have a follow-on?

Yes, thank you for that. Your embedded business is performing very well, with a 9% year-over-year increase over the past 12 months, while your analog business has decreased by 7%. This performance can be attributed partly to your strategic focus on refocusing the MCU businesses in recent years, making them more general-purpose and catalog-focused. Additionally, this seems to align with broader industry trends, as indicated by the SIA data. In comparison to your MCU competitors, the industry trends for MCUs are holding up much better than those for analog products. I would like to hear the team's insights on the significant difference in performance between analog and embedded.

Yes. Yes, thanks for that question, Harlan, and how you framed it. I would say at a top level, the changes that we have made to our product portfolio, the design in that and the customer response to those products as we've put them out in the marketplace continues to be very strong. Our confidence that that business will grow and gain market share over the long term is extremely high, based on that. And as we've talked about before, we're putting in place to be able to support that growth for embedded internally, and that is a position that we haven't been in quite some time. Near term, I would say, besides things stabilizing, we've experienced greater supply constraints over the last two years is embedded, has previously had to rely on foundries to supply that demand. And so those constraints are alleviating. And I think that that's just something that you see across the industry. So thank you, Harlan. And we'll go to the next caller.

Our next question comes from the line of Blayne Curtis with Barclays. Please proceed with your question.

Thanks for taking my question. Just wanted to go back to the decision. I mean, I understand the inventory is not going to be obsolete, but it's eventually going to kind of steal from your future ability to scale gross margins. So I mean, at the current run rate, you're kind of building at like a $23 billion run rate, and it's going to only increase next year. So what's the harm in pulling it back a bit? I'm just trying to understand an interim here, just pulling back utilizations and not building so much inventory.

Our main objective is to support revenue growth rather than to optimize short-term changes in gross margins. While those fluctuations are important, our focus remains on fostering revenue growth over the short, mid, and long term. Inventory helps us manage short-term to mid-term fluctuations, and we currently have ample inventory. The incremental cost associated with inventory is quite low, and we have factors such as obsolescence and the variable costs linked to inventory in mind when making our decisions.

Yes. I just wanted to ask on gross margins. I mean, I know you don't give perfect color, but it seems like it's down at least 150 basis points sequentially. Maybe consumers are mixed. But I'm just kind of curious, is it just depreciation layering in? Or is there any other puts and takes on gross margin?

So I assume you're referencing the third quarter? Yes, our guidance, as you mentioned, only includes top line and EPS. Our guidance is the best estimate we have for our gross margins. The revenue in this case is flat, and it factors in depreciation and other related costs from increased capacity over time. I know you inquired about sequentially, but just to remind you, on a year-on-year basis, keep in mind that last year we had the Lehi acquisition fab cost in restructuring, and now it is recorded in cost of revenue as of December of last year when you account for the transition.

Yes, the year-on-year change in revenue is attributed to the increase in costs from restructuring, which has primarily shifted to the cost of revenue and depreciation. Thank you, Blayne. We'll move on to the next caller.

Our next question comes from the line of Joshua Buchalter with TD Cowen. Please proceed with your question.

Thank you for taking my question. I wanted to follow up on the previous discussion and ask about the depreciation flow. Can you discuss some near to medium-term milestones regarding when the increased output from the 300-millimeter could start benefiting gross margin and help counteract the depreciation headwinds? Thank you.

Yes. What I would say is that we depreciate equipment over five years, while buildings typically have a much longer depreciation period of about 30 years. However, the equipment often lasts much longer than five years; we have factories that have been operational for over 50 years, some with upgraded equipment. Therefore, it's not entirely fair to compare the 300 million benefit directly with depreciation and expect an immediate offset. Instead, consider it from a cash perspective. We are investing capital expenditure, which is cash, and we should set aside consideration of depreciation at this stage. This investment will support growth by increasing our internal capacity, which, as previously mentioned, is a geopolitically reliable capacity. We are establishing multiple facilities, including four Fabs in Sherman, two in Richardson, and two in Lehi in Utah, along with assembly test facilities in Asia, particularly in Malaysia and the Philippines. This will position us strongly to grow our top line for a significant period. As a result, this expansion will generate substantial operating cash that we can either reinvest or distribute to our shareholders after making these investments.

Do you have a follow-on, Josh?

Yes, sure. Thank you. I recognize the language is similar last quarter regarding the end market commentary. But did anything change get any better or worse intra-quarter? And in particular, personal electronics grew, you've talked in the past about it sort of being a four-quarter cycle. Is it safe to say that that's sort of bottom now? Thank you.

Yes. We have continued to observe asynchronous behavior since we started last year. This trend has persisted. In personal electronics, we began to notice a decline in the second quarter, but there has been a slight sequential increase. Despite this, we anticipate little change in our end markets moving forward. Thank you, and let's move on to our last caller.

Our last caller comes from the line of Chris Caso with Wolfe Research.

Yes, thank you. Good evening. I guess just following up on the last few questions. Perhaps you could differentiate a little bit about where you think your customers are still burning through inventory as compared to end demand. And as you noted, the PE segment started to see weakness earlier. We heard from some others that it's no longer an inventory issue. It's more of a demand issue. Perhaps you could talk to that for some of your other end markets? And where we could see incremental weakness of customers still need to bring down our inventory further.

Certainly, Chris. If you examine the end markets as a whole, it's clear that they have generally weakened, reflecting a trend of customers decreasing their inventories, except for the automotive sector. Within that, however, the industrial sectors are not uniform; we've experienced strength in areas like aerospace and grid infrastructure. The same applies to the PE segment, where not all sectors are experiencing the same levels of weakness or strength. Overall, the trend is evident across these markets. Do you have any further questions?

Thank you. To follow up, I want to focus on the auto segment, which has remained strong. When the downturn started, you mentioned that the auto market was stable, but you anticipated it would eventually be affected like in past downturns. So far, it has surprised many of us with its resilience. Has your perspective on the auto market's resilience changed? Do you still anticipate it will need to correct eventually? If not, what makes this situation different?

Yes. So it wouldn't surprise us if it corrected. I don't think anyone can declare certainty on those types of things in the future. But I think that customers will build inventory. I've got 37 years of experience in the industry now, and that's the way the markets have behaved in the past. So that's generally a good guide in the future, but I think you can't pound the table and make absolutes, but certainly wouldn't be surprised if that were the case. So with that, we'll hand it over to Rafael to wrap this up.

Thanks, Dave. Let me wrap up by emphasizing 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 value for owners is the long-term growth of free cash flow per share. While we strive to achieve our objectives, 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 are 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.