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TXN - Earnings call 3 2023

What were the key numbers mentioned on the conference call with context?

• Industrial market was down mid-single digits sequentially.

• Automotive market grew mid-single digits sequentially.

• Personal Electronics was up about 20% sequentially off a low base.

• Communications equipment was down upper teens sequentially.

• Enterprise systems grew upper single digits sequentially.

• There have been four consecutive quarters of double-digit declines year-over-year.

• Capital expenditures are expected to be about $5 billion per year through 2026.

• Industrial market was down mid-teens year-over-year.

• Automotive was up about 20% year-over-year.

• Personal Electronics was down about 30% year-over-year.

• Communications Equipment was down about 50% year-over-year.

• Enterprise System was down about 40% year-over-year.

What were all of the operating metrics they provided?

• Revenue trends:

  • Revenue is down about 10% over the past 12 months.

• Gross margin factors:

  • Gross margin compression of approximately 250 basis points.

  • Factors affecting gross margin include utilization, lower revenue, depreciation, and pricing.

• Operating expenses (OpEx):

  • OpEx is up about 10% over the past 12 months.

  • No specific guidance provided for future OpEx, but historical trends indicate a 10% increase.

• Depreciation:

  • Depreciation is a significant factor in higher manufacturing costs.

  • No specific updates provided for depreciation in '24 and '25, but it's a component of planned capacity expansion.

• Bookings trends:

  • No specific numbers provided, but there is a mention of 4 consecutive quarters of double-digit declines.

  • The company is operating in a weak environment, which could imply weaker bookings trends.

• Other segment performance:

  • The "other" segment includes calculators and other products.

  • This segment experienced a significant year-over-year drop, which is partly seasonal due to calculators.

• Inventory management:

  • The company made progress on inventory replenishment.

  • The objective is to maintain high levels of customer service and stable lead times.

• Capital expenditures:

  • Expected to be about $5 billion per year through 2026 to support build-outs and enable future growth.

• End market performance:

  • Automotive was up about 20% year-over-year.

  • No other specific year-over-year end market performance metrics provided.

We want to get what management thinks is important. What were the highlights of the earnings call?

• Confidence in the secular growth of semiconductor content, particularly in the industrial and automotive markets, where the company is well-positioned.

• Commitment to a long-term 300-millimeter manufacturing roadmap to provide geopolitically dependable capacity for customers.

• Capital expenditures are expected to be about $5 billion per year through 2026 to support growth and customer service.

• Progress in inventory replenishment aligned with long-term objectives.

• Emphasis on the long-term growth of free cash flow per share as the best metric to measure progress and generate value for owners.

• The company's three ambitions: acting like owners who will own the company for decades, adapting and succeeding in a world that's ever-changing, and being a company that employees, customers, communities, and owners can be proud of.

• During the quarter, automotive market growth continued, while industrial market weakness broadened.

• Personal Electronics saw an approximately 20% increase from a low base, communications equipment was down in the upper teens, and enterprise systems grew in the upper single digits.

• The embedded product strategy has been changed, leading to stabilization and continued investment due to its long-term growth potential and contribution to free cash flow.

• The company's performance came in at the midpoint of guidance, reflecting a weak environment, with no unusual linearity in the quarter by end market or aggregate bookings.

What were management's best quotes?

• "At our core, we're engineers and technologies, the foundation of our company but ultimately, our objective and the best metric to measure progress and generate value for owners is a long-term growth of free cash flow per share." - Rafael Lizardi

• "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 part of and would want as our neighbor." - Rafael Lizardi

• "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." - Rafael Lizardi

• "Our objective with inventory is to maintain high levels of customer service, keep our lead times stable, keep product availability really high... so we are prepared for that next upturn when it does come." - Dave Pahl

• "Our confidence in the secular growth of semiconductor content per system, especially in industrial and automotive, remains high, and we're well positioned in these markets." - Dave Pahl

• "Our long-term 300-millimeter manufacturing road map provides our customers with geopolitically dependable capacity." - Dave Pahl

• "They're all the same and they're all different at the same time and they're unique." - Dave Pahl, referring to market cycles.

Did they mention any layoffs or other troublesome signs?

The transcripts do not explicitly mention layoffs or direct troublesome signs such as financial distress. However, there are several indicators of a challenging environment for the company:

• The industrial and China markets continue to remain weak, with no significant rebound materializing as previously expected.

• The only region that was up compared to a year ago was Japan, with other regions being down, indicating broad weakness.

• The company is operating in a weak environment in general, as suggested by the guidance provided.

• There have been consecutive quarters of double-digit declines in certain markets, with Personal Electronics down about 30%, Communications Equipment down about 50%, and Enterprise Systems down about 40%.

• The company's revenue met the midpoint of guidance without the usual beat, which could suggest a lack of positive surprises in financial performance.

• Operating expenses (OpEx) are up about 10% while revenue is down about 10%, indicating a squeeze on profitability.

• There are higher manufacturing costs associated with planned capacity expansion, including increased depreciation and underutilization components.

While these points do not directly imply layoffs, they do suggest that the company is facing a period of reduced demand and financial pressure, which could potentially lead to cost-cutting measures in the future if conditions do not improve.

What is the company's outlook for the rest of the year?

The company's outlook for the rest of the year includes the following points:

• The company is confident in the secular growth of semiconductor content, particularly in the industrial and automotive sectors, where they are well-positioned.

• They have a long-term 300-millimeter manufacturing roadmap that provides geopolitically dependable capacity, with associated capital expenditures expected to be about $5 billion per year through 2026.

• The company has made progress on inventory replenishment to support growth and maintain high levels of customer service.

• The overall environment is considered weak, with no significant changes highlighted for the upcoming quarter.

• Industrial market weakness has broadened, affecting nearly all sectors, while the automotive market has continued to grow.

• Personal Electronics and enterprise systems have seen growth, while communications equipment has declined.

• Inventory levels are nearing targeted levels, leading to a lowering of factory outputs starting in the third quarter, which will have a more significant impact on the fourth quarter.

• The company is prepared for the next upturn when it comes, with stable lead times and high product availability.

It is also noted that while the automotive sector is holding up, the broader industrial trends are weak, and the company is operating in a weak environment with broad weakness across regions, except for Japan which was up. China, in particular, has experienced a significant decline, and the expected rebound has not materialized.

Are they expanding or cutting capacity?

The company is expanding capacity. Here are the key points indicating this:

• The company has a plan in place for capital expenditures (CapEx) and is continuing to invest in capacity expansion despite a slowdown in revenue. There is no indication of a "line in the sand" for revenue that would trigger a cut in CapEx.

• They are preparing for the next upturn in the cycle by investing in capacity and inventory, which bridges the gap until factories can ramp up production.

• The company has a long-term manufacturing roadmap and is committed to providing geopolitically dependable capacity, especially in the industrial and automotive markets. They expect to continue with approximately $5 billion of CapEx per year through 2026.

• They are making progress on manufacturing expansion, which is intended to support customer growth over the coming decade.

• The company is pleased with the progress in their embedded business and continues to invest in it, indicating a focus on growth rather than contraction.

• The company's new fab capacity is based on 300-millimeter wafers, which have a structural cost advantage and are expected to receive benefits from the U.S. government, further supporting the expansion efforts.

What is the company's worst and best-performing segment/commodity?

• Worst-Performing Segment/Commodity:

  • Communications Equipment (Comms Equipment) is the worst-performing segment, with a 50% decline as mentioned by Dave Pahl. This market is described as choppy and is currently adjusting inventory levels, which has contributed to the significant drop.

• Best-Performing Segment/Commodity:

  • The Automotive segment is the best-performing, with a mid-single-digit sequential growth and a 20% year-on-year increase. Despite the broader market weakness, automotive growth has continued, indicating strong performance in this sector.

What is the company’s growth strategy?

The company's growth strategy includes:

• Capitalizing on the secular growth of semiconductor content, particularly in the industrial and automotive markets where the company is well-positioned.

• Executing a long-term 300-millimeter manufacturing roadmap to provide customers with geopolitically dependable capacity.

• Planning capital expenditures of about $5 billion per year through 2026 to support manufacturing expansions and enable future growth.

• Replenishing inventory in line with long-term objectives to support growth and maintain high levels of customer service.

• Focusing on changing the product strategy within the embedded segment to stabilize and invest in the business due to its potential for long-term growth and contribution to free cash flow.

• Managing inventory to maintain high levels of customer service, stable lead times, and high product availability to prepare for the next upturn in demand.

• Adapting and succeeding in an ever-changing world while maintaining the core values of acting like owners, being proud of the company, and benefiting employees, customers, communities, and owners.

The company also emphasizes the importance of generating value for owners through the long-term growth of free cash flow per share.

What is the company’s pricing strategy?

The company's pricing strategy is characterized by the following points:

• Pricing does not change rapidly in their markets and is not a primary factor for customers choosing their products.

• Prices are typically agreed upon for periods of 6 months or on an annual basis for the following year.

• The company's pricing strategy has not changed and they aim to remain competitive.

• With supply and demand coming into balance, the company expects pricing to behave as it has over the past couple of decades, which is characterized by low single-digit declines.

• The company's strategy includes monitoring pricing regularly and adjusting as necessary to maintain competitiveness.

What is the company's cost containment strategy?

The company's cost containment strategy includes:

• Maintaining high levels of customer service and stable lead times while keeping product availability high, which prepares them for the next upturn without the need for significant additional spending.

• Leveraging fixed costs, which can be a disadvantage when revenue is declining but provide operating leverage on the way up, as these costs remain fixed and result in higher cash flow when revenue increases.

• Investing in 300-millimeter capacity, which is mentioned as having very low cost, indicating a focus on efficient production methods to contain costs.

• Managing inventory levels to bridge the gap during an upturn until factories can ramp up production, which suggests a strategic approach to inventory management that avoids the need for sudden capital expenditure when demand increases.

• Continuing to invest in the embedded business due to its long-term growth potential and contribution to free cash flow, which implies a selective investment strategy focused on areas with expected positive financial outcomes.

• Monitoring pricing regularly with a goal to remain competitive, which indicates a proactive approach to pricing strategy to avoid losing market share or revenue due to pricing pressures.

• Taking advantage of the Investment Tax Credit (ITC), which provides a 20% to 25% credit on CapEx spent in the U.S. for fabs, effectively reducing the net cost of capital expenditures.

Based on incomplete answers from management on the earnings call, what (10ish) follow-up questions would an expert industry analyst ask management?

• Can you provide a more detailed breakdown of the factors contributing to the gross margin compression, specifically quantifying the impact of utilization, lower revenue, depreciation, and pricing?

• How should we expect gross margins to trend in the upcoming year, and are there any specific actions being taken to mitigate the compression?

• Could you elaborate on the current pricing strategy in response to the competitive environment, especially in Asia, and whether there have been any recent changes in this strategy?

• Given the weak environment, are there any particular end markets or product lines that are performing better or worse than expected?

• Can you discuss any operational changes or cost-saving measures being implemented in response to the current market conditions?

• What is the current status of lead times, and how has the reduction in demand affected inventory levels and supply chain dynamics?

• With the communications infrastructure business showing weakness, could you provide more insight into the factors driving this trend and any expectations for recovery?

• What specific areas of strategic investment are being prioritized during this period of market weakness, and how do these align with long-term growth objectives?

• Can you clarify the components of the 'other' segment and explain the reasons behind its significant year-over-year decline?

• Are there any updates on capital expenditure plans, and how might these be adjusted in light of the current revenue and margin trends?