The speaker, Dave Pahl, welcomes listeners to the Texas Instruments Third Quarter 2023 Earnings Conference Call. He is joined by Chief Financial Officer Rafael Lizardi and will provide updates on the quarter's results, including revenue, end markets, and financial performance. Revenue for the quarter was $4.5 billion, with Analog declining 16%, Embedded Processing growing 8%, and Other segment declining 32%. The industrial market saw mid-single digit decline, while automotive market continued to grow.

The company's third quarter revenue decreased by 14% due to lower sales and increased manufacturing costs. Gross profit margin decreased by 690 basis points. Operating expenses were in line with expectations and operating profit was down 29% from the previous year. Net income was $1.7 billion, which included a $0.5 benefit for items not originally included in their guidance.

In the third quarter, the company had a cash flow from operations of $1.9 billion and a trailing 12-month cash flow of $6.5 billion. They also had $1.5 billion in capital expenditures and $4.9 billion in free cash flow. The company increased their dividend by 5% and have returned $5.6 billion to their owners in the past 12 months. Their balance sheet is strong with $8.9 billion in cash and $11.3 billion in total debt. They expect fourth quarter revenue to be between $3.93 billion and $4.27 billion, with earnings per share between $1.35 and $1.57. The company plans to stay focused on long-term value.

The company continues to focus on its competitive advantages, such as manufacturing and technology, a broad product portfolio, and strong channels. They plan to strengthen these advantages through disciplined capital allocation and focusing on the best opportunities for long-term growth. The company is now taking questions from analysts, with a limit of one question each. The first question is about gross margins, which are expected to decrease by 250 basis points due to various factors such as utilization, lower revenue, depreciation, and pricing. The company does not provide specific numbers for each factor but expects the trend to continue into the next year.

In the third quarter, gross profit decreased due to lower revenue and higher manufacturing costs associated with planned capacity expansion. The company also mentioned that inventory levels will be reduced in the third and fourth quarter, with future impacts depending on revenue expectations. The company expects to continue operating in a weak environment in the fourth quarter, with no significant changes from the previous quarter. Despite a broadening strike, the auto market remains strong.

The speaker asks if the company's customers are mostly on consignment in the automotive industry and if they have seen any weakening in bookings due to the ongoing strike and weak macro numbers. The company's representative responds that while larger customers in the automotive industry tend to be on consignment, the company has also formed direct relationships with customers and serves a wide range of automotive OEMs. The speaker then asks about the company's plans for CapEx and if there is a point where they would consider cutting it due to weakening revenue. The representative responds that they are pleased with the progress on their manufacturing expansion and have no plans to cut CapEx at this time.

In the third quarter, the company's revenue was in line with its guidance, which is unusual as they usually exceed it. There were no significant changes in the linearity of the quarter, and the revenue increased as the quarter progressed. The weak market environment is evident from the company's guidance. Automotive end market saw a 20% increase in revenue year-over-year.

The speaker is responding to a question about the pricing environment in the company's various markets. They clarify that pricing does not change quickly and is not a primary factor in customers choosing their products. The company's pricing strategy has not changed and they regularly monitor market trends. They expect pricing to continue to decline at a low single digit rate in the future.

The speaker discusses the stability of their company's OpEx over the past few years and their plans to continue this trend. They also mention an increase in OpEx for the current year and their steady approach to hiring and investments. In terms of depreciation, they expect it to increase at a similar rate as seen in 2023, with a projected total of just under $1.2 billion by the end of the year.

The company has set targets for inventory levels based on specific products and their expected lifespan. This has resulted in a $4 billion to $4.5 billion inventory target. The company is taking an underutilization charge due to reaching this desired level of inventory. The change in inventory levels does not reflect a change in expectations for the recovery of revenues.

The company's inventory levels have been increasing, but there has been a deceleration in growth due to purposely slowing down factory starts as they near their target levels. This will continue into the fourth quarter, leading to underutilization charges. However, the company's objective with inventory is to maintain high levels of customer service and product availability in preparation for the next upturn. The upcoming fourth quarter is expected to see a double-digit decline, which has not occurred very often in the company's history.

The speaker, Dave Pahl, is discussing the current cycle and how it differs from previous ones. He notes that the markets have behaved differently this time, with PE recovering first and automotive last. He also mentions that the company's product portfolio has changed over time and they are well positioned for the next upturn. The next caller asks about automotive and the speaker clarifies that they are seeing a seasonal environment in Q4 with no changes in orders for traditional or EV customers.

The speaker is being asked about the third or fourth quarter and whether there are any unusual factors affecting the sector. The speaker confirms that there is nothing abnormal and they will report on the fourth quarter. The speaker is also asked about the revision in depreciation and explains that it is due to more clarity on expected tools and timelines.

Vivek Arya asks about the gross margin headwind, and Rafael Lizardi explains the calculation for gross margin. It starts with revenue, then accounts for the cost advantage of new fab capacity and added depreciation. There may be some puts and takes in any given quarter, such as underutilization, but this can also be a tailwind in the future. Joe Moore then asks a question.

Rafael Lizardi explains the process of determining the underutilization charge, which is based on the percentage of production below normal utilization. This charge includes fixed costs such as depreciation and electricity, and is reflected in the P&L statement. However, this also provides operating leverage when production increases.

Dave Pahl and Joe Moore of Stifel discuss the cash flow and revenue of the company, as well as the current weak environment. They mention that the company does not spend more money on the way up and experiences significant cash flow when using 300-millimeter capacity at low cost. They also touch on the softness of the comm infrastructure business, which accounts for 7% of their revenue. Pahl and Moore believe that the market will continue to be choppy, but they are still investing in it. They also mention that bookings trends are weak and there has been a consecutive decline in revenue for four quarters.

The company does not have a system to track if they are shipping above or below demand, and the strongest signal they get is orders from customers. The Personal Electronics market was the first to go into a downturn, but they have seen a couple of quarters of growth. The industrial market has also started to weaken, and the company believes this is due to customers adjusting their inventories. They are strategically building capacity and inventory to support the next upturn. There is no new update on the timing of offsets to depreciation, but the expectation is a 20-25% credit on CapEx spent in the US for fabs. The company has already accrued $1.2 billion for this on their balance sheet.

The company expects to receive a portion of cash next year from a grant they are actively applying for and believe they are well positioned to receive. China continues to be a weak market for the company, with industrial and overall business remaining down compared to the previous year. Japan was the only region that saw an increase in shipments.

The speaker discusses the weakness in the company's other regions and mentions that the embedded business is holding up well due to positive strategy changes. They also mention that the business relies heavily on foundry suppliers and that capacity has begun to free up. The speaker also mentions that the other segment, which includes calculators, saw a large drop year-over-year, but it is a seasonal market.

The company's DLP and calculator products are facing inventory corrections and weaker sales. The issue of extended lead times has mostly been resolved, with most products available for immediate shipment. The company's focus is on long-term growth of free cash flow per share.

The company has three ambitions: to act like long-term owners, to adapt and succeed in a changing world, and to be a company that people are proud to be a part of. When these ambitions are achieved, everyone involved will benefit. The conference is now over.

This summary was generated with AI and may contain some inaccuracies.