Conference Transcript - TXN 2026-05-28

Stacy Aaron Rasgon, Analyst — Bernstein

Good morning. Almost afternoon, everyone. Thanks for coming. I'm Stacy Rasgon. I'm Bernstein's senior research analyst covering U.S. semiconductors and semi-capital equipment. And it's my honor to welcome our guest here today, Javi Vilan, the president and CEO of Texas Instruments. Before I start, I want to mention, if you have questions you'd like to have asked during the presentation, you should have a link to the pigeonhole forum. I think there's a QR code that you can scan. You can submit your questions there. We'll have time for Q&A at the end. so texas instruments ti you know it used to be that you know they they were sort of the boring semiconductor company they're kind of proud of it um i think it's been a little less boring lately both for ti as well as for the space overall you know but but ti over the last four or five years has embarked on a program of significant capacity expansion that at least temporarily sidelined cash flow and return and this is for a company who sort of pioneered the whole idea of 100% free cash flow return. But they always do think long-term. And we're now at kind of the tail end of that investment strategy. The cash flow now seems ready to start coming through again. Now with a manufacturing footprint that they'll be left with that potentially leaves them increasingly advantaged maybe in a world that is growing increasingly decoupled. I think more tactically, the post-COVID overhang, and it was pretty long, seems to now be behind us. At a minimum, we've got an industrial rebound now that's driving upside. And now coupled with an AI environment that's gone mainstream and sort of dragging everything along with it, there's a data center story that may become becoming more of a primary growth driver for the company, which complements the traditional focus on industrial and auto. So I wouldn't say things are all that boring anymore. And to tell us about it, it's my great pleasure to welcome Haviv. So thank you so much for being with us here today.

Haviv Ilan, CEO

Thank you. Thank you, Stacey. Great to be here. Thanks for having us. You bet.

Stacy Aaron Rasgon, Analyst — Bernstein

And maybe to start off, just on that CapEx strategy, because that really has sort of been the defining element of the company over the last half, I can't believe it's been half a decade already, but it really has. But you're at the end of this five-year CapEx and investment cycle. Maybe just talk to us about how that's, what was the driver of it? What was the impetus? How has it gone versus your expectations? Where are we now? What do we expect going forward in terms of CapEx and cash flow and return and margins and all that? How is the company now, I guess, on the other side of it different from where it was and where it was before we went in? And how does that advantage?

Haviv Ilan, CEO

Sure, sure. First, thanks for the introduction. You touched more or less the executive summary. I appreciate that. I like to make your job. In general, you're right. Somewhere at the back end of 2020 and 2021, we got together and decided that we are going to set the company and prepare it for the next 10 and 15 years. This was not about the next cycle, but more of a longer term thinking that secular growth in semiconductors will continue, especially, as you mentioned, in industrial and automotives. We also thought that we need to be ahead because one of the areas that we've learned during the previous cycle, that when you fall behind and can't supply the parts or the sockets you've won, that's just not a good place to be.

Stacy Aaron Rasgon, Analyst — Bernstein

That kind of did bite you a little bit during COVID.

Haviv Ilan, CEO

Yeah, and our customers deserve that we can support them in every scenario. And then you want to model a set of scenarios. And we said, hey, what could be secular growth in semis? Does it accelerate or not? The answer was yes. The second is, you know, do we only want to grow with the market or do we want to have an opportunity to gain some market share and also support our customers through the cycle, not only at the middle of the trend line, but also at the peaks. And, of course, that's very, very important. And along the investment plan, there was all these geopolitical tensions that continued to rise. And we said, hey, having manufacturing in North America, but in general, a geopolitical dependable footprint that is broad is going to be very, very important. So that's what kind of derived our plan. As you mentioned it, it was a six-year plan between 21 and 26. Yeah, it is 26. You know, it feels, again, a long time ago. By the way, we are now in the last tier of our investment plan. It feels like it went like that. So, you know, some days are longer than others, but it is it does fly by. So we are in the sixth year and we went through a more than 20 billion dollar investment cycle. And we always said we want to be positioned for every scenario. I mean, a couple of years ago, as a cycle deepened or the down cycle deepened and lengthened to your point before, it looked like, hey, are we on the right path? But we always had the conviction that we are. And I think right now, coming into 2026, after a year of growth in 2025, but maybe growing demand driven by industrialists and data centers, as you mentioned, we are very pleased to be where we are because we have the capacity. We have inventory that can support short-term demand from customers or surge of demand. And we also have the clean room or the footprint, especially if you want brick and mortar and clean room footprint, to grow into even faster growth scenarios. So that's a very good position to be in because if you are falling behind in a situation like that, you have to wait four to five years if you haven't made the investment. So we are excited to where we are. I think, as you said, free cash flow should grow as CapEx goes down and demand goes up. And from here on, we should be more in a steady state of supporting our growth with investments as needed. So very happy to be in that phase of the investment cycle.

Stacy Aaron Rasgon, Analyst — Bernstein

It might be helpful if you could outline for us exactly what capacity have you actually put in place over the last six years and where does it sit? I know there's Richardson, and there's Lehigh, and there's German.

Haviv Ilan, CEO

Yeah, so from a footprint location, made investments mainly in North America of 300 millimeter wafer fabs that are not common, by the way, for our analog and embedded market. We are building very modern fab, fully automated, and the scale of TI allows us to do it. So we've built what we call the Richardson 2. That's our fab 2. It's now almost in full production, almost fully utilized. We also decided to build a new site in Sherman, Texas, that's north of Dallas. And over there, we are planning a mega site almost, four fabs that all together will be able to support, by per fab, about $10 billion of revenue. Each. And also, by the way, the cost to build one is also similar to that. So think about it at that rate. And we've built two of them. So two shell rooms are built. The first one is partially equipped, that's Sherman one. It went into production. We had our inauguration date in Q4 of last year, ramping out very nicely. But we have a lot of clean room available over there that gives us the analog growth that we will need through this cycle that we are hopefully experiencing now. Lehigh is really focused on two types of parts. Mainly the embedded processing business is served by the Lehigh Fab. And that was an acquisition, actually, of a fab we bought for Micron.

Stacy Aaron Rasgon, Analyst — Bernstein

That was the Crosspoint facility.

Haviv Ilan, CEO

And what we decided to do, not only to retool the fab into an embedded processing type of product, but also expand the site to the second fab, it's called Lehigh 2, which is a much larger facility that can support even more revenue per the factory, maybe think about about $15 billion of capacity over there. So altogether, the plan is going well. Remember that the Lehigh fab was not only to support growth, but also to support internalization. That was my next question, actually. Building, actually built at the foundries, mainly in Taiwan, into the US. Very, very important to us to control our destiny. And we will grow into our fab. So if embedded used to be maybe 10 or 15% built internally, it will reverse so by the end of the decade we see embedded running more than 90% internal where is it like right now is it still 15 20% in internal no so right now we're almost at 50 50 already because we are transferring our 65 nanometer embedded processing nodes into the factory by the way there is also some analog high-speed analog mixed signal solutions that are built over there but you can think about it as two-third one-third embedded versus analog and that's already moving our next step is to move a 45 nanometer node it's happening this year so by the end of the year embedded will be predominantly built inside our own factory 45 do you have below and you're I can't imagine be that high but maybe it's higher than I think it is so 45 nanometer we ever know that really for a non embedded flash technology so think about external memories for embedded think about radar systems that's the main thing that runs on that but we are going a couple of step forward so right Right now we are already sampling our test chips for 28 nanometer embedded flash systems. We have several flavors, one more mixed signal analog based and one more embedded processing embedded flash based. Our future MCUs, especially the larger one that has more memory footprint, will be built And we can take it one more step forward into 22. That's more or less the plan of this fab. We're not planning to build a FinFET technology in Lehigh. But that gives us, I would say, the excitement, at least 10 or 15 years of runway to support our businesses. And in that sense, very unique. The fact that we have invested in our own technology that allows us right now to respond to the developing situations across our markets, whether it's industrial, data center, or hopefully automotive comes back soon as well. And we are feeling very comfortable about that.

Stacy Aaron Rasgon, Analyst — Bernstein

You'd also closed some other fabs, right? There was also part of the internalization.

Haviv Ilan, CEO

Yes, so we decided through this down cycle to shut our last six-inch fabs. One was in Dallas, one of them was in the same lane in Sherman. That's done, right? That's done. So we are now in the last, also from an overhead perspective, Q2 will be the last quarter of any expense related to these fabs. We are setting them down. And that's good to be because six-inch fabs, they ran for 50, 60 years, by the way. beautiful ROIC, but it's hard to maintain them. So when a tool goes down, it's really hard to fix it. So we took the opportunity to transfer all that goodness of long-lived parts into our 300 millimeter wafer fabs.

Stacy Aaron Rasgon, Analyst — Bernstein

And so how does all this translate into gross margins then? Because, I mean, you used to, you know, clearly when you first embarked on the 300 millimeter, I was probably 15 years ago, like with the RFAB1 and command and everything. I mean, you were running for 4% of CapEx to revenue for 10 years or whatever. And I think gross margins peaked at 70, close to 70. And then we knew as you embarked on this investment cycle, gross margins were to come, and you never hid that. And they came down, I can't remember where they bottomed, like mid to upper 50s. They're kind of creeping up now. I think, I know you don't guide the gross margin, but my math suggests the implied gross margin for the next quarter is right around 60. So at least maybe starting with a six handle. and a lot of the things that you're talking about in theory should be good for gross margins. We're through the depreciation slug. Revenue and utilization hopefully are going up. You've moved stuff in so the cost structure gets better. Where do I see those going? Can that actually get back to where we used to run back in the old days?

Haviv Ilan, CEO

This is always the big question everybody always has for TI. I understand and we respect it. You know we run there. I know you don't run the company. Let's answer your question because I think it's a fair one. first about Q2 I think you said it I think you yeah it's it's a good assumption the the more you wait the better it gets and the reason is Stacy that and that's just a math of depreciation and growth and internalization of wafers so I just invite you if you want to see it in action one way to do it we now I think by segment you can see the reporting of margin of course margin by by segment look at the embedded segment so you will you can For an operating margin by sagging rate, not gross. No, gross margins. You can look at, yeah, that's the new rule. So you go to the 10Q, you'll see it there. Really?

Stacy Aaron Rasgon, Analyst — Bernstein

I didn't even know that.

Haviv Ilan, CEO

Okay, you see, so you're always there on something new. So you can look at it and see the progression of embedded. Because what you're seeing there are wafers that, you know, are coming into Lehigh. The reason Lehigh is now at 50% utilization is that transition. And it continues every quarter because now our 45 nanometer wafers are moving in. And you'll see, you know, gross margins, you know, right now getting closer again to 50% on Embedded used to be much lower. And you'll continue to see that moving. That's one example of how you move a foundry wafer into TI. That's going to be accretive to your gross margins. Same is going to be in Sherman, but over there you have to grow revenue into that wafer capacity. And I think both are happening right now. So to your question, can it get back to the areas of before? And again, we don't think that way. The answer is yes, but that's not going to be satisfying for TI. We care about free cash flow per share growth. So you can have very nice margin and high 60s, and your free cash flow per share can do less than double-digit growth as we've done in the previous decades. So our eyes, how do we get back to that trend line of this about 10% CAGO free cash flow per share? And that's how I talk to the board. That's our commitment. and as you said, we'll take a big step forward in 2026. Because we are seeing some revenue growth, okay? We are seeing internalization of Lehigh, to your point, and we are starting to see the capex levels going down, so the math just works together, and as I said, the more you wait, the better it gets. So that's kind of the plan. I'm always cautious, and we had an encounter last year where we were at the same point of time a year ago, and I want to see the demand continuing, But, you know, so far, the indications that the environment is a little different. This is a more broad environment of demand. I see it across regions. I see it across markets, to your point. Let's see how it develops. Of course, when we go out there in July, we will report further on the progress over there.

Stacy Aaron Rasgon, Analyst — Bernstein

Let's maybe talk about some of those demand drivers, some of those end markets. Let me start with industrial. And so this historically was the biggest piece of your business. and, you know, this was probably the peakiest during COVID given the shortages and everything. And it fell off the most. I can't remember how much you were down.

Haviv Ilan, CEO

Almost 50% down from peak. Almost 50%. On a quarterly basis, yeah.

Stacy Aaron Rasgon, Analyst — Bernstein

So I guess, where are we now? Where are you seeing, regardless of the industrial recovery, which areas are stronger, weaker, and where are we sitting today versus that prior peak?

Haviv Ilan, CEO

Yeah, that's a great question because I look at it all the time.

Stacy Aaron Rasgon, Analyst — Bernstein

And you've been waiting. You always draw this chart of, like, you know, growth versus trend, and you've been making the point We've been below trend for, I don't know, multiple years, right?

Haviv Ilan, CEO

So the beautiful thing is that we are still below our peaks, okay? And we are talking about four years later. So let's go recap what happened first in Q1. I think it's just good to set the stage. Industrial did grow sequentially 20%, so very strong growth of almost a comeback, right? Year over year, close to 35%, somewhere between 30 and 35, but closer to 35. But still, Stacey, 15% below the peak. 1.5. now it's catching up very quickly so as I indicated in the call, the reason we see an above average growth in Q2 sequentially is driven by industrial and data center which is a different story we'll get there, I'm sure I appreciate the fact that you haven't started there, that's great but the fact that industrial is coming back is very visible for us and by the way, some of it in sectors that are you know, data center related if you think about energy infrastructure as a sector, a big sector for TI I think data center helps over there Test and measurement is a sector that is getting help. So these sectors are growing faster, but aerospace and defense is coming in a big way. And we are starting to see, this is my biggest excitement, factory automation or industrial automation and robotics coming back. And that's an area where last year it was waiting to come back. But I think then with all the anxiety about tariffs, I think our customers took a breather of making the CapEx decisions, and I think they are moving now. So we are seeing this beautiful situation of industrial growing very fast on top of secular growth in data center. And if I may add, automotive is still hovering at nice levels, closer to the peak, but has not grown back to where I think it should. So overall, we are in a good setup.

Stacy Aaron Rasgon, Analyst — Bernstein

You sounded a little squishier on auto, I think, on the earnings.

Haviv Ilan, CEO

No, because in automotive, if you look at the progression in the last three years, picked in 2023, automotive never dipped like industrial, kind of stayed hovering around the same level. And I think that's what happens with content growth. I mean, there was inventory correction, but content growth continues to only keep it flattish, so not the industrial story. But I think that also continues to grow. There is secular growth in automotive continuing, and when that happens, my confidence level will be higher. So you're right. The automotive was, you know, growing about mid-single digits over here in Q1, but very close to peak levels, which is a better story. Hopefully that gives you a picture about industrial.

Stacy Aaron Rasgon, Analyst — Bernstein

To go back to industrial, so any thoughts on how much of the strength you might be seeing might be, you know, customer restock given lean inventories versus actual, like, sort of fundamental underlying demand? And I guess, would you be able to tell?

Haviv Ilan, CEO

Yeah, first, you're right. We are trying to be very humble about, we don't have that information, we just have anecdotes, right? I will say that I believe because we are four years further away from the peak, and because we are still 15% lower than the peak, I think it's very early in the recovery phase. And typically in the early phase, customers are not building inventory. Typically that happens towards the end of the cycle or closer to the peak. Now, the customers are sounding, and I did visits in Asia, I did visits in Europe actually this month. And it does sound that customers need more parts to really support ramps. We have seen also, I've seen anecdotally, this is where the only way I can tell with data that there is, yes, I appreciate your six weeks lead time, but I need it now. Meaning customers are not carrying inventory. But that's always for one or two parts. That's not across the board. This is not close to what we've seen in the COVID cycle. But there are more cases where TI needs to solve a problem. A little more escalation. Yeah, my inbox was very quiet for three years. So it's coming back right now. Let's see how it plays out, Stacey. I think we saw Industrial also picking up in the first half of last year. Then it took that little bit of a breather. I want to see it one more quarter in. So far, so good.

Stacy Aaron Rasgon, Analyst — Bernstein

In general, your lead times, do you effectively still have 100% availability of 100% of your parts or pretty close to it?

Haviv Ilan, CEO

Yeah, I'm saying 100%, then I get a call from a customer, hey, but you owe me that part. But in general, yes, our lead times are stable. Most of our portfolio, by the way, the general purpose portfolio is six weeks lead time. The more application-specific that are more unique and have less diversity, we usually keep them at 12 or 18 weeks of lead time, depends on the part, but mostly 12. The average lead time is at around 12 weeks across our revenue footprint. And that has been very stable. And for a good reason. We have built inventory, we have capacity, and I expect it to stay for the foreseeable future that way. Again, demand, I don't forecast right now, but as long as demand continues to be strong, even at that level, we should be fine. The only area where we've seen a little bit more work to do on our side is on the assembly and test side. So over there, the mix is changing, sometimes because of demand signals that are coming to solve problems, as we just mentioned. And this is where you never know the mix up front on the assembly. This is like the different types of package. So many SKUs. We have thousands of SKUs on the assembly and test. And it's different bonders, different lead frames that you have to take care of. So we are putting a little bit of adjustment on how we allocate capex in 2026. It's really towards more on the assembly and test side. We also see the OSATs, the outside assembly and test houses that we are still using, more compressed. so we are actually accelerating the internalization of our manufacturing into TI we have the clean room I can't remember what the target was front end I think was something 90% internal back end was it similar? at 2030 what I can comment about it's probably going to happen quicker because we are seeing tightness externally we just have to qualify more technologies internally and that's what we are doing as we speak right now are you guys holding more Dibank now because of this We do. We do all the Modibank. Again, it gives you that flexibility of what does the customer want. It's also a more financial, it's a more effective way to hold inventory.

Stacy Aaron Rasgon, Analyst — Bernstein

Got it, got it. Let's talk about data center. And so you're reporting.

Haviv Ilan, CEO

28 minutes or 23 minutes in. We're not happy yet even. That's amazing, yeah. But it's good. Usually it's a first question, so I appreciate it.

Stacy Aaron Rasgon, Analyst — Bernstein

We got a build to it. So let's talk about it. So you're reporting it as a segment now, as an end market. And your old segmentation, you had this like enterprise systems, which I think was primarily like more traditional servers and things like that. And it looked like to me you took some out of what used to be an industrial and some out of what used to be com, put it all together, and that's data center. And it's growing, I think last quarter grew 90% year over year, something like that, right? I guess the first question, and it was, I can't remember, nine percent of your revenue last year, so relatively small still, but growing at a very rapid rate. I guess maybe the first one is just, what is in that segment? What are you serving? And how much of it would you classify as, like, actually, like, AI-driven versus more traditional data center? And by the way, maybe those two things are the same thing now. Like, I don't just, given the way the market's going. But, like, see if we can peel the onion back a little for us on what's exactly in that segment now.

Haviv Ilan, CEO

No, I think it's a, let me take a moment to just set up the data center market for our type of chips, because, you know, you guys spend so much time. And you sell like a zillion things, I'm assuming. No, but you're, you're, you're, exactly. But you guys, you know, logic and memory, you know the story over there, and that's not our area. We make what I like to call foundational chips that are analog and embedded chips, and there are many of them, okay? I think even at the street level, people like to talk about a few sockets, but there are so many of them. Really thousands, and sometimes you count on tens of thousands per rack, okay? So very broad opportunity in the sense of product diversity. Customer diversity is more narrow, but the product diversity is very high. Now, in our case, we decided, as you said, to define the end market as a data center because it was too, I mean, first it was very small at the beginning, I would say go five years ago when we made our plans. I did not envision, you know, data center running it now in Q1, 12% of our revenue. 12% in Q1, okay. In Q1, 12%. Last year, it was nine, exactly as you said. And the definition, I like to... And the definition for us, it's whatever it's inside the walls of the data center. Some people call it the white zone, unlike the energy infrastructure that sits in the gray zone where the dust is, right? So we are inside the walls.

Stacy Aaron Rasgon, Analyst — Bernstein

So if you got, like, stuff in, like, a turbine that's in a... You wouldn't count that?

Haviv Ilan, CEO

The SSTs or some of the UPS system, they sit outside, so that's not in our number. That would be in industrial. But also still growing. It's still growing, yeah. That's one of the sectors in industrial that I mentioned before was energy infrastructure. But go back to the walls. Now you talk about three sectors. And if you think about the REC, Stacey, there is compute trays. And this is why I don't say CPU traditional. Today, on a compute node, you can have a CPU and two accelerators, right? So to me, it's compute, and I'm not trying to break it between AI and non-AI. To me, it's all compute. There is networking that is larger than you would think. I'll actually give some numbers in a minute. And then there is what we call rec power and cooling. And the rec power is the traditional PSU. The AC comes in, DC comes out. There is also change over there, as you might know. But overall, the market, if I quantify it last year, I call it in our area, $7.5 billion, less than 10% of our 10. That's the market. That's not your revenue. That's the market. That's the market. We've done 1.5, so it's about 20% share. It feels low, like just given all the 7.5. That's the numbers we've done our math, and it's not very far away from what we've seen. I call it this year, and you can check some of the analysts out there that came in very similar numbers. I think it's 12 and a half this year. So the growth rate is 65% or so. TI in Q1, just to complete the point, grew 90% over the year, and the run rate is right now above $2 billion, so it's close to somewhere between 550 and 600, so that's just to set the stage. Now, why do we want to talk about it? Because of the growth rates. As more power is added to data centers and power density also grows and architectures are changing, there is a very, you know, important and I think unique growth opportunities for our type of chips. Sitting around power, sitting around communication, clocking, sensing, cooling, protection, you name it. And we want to play there. Our plane data center is across the REC. I would say as architectures change from 480 volts AC to 800 or plus minus 400 DC, our plane is going to be in the entire REC. And I would segment it to three sectors, as I said. So I think half of the TAM is more or less in the compute side, power.

Stacy Aaron Rasgon, Analyst — Bernstein

And this is like analog and other stuff on the TAM.

Haviv Ilan, CEO

Feeding the power to the consumers on the board. Think about the compute trace, okay? But not only power sockets. There's also a lot of signal chain, clocking, et cetera. Then there is networking, about 35%, and the rest is data center power and cooling. So that's kind of a footprint.

Stacy Aaron Rasgon, Analyst — Bernstein

Repeat those percentages for me. So 50 will be compute, compute trace.

Haviv Ilan, CEO

35, we count, our estimation for networking. And networking includes also optical networking, the optical modules, etc.

Stacy Aaron Rasgon, Analyst — Bernstein

But only 15% on the power side.

Haviv Ilan, CEO

Power delivery, think about the AC to DC node. There is power also close to the GPU. That's part of the compute node. So that's the way we think about it. Think about it as the end equipment is the tray. That's the way we think about it. What's the content? And the beautiful thing is it's very rich. There are so many sockets per board. Power, signal chain, clocking, protection, sensing. And we play in all of them, Stacey. So our growth even last year was in all these sockets that no one likes to talk about. It's like the broad portfolio that we have, and we serve it very, very well. I love this type of sockets. They don't generate a lot of attention. They are not attacked every other day. But we also want to play, and that was my comment in the last call, on the more application-specific one. Some people will call it, I like to call it multi-phase power. That's what feeds that. You have to take, I don't know, 2,000 amps into a GPU. You don't do it in one wire. This is a heavy socket with multiple, you know, voltage regulators that are delivered in different phases of time. Some people call it the stage two. We'll play over there. And over time, as architecture is growing into, let's call it 800 volts or plus minus 400, we also want to play there. Because we do have a GAN technology that we've invested in. And that's a great technical solution to convert energy, convert power, call it from 800 volts all the way to 12 or 6. you can do it very nicely with GAN solutions. So that's the opportunity for TI. We can grow into more application-specific sockets, very competitive sockets. You have to win at multiple customers, but we are going to play there.

Stacy Aaron Rasgon, Analyst — Bernstein

Is it fair to say that on the application-specific stuff, that is where you have to compete for the socket, but the other stuff, you really don't have to compete as much. Like I said, it's more, I'm probably simplifying, but catalog-y.

Haviv Ilan, CEO

I think competition is tougher for the application-specific, Also because they are defined by the customer as multi, you know, usually they'll define the footprint, and if you want to sell the socket, you're not doing it alone. This is not only yours, right? So you have to compete with other players, plus the revenue concentration. We talked about it last year. Revenue concentration of the socket is high. Every win or lose is a lot, okay? So obviously there is more competition there. Now our supply footprint, the fact that we have such a broad portfolio serves very well the general purpose sockets. And, you know, they are maybe on average $0.20 or $0.30 per socket, but they add up.

Stacy Aaron Rasgon, Analyst — Bernstein

How do you think about content like per rack for you guys?

Haviv Ilan, CEO

Yeah, so you can do all kind of math, but I will say it's in the tens of thousands of dollars per rack.

Stacy Aaron Rasgon, Analyst — Bernstein

Actual content or opportunity?

Haviv Ilan, CEO

Opportunity. You know, our win rate last year or our share last year was 20%. Do we want to grow market share? So, look, I call the TAM at about 65% growth. So far, one quarter, we grew 90%. Can we keep it up at that clip, or can we outgrow the market? We'll have to wait a year and see. But that's always our intention, to outgrow the market.

Stacy Aaron Rasgon, Analyst — Bernstein

I mean, auto and industrial are clearly your biggest segment.

Haviv Ilan, CEO

Like a third, a third, and now we are talking about 12%.

Stacy Aaron Rasgon, Analyst — Bernstein

Well, I'm wondering, does data center become, does it overtake the other ones at some point?

Haviv Ilan, CEO

I don't know if it overtakes the other one, but I think it overtakes the consumer. or PE over time just because of the clip of growth rate. Where's PE now, 20%? PE is now 20, low 20s, I would say. But it doesn't grow fast, Stacey. Again, you've probably talked with people who are saying there's going to be new personal electronics, I don't know, wearables or whatever. I have not seen that market develop yet. But that could also change. But right now, this market has been growing at a low single digit. So when you grow a market in the 60s, it can become our third largest market very quickly, yes.

Stacy Aaron Rasgon, Analyst — Bernstein

I mean, maybe to touch on PE, and I get it, it's not a driver, and it's not that big, but I'm a little worried about PE just into the back half on memory pricing and everything else. What are you seeing there?

Haviv Ilan, CEO

No, I think that's also part of the reason I wanna see one more quarter before I call it, I call the second half. But to me, there is constraint.

Stacy Aaron Rasgon, Analyst — Bernstein

I don't think you should call the second half. I think it's better.

Haviv Ilan, CEO

Call the third quarter. I have to give you a third quarter forecast, right? So I don't want to talk about it right now. But to me, you know, our second quarter, I mentioned 8% sequential growth, nice year-over-year growth. Let's say it play out. But as I said, so far we are on plan. If I had something to report, I would let you know. To me, the P is one of the question marks because I think memory is a constraint. I think they would want to build more end equipments, but they can't. So how – and it's still 21, 22% of our business. So that could change the numbers. So we want to see it play out. Are there memory impacts on anything else besides PE? I specifically have not seen it, but I know our customers are busy around that. I mean, they have to, and I heard it's supply limitations. Also, the costs are higher, but luckily, I guess we don't build memory anymore, and we are focused on our stuff, yeah. That's right.

Stacy Aaron Rasgon, Analyst — Bernstein

How are costs in general trending for you guys? I mean, we're clearly in another inflationary environment. You've got other, like, I mean, maybe if you're insourcing, you're a little more protective from foundry pricing, but foundry pricing going up in memory and other things. And, you know, there's been, I don't even know if it's a rumor. I mean, you guys have been taking up price along with many of your other peers in this environment. I guess how do we think about, maybe the right question is, how do we think about your pricing actions, both in the wake of cost increasing as well as the potential, like, to capture more value for yourselves?

Haviv Ilan, CEO

I think you set it up correctly. The reason we are experiencing inflation, especially when we think about energy in Asia, for example, we have all of our assembly and test cost of resin. So we think about what's coming inside the package and the fillers or the mold compound. That's all higher. Costs of metals are higher. So yes, that's part of what we're seeing. But pricing environment is better than last year. So if you think about the COVID cycle where prices went up all the way into 2022, we have seen three years of our model coming through, like 23, 24, 25. This low single-digit price effect, if you will, like for like, didn't materialize in the last three years. But as I commented on the call, in the first half of this year, we expect pricing to be flat, which is good news for us. Because usually when you start the year, prices, usually because of price negotiations, does fall down a couple of percentage points. So that is flattish. But, yes, we have started discussion with our customers to talk about costs and the supply-demand situation. And I think the second half of the year, prices could be a little higher. And we will be a follower here, Stacey.

Stacy Aaron Rasgon, Analyst — Bernstein

We are not trying to set the market price, but we are watching the market environment. and right now you're right market prices are going high i just found it interesting because you know like the like i look at the equipment guys like lagging edge equipment demand has not been great um i know we're seeing maybe a recovery now in some of the end demand from some of these markets but the end demand in in some of the trailing notes stuff has not been great and like usually you see price increases when supply in these markets is really tight i'm not i'm not exactly convinced that in some of the markets that you play that supply is like incredibly tight and we have been seeing pricing coming so is that just a function of like we saw during COVID, it is inflationary, and you do have the ability to at least pass those costs long without the customers.

Haviv Ilan, CEO

I think it's a fair question, but again, this is why we have to be cautious, because it's only a couple of quarters in. But you're seeing what's happening in industrial, you're seeing the data center market becoming strong. I just came back from Taiwan, I was there last week, really focused on more data center customers, and their supply chain, if you will, is heavily there. And I think we are starting to see areas of supply demand mismatch, even in our area, so especially on the analog side, Stacy, we do see that. So the discussion I had with customers last week was all about, hey, make sure you continue your lead times as they are, make sure that you can upside if we need to. And I always tell them, we have parts, we have capacity, we have inventory, bring it So, but it's not, I think we are a little bit different than average there. I have seen, and you can see it also in lead times, our lead times, you asked before, are It's out there that lead times have been increasing, especially on the analog side, sometimes to a year. So I think TI is uniquely positioned. And we are not surprised. I think we have been disciplined in adding capacity through the down cycle. We are unique there. And it sets us up. We always said to every scenario, the scenario is still getting built as we speak. And you and I will watch it together. But I think if it wants to continue to be strong in the second half, we will be ready if it wants to continue into 27 we'll be ready so that's where we are and I love where we are because if you fall behind and we saw it in the previous cycle and you said okay I want to chase it now you can't four years yeah from the minute you move there to substantial output from your fab it's four years so you're not talking about the current cycle anymore yeah so in that sense TI doesn't have that lead time issue okay we are very well prepared got it talk to me about the slab deal.

Stacy Aaron Rasgon, Analyst — Bernstein

Yeah. You guys sat out of M&A while the industry was consolidating for a long time and I don't know what it was. There wasn't strategic fits or the returns on the valuations weren't there and why now?

Haviv Ilan, CEO

Yeah, so first you said set out in making a decision but we don't sit out on making.

Stacy Aaron Rasgon, Analyst — Bernstein

No, I understand you evaluated all. I get it.

Haviv Ilan, CEO

We have a quarterly process. Okay, so that's ongoing and you've seen that. We've done a big one in the early 2000s, we've done a big one in the early 2010s, yeah, and we did another one last. So on average, it's 10 to 15 years, so we are on the cadence, right? Now, why this one? And that's, I think, let me set up a little bit of embedded, because it's an embedded-centric acquisition, and this is where there is a change. I would say 10 years ago, we would not consider it, because we are not sure about our embedded business. And we were very, I mean, Rich was very open about it. We come from, you look, 10, 15 years ago, custom business, more than 50%, big logic, DSPs, very digital, mainly built externally. That's not the embedded business we are building today. So five, six, seven years ago, we said, okay, let's retool our embedded business towards our competitive advantages. Let's bring it in. Let's create a broad portfolio, meaning less big processors and more MCUs with some analog periphery, some application-specific MCU for power conversion, for motor drive, connectivity solutions, radar systems. These are the type, it's also part of a DSP investment that we have. So these are the kind of investment we are making right now in Embedded. So number of parts we build every year is higher. We are gonna build them all internally, and Embedded is gonna be more than 90% internal by the end of the decade. Now, when you come into Scilab, This is where we had an opportunity to give ourselves a step function in our portfolio. Because we have some connectivity parts, but they are mainly serving very well the automotive market. This is where we are winning and expanding. Our industrial portfolio is slowly growing. And that's a one-time, we saw a one-time chance to really increase our portfolio in a step function. If you think about our competitive advantages, Stacey, it's a beautiful, you know, there are four elements. But they bring in two, we add two. So, you know, we talk about manufacturing and technology, building it internally in our technology. We talk about the broad product portfolio. We talk about a very strong channel position or advantage, both TI.com but also our very large, largest in the industry of sales team, and the position of diversity and longevity. What do they bring in? They bring in a broad portfolio, a broad industrial portfolio, and a good position in terms of diversity and longevity. 90% of their business is industrial. You look at the revenue by socket, you know, very, very broad. I think you can see it on our website. So they bring in two elements. You add to that the fact that you can bring in inside our Lehigh fab and build it internally and control your destiny in terms of technology and manufacturing. And also the field and the ti.com that can really sell beyond that connectivity chip. They have a very narrow portfolio in that sense from a technology perspective. You get into the Excel sheet works, okay? And that doesn't happen every day. Many times we look at stuff, it looks good strategically, but we can't make sense of the price. And look, if you ask me would I do this deal today, it will be harder. Look at what happened to the market prices of assets in the last three or four months. So in that sense, I think the stars aligned and we made the acquisition, very pleased about it, very pleased with the progress towards completing the deal in the next, I would say, three to four quarters by the first half of next year. And I think it will be a great addition to our embedded business. So that's a story over there. You want to do this deal 10 years ago, you don't have Lehigh, you don't have conviction that we can be successful with our portfolio. Our confidence level is higher, and that's kind of the way we'll think about it moving forward.

Stacy Aaron Rasgon, Analyst — Bernstein

So you wouldn't have had confidence in the business, In general, the business, yeah.

Haviv Ilan, CEO

You wouldn't have anywhere to put it, even if you... And the synergies would not come in, because these guys were using mainly TSMC.

Stacy Aaron Rasgon, Analyst — Bernstein

How long will that take you to internalize their product, and how difficult is that to do?

Haviv Ilan, CEO

So luckily, we have been doing it ourselves many times, including right now as we speak, and bringing stuff from the founders into Lehigh on our portfolio. But they've done a great job, and this is very rare in a company on an embedded field. Very, very well organized platform operationally. very well invested it's only somewhere between 10 and 15 different dies which is how many different products you said 2,000 products oh wow okay so they have done a very good job on on on doing this platform approach that you can build you know 10 to 15 dies and then approach many many products out there so that would take not too long okay it will be mostly completed by the end of the decade we will start yes it's gonna take two to three years yeah okay but we're gonna start immediately after close we are and that's the way we've we've modeled the synergies now internally I want the team always to move faster but as you saw the 450 million dollars of synergies that we described they are mainly supported through the cogs and it's almost fully in by the end of the a decade.

Stacy Aaron Rasgon, Analyst — Bernstein

Got it, so that also means that it's harder to buy somebody that sells 10,000 different products.

Haviv Ilan, CEO

There you go, there you go. To bring that in. And most companies, especially on the embedded side, the breadth of the portfolio is so high, it's hard to do, it's hard to bring in the synergies when you buy a fabless company. Now, in the case of National, they had their own fab, so it's a different story. But this is why these things are not trivial. They're not easy to do. This is why you see us doing But I can tell you, nothing has changed on the strategy. We'll continue to look at assets, and I think this one was a unique one.

Stacy Aaron Rasgon, Analyst — Bernstein

Got it. Talk to me about China. So, clearly you guys have made a bet on the US, and I get it. And I understand the whole concept of geographically, a geopolitically attractive capacity. At the same time, I know it's an investment controversy. I don't know how real it is, but it's an investment controversy about your position in China, and I always joke, Texas Instruments has Texas right in the name. And most players in China, there has to be some sort of a China-for-China strategy, whether it's working with local partners or making it directly in the region or whatever. How do we think about TI's competitiveness over time in China relative to some of the local players, given the trends that we're seeing on the geopolitical spectrum right now?

Haviv Ilan, CEO

Yeah, let me break it. I think it's an important topic. Let me break it up to two parts. The first one you mentioned is kind of you bet on the US maybe on manufacturing or new manufacturing footprint not on the market only the market wise we are a global company okay so and the fact that we are investing in the US it doesn't mean that we don't know how to solve China from China we have we have a factory in China we have a fab we are still you know we have a big assembly and test out so we can we can support China manufacturing wise I think the challenge in China it's actually how do you compete in the market and especially when you're not a Chinese supplier I think that's more interesting and first we want to play there why China is what 20% of world GDP more or less something with some of your revenue and I guess by headquarters our revenue by headquarters in last year was about 20% okay more importantly China has some very important customers let's Let's take automotive, that are technology leaders. You even go into data centers, optical links. China is a big player there in terms of headquarters company. And we also see areas in industrial where China, robotics, for example. China is a big player. So you don't want to exclude yourself from China, you want to compete. It is harder. It is harder because of what you said. There is a growing industry of a very hungry supplier base that is always expanding. I have my own China index. You know, I review with my team every quarter a set of 25 competitors, 25 that together add up to about half of TI, but they are doing well. I mean, they are competing, but TI can compete. And the reason we can compete is that we have some competitive advantages that are very, very important to our China customers. Their portfolio. Their portfolio is very attractive. If I want to solve a problem on the board, do I bring in 25 suppliers? some of them are startup companies that are just trying to breathe, versus an established player like TI that has good solution. Now, the portfolio is not enough. Cost competitiveness is key. But can TI play that game? Yes, we are vertically integrated. As much as the foundries in China are serving these local competitors, they still don't work for free. They also sound, if you look at the utilization rates over there, they are also not, you know, they are not underutilized, let's say that. So we can compete by supply and also cost structure. Very strong channel or sales team that is entrenched over there and built relationships with customers for years. And a customer base, Stacey, and I mentioned data center, but that's not the only case, that is continuously wanting to diversify their markets, wanting to go into non-China markets. It's actually where they make most of their profit. So that game is played well for TI, and the reason I say played well, just go put 2025. We report our China business. We grew close to 25%. The index I just mentioned grew slower, okay? And we are watching this every quarter. Q1 is now being reported. We are holding our share, okay? So you can argue that last year we gained share in China in an impossible environment. This year I think our odds are even better because of the supply-demand mismatch. Usually everything starts in China. That's not an outlier this year. So over there, our capacity, our footprint, our cost competitiveness, and our broad portfolio and channel advantages are playing on. And the risk I have about China, don't fall asleep. Don't be complacent. Don't say these guys are commodity players. Respect them. But also don't be scared. Fight the fight. So we take the fight to Shenzhen, to Shanghai. Our customers over there appreciate us. And by the way, every time there is a tie, we lose the sockets. So we always have to be a little bit better than the local competition. Hopefully that covers China.

Stacy Aaron Rasgon, Analyst — Bernstein

No, that does, that does. Two minutes left. You want to do the lightning round?

Haviv Ilan, CEO

Whatever it means, I don't know. We've got a few audience questions. We're going to get one.

Stacy Aaron Rasgon, Analyst — Bernstein

Are robotics, humanoid or general, drones or autonomous vehicles, a driver of growth for you going forward? When do you expect it to show up meaningfully in the top line?

Haviv Ilan, CEO

Look, humanoid content is astonishingly high. 40i, not only the TAM. So we are talking about a content 40i higher than a car. I have an automotive. Think about $1,000 per humanoid. That's the content. Now, you tell me the number of humanoid that are going to be built, it depends who you listen to, but I think we are starting to see it, and I am excited about it. I don't think it's as soon as people say, but I can see why humanoid-like robotics will be one day walking around our factories, especially assembly and test, and providing value. So I'm excited about that.

Stacy Aaron Rasgon, Analyst — Bernstein

We've got one minute left, so I'm going to finish this up the way I always do with everybody. You've got a whole room full, full room folks here. Why should they buy TI stock?

Haviv Ilan, CEO

Yeah, so again, I think part of your introduction helped me, but Stacey, as we discussed, we have been preparing for an opportunity for a long time. It's been a long journey. I even kind of wake myself up. It's been six years, but we have done the hard work for being prepared. Now, tell me what the scenario will be. I think we are seeing more and more evidence that this is going to be a good time to be in semis. There is a secular growth in the data center market that is really not negligible anymore. TIA is in a great position. There is industrial coming back in a nice way. And I think automotive is around the corner. So you put all these three together, you can envision a very strong demand environment. We are well positioned to support it. We have the inventory, we have the capacity, we can grow into it, allowing, hopefully, share gains for the company. So thank you, Stacey. I appreciate being here, and thanks for the time.

Stacy Aaron Rasgon, Analyst — Bernstein

I appreciate having you here. Thank you so much.