The Texas Instruments Fourth Quarter 2023 Earnings Conference Call began with an introduction from Dave Pahl, Head of Investor Relations, and Chief Financial Officer Rafael Lizardi. They discussed the release of the earnings report on the company's website and the availability of a replay of the call. They also reminded listeners of the upcoming Capital Management Call on February 1. Pahl then provided an overview of the quarter, including a decline in revenue compared to the previous quarter and the same quarter a year ago. Lizardi covered the specific numbers and gave guidance for the first quarter of 2024. Pahl then discussed the revenue breakdown by end market, with declines in analog, embedded processing, and the other segment.

The company's results show weakness in industrial and automotive markets, with slight growth in personal electronics and enterprise systems. Industrial and automotive markets make up a large percentage of the company's revenue and they are focusing on these markets for growth opportunities. The company's revenue for 2023 is broken down by end market, with industrial and automotive making up the majority. The company's profitability and capital management will be reviewed, with a decrease in gross profit margin compared to the previous year.

In the fourth quarter, operating expenses for the company were as expected, while operating profit was down compared to the previous year. Net income for the quarter was $1.4 billion, including a $0.03 benefit. The company generated $1.9 billion in cash flow from operations and had $8.6 billion in cash and short-term investments. For the year, cash flow from operations was $6.4 billion and free cash flow was $1.3 billion. The company expects first quarter revenue to be between $3.45 billion and $3.75 billion, with earnings per share ranging from $0.96 to $1.16.

The company expects their effective tax rate to be 13% in 2024 and will focus on long-term value. They will continue to invest in their competitive advantages and strengthen them through disciplined capital allocation. The company will now take questions from analysts. The first question is regarding the Q1 outlook, which is expected to be down 12% due to weakness in the industrial and automotive sectors and customers rebalancing their inventories.

The speaker is asking about the drop in gross margins and if it is due to pricing or volume. The company's CEO explains that pricing does not change quickly in their industry and their strategy has not changed. They expect pricing to revert back to previous levels as supply and demand come into balance. The next caller asks about factory loadings and the CEO explains that gross margin was down and utilization is coming down, which is reflected in lower CapEx for December.

The speaker is discussing inventory levels and factory loadings for TI. They mention that in the third quarter, they adjusted their factory loadings and this had an impact on gross margins due to underutilization. They also mention that in the first quarter, they will continue to adjust for underutilization, but they still have an upward bias on inventory. The speaker also clarifies that their CapEx is on track and they expect it to remain at around $5 billion per year through 2026. A caller asks about the target inventory level and the speaker explains that there have been no changes and they expect utilization rates to bottom in Q1, but there may be further adjustments in Q2.

The company's inventory targets have remained consistent over the past six to nine months, with a target of $4 billion to $4.5 billion worth of inventory. The timing of when underutilization will bottom out will depend on revenue expectations, which are only given one quarter at a time. The target inventory is determined by device and is based on factors such as customer buying patterns and manufacturing time. The decline in the industrial market is attributed to excess inventory rather than a decrease in demand, while the automotive market is also weakening but may not be affected by the same inventory issues.

The speaker discusses the decline in the industrial and automotive markets and how it has affected their business. They believe that they are shipping below demand and that customers have built inventory to correct this. However, they do not have a clear picture of their customers' demand and channel inventories. The decline in the automotive market was not surprising, as customers had wanted to build inventory. In terms of linearity, the finished goods inventory increased due to their ability to build inventory buffers.

The speaker explains that the company has a large number of parts, with the majority being catalog items sold to many customers. They have inventory at both the chip and finished goods level, which is necessary for their operations. The business performed as expected in terms of revenues in industrial and automotive markets. When comparing the performance of the analog and embedded segments, the speaker suggests looking at end markets and the reliance on foundry wafer supply as factors.

The constraints that caused lag in the industry have been resolved and TI's CapEx plans will focus on building more wafers internally. The current cycle is different due to the market's behavior, with personal electronics weakening and automotive declining. Other factors such as pricing and non-cancellable orders have also added noise to the system. TI remains focused on investing in their competitive advantages and gaining share in the long-term.

Rafael Lizardi clarifies that the company does not engage in non-cancellable, non-returnable practices, unlike some of its competitors. He also mentions that only 25% of the company's revenue comes from distributors, with the majority being direct sales. The next caller asks about the Chips Act and Lizardi explains that the company has accrued $1.4 billion in investment tax credits, with $500 million expected to be received later this year. The rest will be received in subsequent years. The company is also seeing the benefit of lower depreciation on their P&L due to the ITC.

The company has submitted an application for grants in December and is waiting to hear back from the Department of Commerce. The operating cash flow is strong, but the free cash flow is below the level of the dividend. The company's objective is to return all free cash flow via dividends and repurchases. The team has seen increasing cancellations and push-offs in previous quarters, and this trend is expected to continue into the December quarter.

The company has seen cancellations and push-outs in the fourth quarter, but they are not increasing. The weakness in sales is spread out across all regions except for the rest of Asia. The company is not changing their OpEx strategy despite the extended softness in the market.

Rafael Lizardi confirms that the company has a disciplined process for allocating capital to R&D and SG&A, and that they have maintained this discipline throughout the pandemic. He also mentions that their investments in industrial automotive are long-term in nature and they will continue to maintain them. When asked about fixed cost leverage, Lizardi states that the 70-75% gross margin fall-through is still a reasonable starting point, but adjustments need to be made for depreciation and other factors. He also mentions that underutilization is currently affecting their margins, but this will eventually improve.

The speaker expresses confidence in the company's inventory levels, which are currently double what they were pre-COVID. They expect the inventory to continue to increase for at least one more quarter, but feel good about their strategy of holding high levels of inventory for their industrial and automotive parts.

TI's order fulfillment processes have improved, with 35% of revenue now coming directly from their website and other tools. They cannot share any updates on their application for the Chips Act, but it factored into their decision to increase CapEx. Customers' reactions to TI's lead times may be due to a downturn in end markets or a delay in inventory adjustments until lead times for the rest of the industry come down.

Dave Pahl, a representative from TI, explains that there are many factors that contribute to lead time normalization, including competition and the large number of customers and products they manage. He also mentions that some customers have changed their growth plans, resulting in underutilization of inventory. It is difficult to quantify the impact of this underutilization, but it is expected to have a headwind on cost to sales. In the future, there may be a snapback in margins as underutilization decreases, but it is likely to return to previous levels.

Rafael Lizardi, the speaker, explains that they do not have a specific number for underutilization, but it can be estimated by looking at their numbers and considering expected depreciation. He also mentions that the deployment of CapEx on 300 millimeter will have many benefits, such as a cost advantage and potential grants. The speaker concludes and hands the call over to Dave Pahl, who thanks everyone for joining and announces an upcoming capital management update. The call will be available for replay on their website.

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