Good day, everyone, and welcome to today's Texas Instruments Q4 2020 Earnings Release Conference Call. At this time, I would like to turn things over to Mr. Dave Paul. Please go ahead, sir.
Good afternoon and thank you for joining our Q4 2020 earnings conference Rafael Lizardi, TI's Chief Financial Officer is with me today. 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. A replay will be available through the web. 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. First, let me provide some information that's important for your calendars. We plan to hold a call to review our capital management on February 4th at 10 am Central Time. Similar to what we've done in the past, Rafael and I will summarize our progress and provide some insight into our business and approach to capital allocation. For today's call, let me start by summarizing what Rafael and I will be reviewing.
First, I'll start with a quick overview of the quarter, And next, I'll provide some insight into 4th quarter revenues results. And as we've done the past few quarters, will provide details by end market, including sequential performance, since it's more informative at this time. I'll also provide the annual summary of revenue breakdown by end markets. And lastly, Rafael will cover the financial results, some insight into one time items and our guidance for the Q1 of 2021. So starting with a quick overview of the Q4.
The company's revenue increased 7% sequentially and 22% year over year, driven by strong demand in automotive, personal electronics and the industrial markets. Analog revenue grew 9% and Embedded grew 11% sequentially. On a year over year basis, analog revenue grew 25% and Embedded grew 14%. Our other segment grew 4% from a year ago quarter. Moving on, I'll now provide some insight into the 4th quarter revenue by end market.
First, the automotive market continued its rebound following the 2nd quarter bottom with 19% sequential growth and 25% year over year growth. The industrial market was up 7% sequentially and 16% from the year ago. The strength was seen across most market sectors. Personal electronics was up 11% sequentially and up 39% compared to a year ago. The strength was broad based across sectors and customers within Personal Electronics.
Next, as expected, communications equipment was down 28% sequentially and down 8% from the year ago. Enterprise Systems was down 2% sequentially and down 13% from a year ago. And lastly, as we do at the end of each calendar year, I'll describe our revenue by end market for 2020. We break our end markets into 6 categories that are grouped by their life cycles and market characteristics. The 6 end markets are industrial, automotive, personal electronics, which includes products such as mobile phones, PCs, tablets and TVs, communications equipment, enterprise systems and other, which is primarily calculators.
As a percentage of revenue for the year, industrial was 37%, Automotive 20%, Personal Electronics 27%, Communications Equipment 8%, Enterprise Systems 6% and other was 2%. Looking at the changes versus 2019, industrial increased 1 percentage point, Automotive declined 1%, personal electronics increased 4%, communications equipment declined 3%, Enterprise Systems was even and other declined 1 percentage point. In 2020, industrial and automotive combined made up 57% of TI's revenue, about even with last year, and up 42% in 2013. We see good opportunities in all of our markets, but we place additional strategic emphasis on industrial and automotive. Our industrial and automotive customers are increasingly turning to analog and embedded technology to make their end products smarter, safer, more connected and more efficient.
These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth compared to our other markets. Rafael will now review profitability, capital management and our outlook.
Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2,600,000,000 or 65 percent of revenue. From a year ago, gross profit increased primarily due to higher revenue. Gross profit margin increased 2 30 basis points. Operating expenses in the quarter were $786,000,000 down 2% from a year ago and about as expected.
On a trailing 12 month basis, operating expenses were 22 percent of revenue. For the year, we have invested $1,500,000,000 in R and D, an important element of our capital allocation. We're pleased with our disciplined process of allocating capital to R and D, which we believe will allow us to continue to grow our top line over the long term. Acquisition charges and non cash expense were $47,000,000 in the 4th quarter. Acquisition charges will remain at about this level through the Q3 of 2021.
Operating profit was $1,800,000,000 44% of revenue. Operating profit was up 45% from the year ago quarter. Other income and expense was $162,000,000 in the quarter due to a one time benefit related to the signing of a multi year royalty agreement. Net income in the 4th quarter was $1,700,000,000 or $1.80 per share, which included a $0.16 benefit that was not in our prior outlook, primarily due to the royalty agreement we just mentioned. Let me now comment on our capital management results, starting with our cash generation.
Cash flow from operations was $2,100,000,000 in the quarter. Capital expenditures were $212,000,000 in the quarter. Free cash flow on a trailing 12 month basis was $5,500,000,000 down 5% from a year ago. In the quarter, we paid $937,000,000 in dividends. We have increased our dividend per share by 13%, marking our 17th year of dividend increases.
We repurchased $15,000,000 of on stock for a total return on cash to owners in the Q4 of about $1,000,000,000 For the year 2020, we returned $6,000,000,000 consistent with our strategy to return all free cash flow to our owners. Over the same period, our dividend represented 62% of free cash flow, underscoring its sustainability. Our balance sheet remains strong with $6,600,000,000 of cash and short term investments at the end of the 4th quarter. Total debt was $6,800,000,000 with a weighted average coupon of 2.77%. Inventory days were 123, down 21 days from a year ago and down 14 days sequentially.
Now let's look at some of these results for the year. In 2020, cash flow from operations was $6,100,000,000 Capital expenditures were $649,000,000 or 4.5 percent of revenue. Free cash flow for 2020 was $5,500,000,000 or 38 percent of revenue. Our cash flow reflects the strength of our business model. As we have said, we believe that growth of free cash flow per share is a primary driver of long term value.
And after accretive investments in the business, the remaining cash will be returned over time via dividends and share repurchases. Over the last 12 months, we paid $3,400,000,000 in dividends and purchased $2,600,000,000 of our shares, reducing outstanding share count by 1.4% in 2020. Turning to our outlook for the Q1, we We expect our 2021 annual operating tax rate to continue to be about 14% and our effective tax rate about a percentage lower than that, a percentage point lower than that. In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, 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 market
Okay. Thanks, Rafael. Operator, you can now open the lines for questions.
Thank you. We'll go first today to John Pitzer with Credit Suisse.
Yeah. Good afternoon, guys. Thanks for letting me ask the questions. Congratulations on the solid results. David, Rafael, I'm wondering if you could talk a little bit about just the current demand backdrop.
I mean, clearly, we're hearing about lead time stretching out in the semi industry. Clearly, we're hearing about lead times stretching out in the semi industry. Many of your peers are talking about raising pricing. I guess specifically to you guys, can you help us understand what your lead times are doing? What you guys are thinking about doing around pricing?
And I guess more importantly, given your inventory strategy And the fact that you ran your fabs a little bit fuller last year, do you think the current results represent your ability to gain some incremental share as some of your peers just are having a harder time supplying customers right now?
Yes, John, let me take, you covered a lot of ground with that first question. So Let me take some pieces of it. Rafael, if you want to add anything and if I miss any, John, we'll give you a chance for the follow-up. But The first one is certainly we've read the same reports and seen the same releases from our peers On the supply constraints and raising prices, the short answer of we doing that, the short answer is no. I think that that brings us to one of our foundational competitive advantages is manufacturing and technology.
And that really provides 2 benefits. 1 is the obvious, which is lower cost, but the second is just greater Control of our supply chain. So it's really times like this and really throughout 2020 that greater control of your supply chains really becomes a great advantage.
Yes. I'll just add on the inventory angle of your question, John. Remember, our long term objective for inventory, as we have talked about in many capital management calls, is to maintain high levels of Customer service while we minimize inventory obsolescence. Now part of the reason we can do that is that we are strategically positioned The way we run the company, our business model and competitive advantages, where we our parts are mainly catalog parts that Selling to industrial and automotive, our focus is on those with very long product life cycle. So we can build inventory ahead of demand.
We can position that inventory well. That served us well in 2020 and will continue to serve us well from a business model standpoint in order to Maintain those high levels of customer service with our customers.
So I think we got most of the pieces. John, you have a follow-up or Other pieces we can touch on. Yes.
Just a quick follow-up, Rafael. Rafael, I know you don't specifically guide gross margins, but I was wondering if you could give us Some parameters around OpEx for the next couple of quarters. I mean, we're heading into strong cyclical recovery in revenue off of what was kind of an unusual And so as we think about the March quarter, can you help us kind of frame the period costs around SG and A and R and
D that we should be thinking about?
And if you want to give us gross margin target, that would be great, but I know you tend to avoid that.
Yes. On a gross margin, like we have said before, just think of 70%, seventy 5% fall through. So you figure out what incremental revenue you want to play in and just fall that through at 70% to 75%, You get a good place over the long term, right? Any one quarter can be a little higher, a little lower, right? On OpEx, we talked about We can operate between 20% 25%.
Since the last 3 or 4 years, we have been between 21% 22% Pretty much, right. So I don't mean to narrow that range, but that's where we've been running, and I would expect to stay somewhere in that neighborhood Yes, between 2025. Right, right.
Okay. Thank you, John. And we'll go to the next caller, please.
That will come from Vivek Arya with Bank of America.
Thank you for taking my question and congratulations on the strong growth. Just wanted to follow-up on the demand question. And I'm curious, even if you are able to supply because of Your very strong strategic capacity. Do you think your customers, especially on the automotive side, might be constrained with Other parts of the bill of materials that they get from others and maybe those become bottlenecks. I'm just trying to reconcile the very strong Demand backdrop that we are hearing from your results and your outlook versus all the news around auto supply chains facing more constraints.
What is the true sense of kind of supply and demand across your customer base? It would be very helpful to hear your
Sure, Vivek. Yes, I think that's a great question. We see the same reports that you're seeing. And I think the best way to Maybe describe what we're seeing in the automotive market is just A just in time supply chain that's restarting from essentially a full stop that happened in Q2. And just as a reminder, what we saw in Q3 was a 75% The sequential increase followed by this last quarter with a 20% sequential increase.
What I'll say is that those reports are fairly widespread, but we aren't seeing Demand signals that would show us that there's anything that's consistent with Any of those constraints that you're pointing out or that are in press releases. Do you have a follow on?
Yes. Thank you, Dave. Good to see the growth in the Embedded segment and I know you made some changes in that business last year. Do you think you will start to see the benefits of that in 2021 because they also tend to be somewhat stickier markets? So I'm just curious if you could give us an update on what are you doing specifically to regain market share?
And do you think we can start to see your embedded business start to grow in line with your analog business this year? Thank you.
Yes. I'll give you a few on those ones. So first, we're pleased with the progress we're seeing in embedded. Our plan has called to 1st stabilize the business and then start to prove that we can resume long term consistent growth. We're leveraging our competitive advantages, particularly building a broad base, a more diverse product portfolio that can then deliver long term sustainable growth.
I think it was in Q2 of 2020 where we announced where we had a restructuring charge related to embedded and we reallocated resources. Some product lines Increased investments, some we decreased, others stayed about the same and we're seeing the beginning of that stabilization on that front.
Okay. Thank you, Vivek. And we'll go to the next caller, please.
We'll hear next from Craig Hettenbach with Morgan Stanley.
Yes, thank you. Dave, just following up on your comments around autos and particularly the just in time inventory angle, certainly 2020 was a challenging year for the Supply chain and we're dealing with some of those repercussions now. But do you think you'll see some changes to that over time in terms of how they Great from an inventory perspective or something that might be difficult in the next couple of quarters, but kind of gets back to that just in time?
Yes, Craig, I don't want to speak for our customers or how they're managing their inventories. I think As you've seen us and how we've managed our business and our operations, we just work very hard to Try to have capacity in place to support our customers' needs. You saw the decisions that we made earlier in the year to try to keep high Service and optionality in place, and we'll just continue to try to support our customers' needs, whatever their supply chains look like. So and whether that's in the automotive market or the other So, we just we try to make them happy. That's what we're trying to do.
So you have a follow on?
I do. Thanks. And just looking at analog up 25% year over year, I know that comes off of a difficult year and coming out of a down cycle. So that's some of it, but just curious at a high level just to get your thoughts of just the type of strength you're seeing and how you feel about what the demand is out there?
Can you clarify that a little bit for me, Craig, just so I'd make sure I answer the right question?
Yes. So just with the analog business up 25% year over year, That's coming off of an easy comp, if you will, coming out of the down cycle. So I think that's some of it. But just curious, I know in some of these calls you've talked about just your view of just, Hey, are supply and demand equilibrium or how you feel like demand is relative to how your business is trending right now?
Well, yes, I think that when you look at Where that business is, I think that we've just come through a From cyclical indicators and those types of things, you'd even have to go back 2018 when the industry had reached the cyclical peak, then you throw in and sprinkle on top COVID-nineteen And it was really at the beginning of or at the end of last year and the beginning of 2020 that we had begun to see signs of stabilization before COVID had hit. So inventories really weren't a problem at That point in time and we had said at that point in time that our shipments were beginning to reflect what customers were beginning to ship overall. So again, I think that what we are shipping today is reflective of what customers are asking us to ship. We have a good availability of product because of the decisions that we've made, And our lead times have remained stable. That doesn't mean, of course, that we don't have hotspots That we're working and we always have hotspots, but that's kind of where we are today.
Thank you, Craig. And we'll go to the next caller, please.
We'll hear next from Harlan Sur with JPMorgan.
Good afternoon. Congratulations on the strong execution. Amidst the strong demand environment, as we all know, foundry capacity is Pretty tight, both leading edge and lagging edge. And I know that TI outsources about 20% of its wafer requirements, most of it with your embedded products, MPUs, MCUs. So because of the foundry tightness, is the team also somewhat constrained on your embedded products either Q4 or here in Q1 and also the same thing from an assembly test perspective, where I think about 40% of your Assembly and test requirements are outsourced to the subcons.
Is this constraining maybe some of your shipments near term?
At a high level, we have long term agreements with these suppliers like we do with other suppliers. Even though we only outsource a relatively small part of our loadings, we're still being a big company. That's still a good amount of loadings, right? So we still get Some decent leverage. So we're seeing some hotspots here and there, but to the largest degree, we're getting what we need.
Yes. And I would say having 80% of our wafer sourced internally, almost all of our analog sourced Internally, and that is a great advantage for us. So overall, as we've talked about that Lead times have remained stable. So that has been a huge advantage for us. You have a follow on, Harlan?
Yes, absolutely. Yes, thanks for the insights there. Can you guys just provide us with the shipment trends quarter over quarter, year over year by geography? Know it's shipped to location, but I think it's still useful to kind of understand the breadth of the overall demand profile you guys are seeing?
Sure. So in the quarter, and thank you for the preamble there, so I won't repeat it, But a year ago, Asia was up and all of the other regions were either flat or down. And sequentially all the regions except for the U. S. Were up.
And just as another point of Color on where we ship our products. 90% of our revenues come from shipments outside of the U. S. And we've got about 20% of our revenues that are based by customers in China. So Just a little bit more color on the comment that you made there earlier.
So thank you, Harlan, and we'll go to the next caller, please.
We'll hear now from Timothy Arcuri with UBS.
Thanks a lot. Rafael, I guess I asked this question Quarter 2, but you again bought back next to no stock and I totally get that you were running ahead of the plan in the first half and you were certainly out of the 100% for the full year. But you also have a pretty strong intrinsic value model for the share repo and you've been pretty good at buying back So I guess maybe I'll ask you again to just sort of comment on that. Is there anything that we can read into that given that it's the 2nd quarter in a row?
What I would tell you is that as we talk about during capital management, our goal is to return all free cash flow to the owners of the company. We generated in 2020 $5,500,000,000 of free cash flow, and we generated $6,000,000,000
of free
cash flow. So clearly, Well above the cash flow generation. Okay. Thanks. And then I guess yes, yes, yes,
I do. I guess, can you give us an update on the 300 millimeter, the new fab and sort of the timing around that? And I guess, on that, Can you qualify for some of these subsidies coming from the government or is that mostly going to be leading edge? Thanks.
Yes, sure. So the update on the factory is the same as nothing has changed as far as Nothing has changed as far as our expectation. The new factory is being built. We expect it to be completed in 2022, so next year. In fact, we should have some form some level of output in the second half of next year.
So that's all going as per plan. When it's fully EQIP, it has the potential for revenue of about $5,000,000,000 per year. On your question on the incentives, a lot of that remains to be seen. There are 2 Legislation, one that was approved but was not funded. Another one hasn't been approved.
The chips, I think, is the one that hasn't been approved. But the one that was approved is not even funded. So and there's a lot of uncertainties on that depending on how That comes out. So when that comes out, we'll look at it and we'll decide if it makes sense for us. But at the biggest and at the highest level, we think Semiconductor is a foundational technology and anything that the government can do to strengthen that and to Keep us at a level playing field companies in the United States versus other countries that would be a good thing.
Okay. Thank you, Tim. And I think we've got time for one more caller, please.
That will come from Tore Svanberg with Stifel.
Yes, thank you and congratulations on the results. First question for Rafael, I typically wouldn't ask you this because I know you get a lot of these, but the royalty this quarter was pretty material, 162,000,000 Can you maybe add any color on that? And should we expect sizable things like that going forward as well?
Yes. So it was about inside that $162,000,000 it was more most of that $162,000,000 And we recognize Based on accounting rules, the cash actually comes in not quite like that. It comes in over time. But it's just a licensing agreement. We've had those for many years.
They have become de minimis in the highest level, frankly. So I don't Expect that to change from a cash standpoint. It's about $100,000,000 a year. From the revenue or the income recognition standpoint, sometimes they come in as pops, that's what you saw. But their cash, which is really what matters, is more And again, like I said, it's about $100,000,000 a year and I don't expect that to change much.
Yes. Prahlad, I'm sorry.
Yes. Thank you, Dave. So I know your long term goal is to grow CapEx at 6% or to spend 6 percent of your revenues and CapEx. I think last year you said it was 4.5%. Was there sort of any COVID related issues that slowed things down?
And as we look at 2021, do you think it will come in close to that range sort of 6%?
Yes. So I'll go ahead and take that. So yes, our guidance is 6%. Our guidance continues to be 6% CapEx as That's a long term guidance, includes everything that goes into CapEx as far as building and equipment. Now, of course, that number can fluctuate, right?
Like you pointed out, it just fluctuated down in 2020 to 4.5%. So I wouldn't be surprised if it's a little higher than 6 For a year or 2. But for your models, I would suggest you stick with 6% out into the future. It's just It's simpler that way and it gets the point across.
I think that much.
Thank you, Tore. That concludes the call. So let me finish with a few comments on key items that we believe deeply. First, we run the company with the mindset of being a long term owner. We believe that growth of free cash flow per share is the primary driver of long term value.
Our ambitions and values are integral to how we build TI Stronger. When we're successful in achieving these ambitions, our employees, Customers, communities and shareholders all win.
Okay. And thank you all for joining us. A replay of this call will be available shortly on our website. Good evening.
And again, that will conclude today's conference. Thank you all for joining us.