Texas Instruments Q2 2023 Earnings Report

Texas Instruments EPS Results

• Actual EPS: $1.87
• Consensus EPS: $1.76
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: $2.45

Texas Instruments Revenue Results

• Actual Revenue: $4.53 billion
• Expected Revenue: $4.37 billion
• Beat/Miss: Beat by +$162.11 million
• YoY Revenue Growth: -13.10%

Texas Instruments Announcement Details

• Quarter: Q2 2023
• Date: 7/25/2023
• Time: After Market Closes
• Conference Call Date: Tuesday, July 25, 2023
• Conference Call Time: 4:30PM ET

Texas Instruments (NASDAQ:TXN) Inc. (NASDAQ: TXN) is a global semiconductor company headquartered in Dallas, Texas, that designs and manufactures analog and embedded processing chips. The company’s products are used across a wide range of end markets, including industrial, automotive, personal electronics, communications and enterprise equipment. TI’s business emphasizes components that condition, convert, manage and move electrical signals—capabilities that are foundational to modern electronic systems.

TI’s product portfolio includes a broad array of analog integrated circuits—such as power management, amplifiers, data converters and interface devices—as well as embedded processors and microcontrollers used to control systems and run real-time applications. Beyond silicon, the company provides software development tools, reference designs and documentation to help customers integrate its components into finished products. TI designs and manufactures many of its own devices and sells through a mix of direct channels and distributor partnerships to serve customers of varying size and geographic scope.

With roots dating back to Geophysical Service Incorporated in 1930, Texas Instruments has a long history in electronics and semiconductor innovation; an early milestone was the invention of the integrated circuit by Jack Kilby at TI in 1958. The company operates globally, supporting customers and manufacturing activities around the world, and is led from its Dallas headquarters by an experienced executive team and board of directors. TI’s strategy centers on leveraging its process and analog design capabilities to serve broad, durable markets that require reliable, high-volume semiconductor solutions.

Texas Instruments Q2 2023 Earnings Call Transcript

Key Takeaways

• Revenue in Q2 was $4.5 billion, up 3% sequentially but down 13% year-over-year, with Analog down 18%, Embedded Processing up 9% and Other down 10%.
• By end market, Industrial was flat sequentially, Automotive rose low single digits, Personal Electronics rose low single digits, Communications Equipment fell mid-teens and Enterprise Systems fell mid-single digits.
• Gross profit was $2.9 billion (64% of revenue), down 540 basis points year-over-year due to lower volumes, higher CapEx and L-FAB charge transitions; operating profit was $2.0 billion (44% of revenue) and net income was $1.7 billion ($1.87 EPS).
• Q2 generated $1.4 billion in operating cash flow, $1.4 billion in CapEx and $3.2 billion in trailing-12-month free cash flow, with $9.6 billion in cash on hand and $6.5 billion returned to shareholders in the past year.
• For Q3, TI expects revenue of $4.36–$4.74 billion and EPS of $1.68–$1.92, while maintaining a 2023 effective tax rate of about 13–14% and investing ~$5 billion per year in manufacturing to drive long-term free cash flow per share growth.

Presentation

[Dave Pahl, Head of Investor Relations at Texas Instruments]

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.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Next, I'll provide insight into second quarter 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 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.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Next, the automotive market was up low single digits. Personal electronics was up low single digits after several quarters of sequential declines. Communications equipment was down mid-teens. Enterprise systems was down mid-single digits. Rafael will now review profitability, capital management, and our outlook. Rafael?

[Rafael Lizardi, CFO at Texas Instruments]

Thanks, Dave. 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-month 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.

[Rafael Lizardi, CFO at Texas Instruments]

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 twelve months. Our balance sheet remains strong, with $9.6 billion of cash and short-term investments at the end of the second quarter.

[Rafael Lizardi, CFO at Texas Instruments]

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-$4.74 billion and earnings per share to be in the range of $1.68-$1.92. Lastly, we continue to expect our 2023 effective tax rate to be about 13%-14%. In closing, we will stay focused in the areas that add value in the long term.

[Rafael Lizardi, CFO at Texas Instruments]

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. Let me turn it back to Dave.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

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. Operator?

[Operator]

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

[Vivek Arya, Managing Director at Bank of America Securities]

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. When I look at your trailing 12-month free cash flow of south 17%, if my model is right, that is the lowest since 2010. At 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? I understand that obviously you're not optimizing the model for just one year, but now we have seen this consistent decline in free cash flow per share, which is your preferred metric.

[Vivek Arya, Managing Director at Bank of America Securities]

At what point should we start to see free cash flow get back to historical trends?

[Rafael Lizardi, CFO at Texas Instruments]

Thanks, Vivek. Let me start, and Dave, you, if you wanna chime in, chime in. You know, 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 gonna enable revenue growth for the company for the next 10-15 years. Okay, so that's how we're thinking about it, and that's why we're making these investments, on CapEx, in particular, about $5 billion per year for the next four years. We are committed to those investments. We're excited to making those investments, regardless of the short-term fluctuations of revenue.

[Rafael Lizardi, CFO at Texas Instruments]

Of course, lower revenue means, lower operating cash, which now with the CapEx, that's what you're seeing on the free cash flows. It's not unexpected.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah, maybe I'll just add that Vivek, as you know, and have followed us for some time, one of our competitive advantages is manufacturing and technology. These CapEx investments really are strengthening that advantage over time. You know, it's fairly obvious that those investments will allow us to produce products at significantly lower cost when to service demand. Controlling the those assets in today's world is increasingly important. Customers can see the investments that we're making, not only with that, the other systems that we've got to make it easier to do business with us, combined with the inventory we're putting in place to support their growth, customer reactions is extremely positive to that.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

We believe these will be great investments for all of us long term. You have a follow-on?

[Vivek Arya, Managing Director at Bank of America Securities]

Yeah. Thank you. I guess maybe, to say, you know, ask the same question, but in a different way, right, 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. It's not a, you know, one quarter or two quarter phenomena. Sales have been under growing your peer growth for almost two years now, and CapEx is growing while sales are declining. That's why I'm questioning whether the strategy is still right, whether the results are actually justifying the strategy?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah. I'll start, Rafael, if you, if you wanna 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 is, someone using. As you know, we've transitioned, from, mostly using distribution to mostly, having revenue come direct, so there was inventory that needed to be burned out, of the channel as we made that transition. There's multiple factors. I think going forward, our confidence in being able to continue to gain share, is extremely high.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Customer reaction to the capacity that they know they need to have, wanting to know that they've got the capacity runway, not from someone's manufacturing supplier, but directly from someone that makes their products, is really resonates with customers.

[Vivek Arya, Managing Director at Bank of America Securities]

Okay, thank you.

[Rafael Lizardi, CFO at Texas Instruments]

Thank you.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

We'll go to the next caller, please.

[Operator]

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

[Toshiya Hari, Managing Director at Goldman Sachs]

Hi, guys. Thank you for taking the question. My first one is on your Q3 guidance. You know, you're guiding revenue up, 1% sequentially. Dave, you called out Automotive as the one end market that continues to be healthy. 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?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah. You know, I'll just point out that, you know, this last quarter, we saw a weakness across the board in our markets, with the exception of Automotive, like you've called out. Just to point out that continued asynchronous behavior, you know, we had PE weaken back in second quarter a year ago, and the other markets followed. Obviously, you know, the exception of that with Automotive continued to be strong, and it's up over 20% year-on-year. Definitely very strong growth there. As we look into third quarter, we're not expecting to see any significant change in our end markets compared to this last quarter.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

You have a follow-on?

[Toshiya Hari, Managing Director at Goldman Sachs]

I do, thanks. Inventory on your balance sheet, was up, I think, 13% sequentially, days grew to 207.

[Toshiya Hari, Managing Director at Goldman Sachs]

I know on your capital management call, you revised up the upper range of your target to more than 200. I also appreciate, you know, Dave, the transition from disti to direct. At what point do you think you need to, you know, cut production or cut utilization rates and start to manage down inventory? Are you still comfortable with where things are today?

[Rafael Lizardi, CFO at Texas Instruments]

Yeah, no. Thanks for the question, Toshiya. Yes, we are comfortable where we are. As a reminder, our objective for inventory is 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, over about 30 some years, and what that informs us on what could happen in the future. We were planning for the long-term growth through those cycles, not in any one quarter or even any one year. Of course, inventory levels always depend on demand expectations, and for the time being, in the near term, we, they will likely have an upward bias.

[Toshiya Hari, Managing Director at Goldman Sachs]

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

[Rafael Lizardi, CFO at Texas Instruments]

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

[Toshiya Hari, Managing Director at Goldman Sachs]

Okay.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

That's right.

[Toshiya Hari, Managing Director at Goldman Sachs]

Thank you.

[Rafael Lizardi, CFO at Texas Instruments]

Thank you, Toshiya. The next caller, please.

[Operator]

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

[Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research]

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

[Rafael Lizardi, CFO at Texas Instruments]

Well, the days depends on revenue, of course. On the dollars has an upward bias, so there's a very likely that the dollars will go up in Q3. Of course.

[Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research]

How-

[Rafael Lizardi, CFO at Texas Instruments]

You know, and you know this, right? Inventory is on the balance sheet at one point in time, but it's meant to support the future, growth.

[Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research]

Yeah.

[Rafael Lizardi, CFO at Texas Instruments]

You know, 200 days is about two quarters worth of inventory in various stages.

[Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research]

Right

[Rafael Lizardi, CFO at Texas Instruments]

... of finish.

[Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research]

How many quarters is it gonna keep going up for, though?

[Rafael Lizardi, CFO at Texas Instruments]

That's gonna depend on revenue expectations beyond now, and then the decisions that we make on the factory, and we forecast one quarter at a time. Just know that our thinking is long-term in nature, as I talked, as I mentioned to Toshiya in the previous call, and we're managing through the cycles, right? Not what's gonna happen in one quarter or even two quarters, what we think is gonna happen over longer than that on inventory. On capacity, we're adding capacity that's gonna support us for many years, right? It's gonna give us plenty of headroom. One more comment on inventory, just for those who maybe have not listened to us very often. You know this, our inventory has very low obsolescence.

[Rafael Lizardi, CFO at Texas Instruments]

The bulk of it is for catalog parts that the inventory itself lasts, years, in fact, up to 10 years on the shelf, but the product life cycles, are very long with our customers, and we have, in many cases, tens or dozens of, customers that buy the product. The risk of obsolescence is very low on this inventory.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

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

[Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research]

Oh, was that my-?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

I lose your signal. Yeah, thank you.

[Operator]

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

[Chris Danely, Managing Director and Senior Semiconductor Equity Research Analyst at Citigroup]

Hey, thanks, guys. By the way, thanks for having a nice, concise conference call. It's unique in semis, and much appreciated. My first question is just on lead times and shortages. You know, given all the capacity you're adding in the inventory, can we pretty much say that, you know, TI lead times are the lowest, at least among peers, and the shortages are all gone? Are we pretty much, I guess, quote, unquote, "back to normal"? 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?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah, Chris, what I would, how I would frame it, you know, today is we've got the vast majority of our products are available on ti.com for immediate shipment. As Rafael talked about, you know, whenever the upturn does come, you know, we'll have product available as well as capacity behind that to be able to support that demand. Now, if a customer wants to give us an order, at lead time, those lead times over the cycle haven't changed that much. They can place that order, or if they need it inside of that, they can for the vast majority of the products, have it available. Now, we do have hotspots.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

We'll probably always have a place where we have a demand and supply imbalance. Those hotspots are closing and closing pretty quickly. As Rafael talked about, we're bringing on capacity every quarter, that just gives us more flexibility to be able to meet the customer demand, but it does vary beyond what we've got on hand. You have a follow-on?

[Chris Danely, Managing Director and Senior Semiconductor Equity Research Analyst at Citigroup]

Yeah, earlier in the call, and in a bunch of the calls, you keep talking about your advantages in manufacturing and, you know, given you have more internal manufacturing and more 300 mm than the competitors. Are you or, 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? You know, some of your competitors have, I guess, quote, unquote, "complained" about TI getting more aggressive in price recently. I just wanted your response to that.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

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

[Chris Danely, Managing Director and Senior Semiconductor Equity Research Analyst at Citigroup]

Thank you.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

We'll go to the next question.

[Operator]

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

[Harlan Sur, Executive Director of Equity Research at JPMorgan]

Thank you. Good afternoon. Up until the March quarter, the team had seen three consecutive quarters of increasing cancellations and pushouts, right? Sort of the typical sort of customer behavior in a weak demand environment. Did the team continue to see cancellations and pushout activity expanding in the June quarter, or have you guys, or have you or are you seeing signs of stabilization?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Well, I, the way I'd describe that is the cancellations remain at elevated levels. You know, we believe that customers are continuing to work down inventories to get that more in line with their demand. You have a follow on?

[Harlan Sur, Executive Director of Equity Research at JPMorgan]

Thanks for that. Your Embedded Processing business continues to hold up very well, right? I think trailing 12-month, it's up 9% year-over-year, versus your Analog business, which is down 7%. I know part of it is due to the strategy, the refocusing of the MCU businesses over the past few years, you know, more general purpose, catalog focus, right? It also seems to be reflecting this broader trend in the industry. If I look at the SIA data, if I look at you and your other MCU competitors, where industry MCU trends year-over-year are holding up much, much better versus Analog. I just wanted to get the team's perspective on why the large delta in performance Analog versus Embedded Processing.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah, thanks for that question, Harlan, and how you framed it. I would say, you know, at a top level, you know, 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 business will grow and gain market share over the long term is extremely high based on that. 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.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Near term, I would say, you know, besides the things stabilizing, we've experienced greater supply constraints over the last two years, as Embedded Processing has previously had to rely on foundries to supply that demand. Those constraints are alleviating, and I think that that's just something that you see across the industry. Thank you, Harlan.

[Harlan Sur, Executive Director of Equity Research at JPMorgan]

Thank you.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

We'll go to the next caller.

[Operator]

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

[Blayne Curtis, Managing Director at Barclays]

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

[Rafael Lizardi, CFO at Texas Instruments]

You know, in the big scheme of things, our goal here is to support revenue growth. It's not frankly, to optimize short-term fluctuations in gross margins. Those are not, you know, irrelevant, of course, it's just the focus is on supporting revenue growth in the short term, mid-term, and long term. Inventory supports short term to mid-term fluctuations, right? That we can mitigate. We're having plenty of inventory. The incremental cost of inventory is really low, as we talked about on the obsolescence side, also on the variable cost nature of what goes into inventory. It's just sort of just things that we keep in mind in trying to make those decisions.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah.

[Blayne Curtis, Managing Director at Barclays]

Yeah, 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 a mix. I'm just kind of curious, is it just depreciation layering in, or is there any other puts and takes on gross margin?

[Rafael Lizardi, CFO at Texas Instruments]

I assume you're talking about third quarter.

[Blayne Curtis, Managing Director at Barclays]

Yeah.

[Rafael Lizardi, CFO at Texas Instruments]

Yeah, our guidance, and as you pointed out, you know, we only give top line and EPS. Our guidance best estimate that we have in our gross margins. Or I'm sorry, that guidance embeds the revenue is flat in that particular case, and it embeds the resulting depreciation and other related costs from added capacity over time. On a year-on-year basis, I know you asked sequentially, but just a reminder, 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 in CoR, in cost of revenue, as of December of last year is when it moved.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yep. yeah, so year-on-year, you know, think change in revenue, the increase in, or moving of the costs from, restructuring into, most of that into cost of revenue.

[Rafael Lizardi, CFO at Texas Instruments]

Depreciation.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

As well as depreciation. Thank you, Blayne.

[Blayne Curtis, Managing Director at Barclays]

Thanks.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

We'll go to, go to the next caller, please.

[Operator]

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

[Joshua Buchalter, Managing Director of Equity Research in Semiconductors at TD Cowen]

Hey, guys. Thanks for taking my question. I guess I wanted to follow up on the previous one, and ask about, we understand the depreciation flow-through, that is what it is. Could you maybe talk through some of the near to medium-term milestones when the 300 mm increased output could start to benefit gross margin and sort of help offset the depreciation headwinds? Thank you.

[Rafael Lizardi, CFO at Texas Instruments]

You know, just... What I would tell you is depreciation, the way we depreciate equipment is over five years, buildings is much longer. Usually, they average about 30 years or so. Consider that that equipment lasts a lot longer than five years, right? We have factories today that are running on 50 years plus, and, you know, some of that has had upgraded equipment. Broadly speaking, that equipment lasts for decades, not the five years where we depreciate it. It's probably an unfair comparison to try to put the 300 benefit next to the depreciation and expect, you know, an offset in the short term. I would suggest you think of it from a cash standpoint. We're investing.

[Rafael Lizardi, CFO at Texas Instruments]

That CapEx is cash. Forget about the depreciation, is CapEx is where, what we invest in. That's gonna enable growth by adding that internal capacity, which as Dave alluded to earlier, that is geopolitically dependable capacity. We're putting as many as four fabs in Sherman, two in Richardson, two in Lehi, in Utah, and then assembly test facilities in Asia, primarily Malaysia and Philippines, for example. That's gonna put us in a really great position to grow the top line for a long time. What happens there is that yields a lot of operating cash for the company, and then we can either redeploy or return to the owners of the company after those investments.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

A follow-on, Josh?

[Joshua Buchalter, Managing Director of Equity Research in Semiconductors at TD Cowen]

Yep. Yeah, sure. Thank you. I recognize the language was similar last quarter regarding the end market commentary. Did anything change get, you know, any better or worse intra-quarter? 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 sort of bottom now? Thank you.

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Yeah. Again, I think that overall, we had continued to see that asynchronous behavior as we started back a year ago. That has that has continued. PE again, we started to see weakness in Q2. We've completed now, it actually grew first to second, so we've got several quarters of decline. It was up slightly sequentially. Again, we're not expecting much change in our end markets as we as we look forward. Okay, thank you. Let's go to our last caller, please.

[Operator]

Our last caller comes from the line of Chris Caso with Wolfe Research. Please proceed with your question.

[Chris Caso, Managing Director at 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? As you noted, the PE segment, you know, started to see weakness earlier. You know, we heard from some others that, you know, 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, you know, where we could see incremental weakness if customers still need to bring down inventory further?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

Sure. Yeah. Chris, I think if you look across the end markets, broadly, you know, you could say that all of them showed weakness and reflective of customers reducing inventories, with the exception of Automotive. Even inside of that, of course, if you look at Industrial, not all the sectors aren't identical, meaning you've had strength in aerospace, Grid infrastructure, in other sectors like that. PE is the same way. Not all of the sectors were as weak or as strong as others. Broadly, you could say it was across each of those markets. You have a follow-on?

[Chris Caso, Managing Director at Wolfe Research]

I do, thanks. Maybe with a follow-on, I'll hit on the segment that has remained strong, Auto. You know, when this downturn began, I believe your commentary was that, you know, Auto had remained stable then. You thought that eventually it would come to Auto just because it always has in the past. You know, so far it hasn't. I think it surprised a lot of us, the resilience on that. Has your view changed about, you know, the resilience of the Auto market? Do you still expect that has to correct at some point? If not, why do you think it's different?

[Dave Pahl, Head of Investor Relations at Texas Instruments]

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

[Rafael Lizardi, CFO at Texas Instruments]

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. 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're successful, our employees, customers, communities, and owners all benefit. Thank you, and have a good evening.

[Operator]

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

Participants

Executives

• Dave Pahl, Head of Investor Relations
• Rafael Lizardi, CFO

Analysts

• Blayne Curtis, Managing Director at Barclays
• Chris Caso, Managing Director at Wolfe Research
• Chris Danely, Managing Director and Senior Semiconductor Equity Research Analyst at Citigroup
• Harlan Sur, Executive Director of Equity Research at JPMorgan
• Joshua Buchalter, Managing Director of Equity Research in Semiconductors at TD Cowen
• Stacy Rasgon, Managing Director and Senior Analyst of U.S. Semiconductors and Semiconductor Capital Equipment at Bernstein Research
• Toshiya Hari, Managing Director at Goldman Sachs
• Vivek Arya, Managing Director at Bank of America Securities