Welcome to Texas Instruments Q2 2022 earnings release conference call. Today's call is being recorded. I'm Dave Pahl, Head of Investor Relations, and I'm joined with 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. 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. Today, we'll provide the following updates. First, I'll start with a quick overview of the quarter.
Next, I'll provide insight into Q2 revenue results with some details of what we're seeing with respect to our customers and markets. Lastly, Rafael will cover the financial results and our guidance for the Q3 of 2022. Starting with a quick overview of the quarter. Revenue in the quarter was $5.2 billion, an increase of 6% sequentially and 14% year-over-year, driven by growth across markets. Analog revenue grew 15%, Embedded Processing grew 5%, and our other segment grew 19% from the year-ago quarter. Now let me comment on the environment in the Q2 to provide some context of what we saw with our customers and markets. As we spoke about in our last earnings call, April started out weak from COVID-19 restrictions in China.
As those restrictions began to ease towards the latter part of May and into June, customers began to pull product generally consistent with their prior demand forecast at the start of the quarter. Moving on, I'll provide some insight into our Q2 revenue by market from the year ago quarter. First, the industrial market was up high single digits and the automotive market was up more than 20%. We saw weakness throughout the quarter in personal electronics, which grew low single digits. Next, communications equipment was up about 25%. Finally, enterprise systems was up mid-teens. Rafael will now review profitability, capital management, and our outlook.
Thanks, Dave, and good afternoon, everyone. As Dave mentioned, Q2 revenue was $5.2 billion, up 14% from a year ago. Gross profit in the quarter was $3.6 billion or 70% of revenue. From a year ago, gross profit margin increased 240 basis points. Operating expenses in the quarter were $836 million, up 2% from a year ago and about as expected. On a trailing 12-month basis, operating expenses were $3.2 billion or 17% of revenue. Restructuring charges were $66 million in the Q2 and are associated with the LFAB factory that we purchased in October of last year. Operating profit was $2.7 billion in the quarter or 52% of revenue. Operating profit was up 23% from the year ago quarter.
Net income in the Q2 was $2.3 billion or $2.45 per share. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.8 billion in the quarter. Capital expenditures were $597 million in the quarter and $2.8 billion over the last 12 months. Free cash flow on a trailing 12-month basis was $5.9 billion. In the quarter, we paid $1.1 billion in dividends and repurchased $1.2 billion of our stock. In total, we have returned $6.2 billion in the past 12 months. Our balance sheet remains strong with $8.4 billion of cash and short-term investments at the end of the Q2 .
We retired $0.5 billion of debt in the quarter. Total debt outstanding was $7.3 billion, with a weighted average coupon of 2.7%. Inventory dollars were up $139 million from the prior quarter to $2.2 billion, and days were 125, down two days sequentially and below desired levels. Accounts receivable for this quarter ended at $2.2 billion, up from $1.6 billion a year ago. This increase primarily reflects the higher proportion of shipments made near the end of the quarter, as COVID-19 restrictions were lifted in China and customers began pulling product.
For the Q3 , we expect TI revenue in the range of $4.9 billion-$5.3 billion and earnings per share to be in the range of $2.23-$2.51. This outlook comprehends the weaker demand we see, particularly from customers in the personal electronics market. We expect our 2022 effective tax rate to be about 14%. Lastly, we and our customers remain pleased with the progress of our expansion of manufacturing capacity, which was outlined in our February capital management call and will support the long-term secular trend of increased semiconductor content per system. We broke ground on the Sherman manufacturing complex in May, and work continues at RFAB2 and LFAB to prepare for production output. 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, a broad product portfolio, reach of our channels, and diverse and long lead 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. With that, let me turn it back to Dave.
Thanks, Rafael. Operator, you can now open the lines for questions. In order to provide as many of you as possible an opportunity to ask your question, please limit yourself to a single question. After our response, we'll provide you an opportunity for an additional follow-up. Operator?
Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to give everyone an opportunity to signal for questions. We'll take our first question from Stacy Rasgon with Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my questions. My first one, I guess I wanted to ask about gross margins. They declined. They were very strong objectively, but they declined sequentially from Q1- Q2, even as revenue grew. You know, I know you don't guide gross margins for next quarter, but if I sort of like squint at the math, they seem to be being guided down probably a little more than revenues. I'm just wondering if something is going on, whether on the cost line or on the pricing line in this environment that may be influencing gross margins at all.
Yeah, Stacy, I'm happy to address that. First, as you pointed out, our gross margin in Q2 was about 70%. We are pleased with that performance. The fall through on a year-on-year basis was almost 90%. I would also point out that and you can see this on our cash flow statement, depreciation increased sequentially by about $30 million, and that's a direct result of the investments in manufacturing capacity. On your second part of your question, on a go-forward basis, as expected, depreciation is gonna increase. We've talked about that in the February call. To help you, I'll tell you that for 2022, expect depreciation to be about $1 billion for the full year. Do you have a follow-up?
I do. Thank you. It sounds like you had a surge in demand at the end of Q2, as everything opened up. I guess that's leading into Q3. I'm just wondering if the shape of the revenue, the linearity through Q3 kinda looks the reverse of what we saw in Q2. We had a weak start and a strong finish in Q2. Do you think we have like a strong start and then maybe a weaker finish into Q3, just given the, I guess, the demand surge that we've got going into it?
Yes, Stacy. You know, this last quarter obviously was unusual because of the COVID restrictions that we had talked about, right? Those shipments were, you know, scheduled earlier in the quarter, so really were reflective of the restrictions lifting and our ability and customers' ability to be able to receive that product. You have that noise going into it. As we said, you know, in the prepared remarks that we did see weakness in, you know, in the personal electronics market, and that weakness, you know, is comprehended in the guidance in Q3 . Thank you, Stacy. We'll go to the next caller, please.
We'll take our next question from Vivek Arya with Bank of America. Please go ahead.
Thanks for taking my question. First one, I think you mentioned Q3 is below seasonal because of pressure on the consumer. I'm curious, what about the other segments, automotive, industrial, comm equipment, you know, enterprise and so forth? Do you see their demand is, you know, seasonal or different than that?
Yeah, Vivek, I would say that, as you know, we don't forecast the out quarter by market with the exception when there's something significant that's an outlier, and hence that's why we're you know, highlighting personal electronics. I'd just leave it at that. That's where we're seeing really most of the weakness.
All right.
Do you have a follow-up?
Yes, thank you, Dave. My follow-up is actually on free cash flow. You know, if I go back to calendar 2020, TI's free cash flow was 38% of sales. Last year, it was 34%. Now, on a trailing 12-month basis, it's just 30%. You know, then you're guiding down Q3 below seasonal, and Q4 and Q1 are, you know, tend to be below that also. You mentioned that, you know, you're committed to your CapEx plans. Is this a fair representation of how you think about free cash flow margins, that we should just expect free cash flow margins to be at the lower end of the target range for the near to medium term?
I'll take that question from a few angles. First, tactically, Q2 , as we pointed out, was the revenue came in late in the quarter or a disproportionate amount of the revenue came in late. That means that a lot of the cash was stuck in accounts receivable, as I talked about in the prepared remarks. That's gonna distort some of your trends from a cash flow standpoint a little bit. Beyond that big picture, we are very excited about these investments in manufacturing and technology. They're gonna continue to position us well for the long term, giving us the manufacturing platform that's needed to support revenue growth. That will have a CapEx increase as we have talked about in February.
In fact, at that time, we talked about for the next four years, from 2022 through to 2025, an average CapEx. That's an average of $3.5 billion per year. For this year, it looks like we're gonna be coming in at about $2.5 billion, about as expected. It could come in a little higher than that. Then, obviously, since the average is $3.5 billion, you would expect the subsequent years to then come in higher than that number.
Okay. Thank you, Vivek. We'll go to the next caller, please.
We'll take our next question from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. I wanted to ask about the supply side of the equation. You have a bunch of new facilities that are coming online. You talked about breaking ground in Sherman, but before that you have RFAB2, and then you have LFAB. So can you just talk to us about when does that capacity come online where it can be a tailwind to revenue? How should we think about the depreciation from those rolling in, acknowledging, of course, that Rafael, you just told us we're gonna have $1 billion for depreciation for this year as a whole.
Correct. First, as I talked about earlier, we're very excited about this investment, RFAB2 and LFAB. We're gonna have RFAB2 sometime in the H2 of this year, supporting production and LFAB, early 2023. Then on Sherman, we just broke ground on that a couple months ago, and we expect the Sherman facility, the first factory there, to support revenue in 2025. That's how you wanna think about it. From a depreciation standpoint, I just gave you the $1 billion for this year. Beyond that, and I had already given you, in February, to expect about $2.5 billion of depreciation by 2025.
From $1 billion-$2.5 billion, you can roughly approximate that linearly between the end of 2022 to 2025 to get to model how depreciation will likely come in.
To follow on, Ross?
Yeah. Thanks for that color. I guess the final topical side, the CHIPS Act and the equivalent thereof in Europe, all the numbers you just gave, I assume are exclusive of those government policies. How should we think about TI taking advantage of those policies or not, and maybe lowering some of those impacts financially on your company?
Correct. The numbers that we have given you over the last six months or prior did not include any benefits from any of those bills. On the CHIPS Act specifically, it's great to see strong bipartisan support of U.S. semiconductor manufacturing that will boost domestic chip production and improve the industry's ability to remain competitive. These provisions will be meaningful and support our manufacturing and our roadmap. That bill hasn't passed yet, when it passes, we'll be analyzing that, and as we assess the benefit that we'll get from that, and we should be a beneficiary from both of the grant portion and the investment tax rate portion. As we assess that in more detail, we'll provide you updates as appropriate.
Great. Thank you, Ross. Now we'll go to the next caller.
We'll take our next question from Joseph Moore, Morgan Stanley. Please go ahead.
Great. Thank you. I guess going back to the guidance that you had given in April when you talked about kind of maybe demand to support $5 billion in Q2, but you were taking it down to $4 billion or $5 billion because of China lockdown. You know, can you just give us some sense of how much of that $500 million did you end up capturing? How much of this upside reflects upside in other regions? Just, you know, put this in the context of that original adjustment.
Yeah. I would say you know as we said in the prepared remarks Joseph that you know customers were generally pulling with their original demand forecast right? Meaning that as we looked at what was going on you know we started the quarter we were tracking lower. As we talked about last quarter customers weren't canceling orders they weren't rescheduling. They still wanted to have that product. That's really what you know what made up the majority of that of where we came in for the quarter. Does that help?
Yeah, that does. Then if you could just characterize your customers' kind of mentalities around inventories at this point. Obviously, we've been dealing with hot spots and tight conditions for a while. You know, do you feel like your customers in industrial and automotive markets are looking to build buffer stock inventory so that this is done? Again, just kinda how are people thinking about that?
Yeah. I, you know, I think many have reported, and we can see in the filings that our customers have had that there's clear signs of inventory being built, you know, over the last several quarters. You know, there is discussions on how much inventory do they hold more permanently, and those types of things. We'll see how that behavior changes over time. I think there are some places where that probably will stick and probably some places where it won't. I think the most important thing when we look at it, 'cause, you know, we won't manage our customers' inventory, but we can manage what we do. We've long believed that owning and controlling our inventory is really a strategic advantage.
You've seen us take those actions over time. You know, we finished the quarter with just a little over $2 billion of inventory. Whenever things do weaken, you know, we'll take that time to replenish inventories. That'll keep lead times stable and low. Those are the best things that we can control and what we'll do as we move through the next few quarters. Thank you, Joseph. We'll go to the next caller, please.
We'll take our next question from Christopher Danley with Citi. Please go ahead.
Hey, thanks guys. With the weakness in PE, but also the strength in auto and industrial, are you or can you take some of that capacity from the weaker parts and allocate it towards the stronger parts? Then if so, how long does that take?
Christopher, we do that constantly. At the highest level, yes, the capacity is relatively fungible. There's always some nooks and crannies that are a little different for each technology or each particular part, so you know. At the highest level, yes, we have been adjusting our capacity over the last two months as things have been tied to deploy that to the best uses and support our long-term strategic roadmap.
Great. For my follow-up, you know, sort of, going along with that line of questioning. You know, you guys have talked about shortages and extended lead times all year. Are we seeing any improvement or do you anticipate any improvement there before the end of the year?
Yeah, I'll comment, and Rafael, if you wanna jump in, please do. You know, our lead times haven't changed much from last quarter. I think as we look in the out quarters, it really depends on how demand begins to shape up. We will have capacity coming online as we've talked about, but in any given quarter, you know, sequentially, that's not gonna make a huge difference. But you know, we lap a year or several quarters and it really will make significant difference in the capacity that we've got available.
No, no, I agree. It's all about increasing our supply. That's what we can control, right? We'll be increasing that with RFAB2 coming online soon, LFAB shortly after that, and then in 2025, the first of the four factories in Sherman. That will increase our ability to supply the market. By the way, as you can see, we just put out $5.2 billion of revenue and grew inventory again for I believe the fourth consecutive quarter. That gives you also a sense of the increased ability that we're developing to supply the market.
That's right. That's a good point. Thank you, Christopher. Now we'll go to the next caller, please.
Thanks, guys.
We'll take our next question from Toshiya Hari. Please go ahead with Goldman Sachs. Please go ahead.
Hi, thanks so much. I had two as well. First on your pricing strategy going forward, just curious, you know, with RFAB2 ramping and LFAB ramping over the next, you know, 12 months-18 months and your peers, you know, much more supply concerned than you are, and they're all sort of facing, you know, inflationary pressures from their foundry partners, is there an opportunity for you to be a little bit more aggressive than historical trends and for you to pursue market share? Or would you look to follow suit and raise pricing along with your peers going forward?
Yeah. Yeah, Toshiya, thanks for that question. I would say, as you've seen us behave, you know, in the past, our approach to pricing hasn't changed. You know, as pricing decisions are made at the product line level, we've got about 65 different product lines, so they're close to customers, close to the market, understand what their peers in the industry are doing. To your point, you know, many of our peers in the market that are outsourced, you know, they do have to take action when they see pricing increases from their suppliers.
I think that just emphasizes the competitive advantage we have in manufacturing and technology, and continues to highlight that, and part of the reason why we're continuing to invest to strengthen that competitive advantage. You have a follow on?
I do. Thanks, Dave. So on OpEx, I think over the past 12 months, your OpEx budget is barely up. I think it's up 1%+ in what's been a very inflationary environment. I'm just curious what the offsets have been over the past 12 months and how should we think about sustainability, you know, in your model, OpEx being up kinda low singles while revenue growing strong double digits. Thank you.
Yeah, no, happy to address that. We are pleased with how we're allocating our investments to R&D and SG&A to the best opportunities, and that is primarily industrial and automotive, as we have talked about, also initiatives such as ti.com that ultimately strengthen our competitive advantages and maximize our ability to grow free cash flow per share over the long term. On the last part of your question, on an absolute basis, I would expect to increase investments over the next several years as we continue to see strong market opportunities.
Thank you.
Thank you. We'll go to the next caller, please.
Take our next question from Harlan Sur with JPMorgan . Please go ahead.
Good afternoon, guys. Thank you for taking my question. On finished goods inventory, which is where your direct customer consignment inventories resides, they're still 30% below pre-pandemic levels. They're down 3% versus last year. They're down slightly sequentially. Is it fair to assume that this is a reflection that your direct customers continue to pull at a very strong rate, just given their demand profiles? Can you guys get to your target inventory days exiting this year, especially with RFAB2 ramping?
Yeah. You know, what I would tell you, given our manufacturing process, the parts that start as WIP, then they go to chips, then they go to finished goods. Overall inventory has been growing, as I pointed out, over the last four quarters. This last quarter, $140 million. But as you said, finished goods is still lean. Our goal is for inventory to continue to grow. We have talked about a target of 130 days-190 days, and as I have said before, I would not be uncomfortable to be at the high end of that range, 'cause ultimately that inventory gives us just tremendous optionality, puts us in a really good position to support customers.
Just given our business model, the less risk on that inventory is nil, because that inventory goes to support products that sell to many, many customers and have a very long, long life. We feel comfortable increasing inventory for that reason.
Yeah. Let me just add that, Harlan, part of your question was that, is that a reflection of direct customers? Just remind that we have-
Mm-hmm
about 70%, we actually last year around 70% of our revenue is direct. That includes-
Right
The revenue going through ti.com, which, you know, we still believe is going to be a significant strategic asset for us as we move forward. What goes through distribution to my prior comment, we've, you know, long believed that owning and controlling that inventory is important. We're probably running, you know, two weeks or less than that inside of that. When we ship revenue, because we're owning and controlling that inventory, it really is reflective of what customers want inside of that quarter. You have a follow on?
Yeah. Thanks for the insights there. I know it's shift to location, but wanted to know what the year-over-year profiles look like for the different geographies? Thanks.
Yeah. Inside of the quarter compared with a year ago, you know, all the regions were up. That's the year-on-year, and sequentially, they were all up as well. We did see those trends in both year-on-year and sequentially. Thank you, Harlan. We'll go to the next caller, please.
Yep. Thank you.
We'll take our next question from C.J. Muse with Evercore. Please go ahead.
Yeah, thank you for taking the question. I guess first question, revisiting an earlier question around the $560 million revenue beat versus the midpoint of your guide for June, and the $500 million haircut that you took when you initially guided. So curious, you know, given that you started to see recovery in May, is it safe to say that maybe you went above and beyond kind of the run rate and therefore you recaptured all of that $500 million, or was it just a portion of that? And then as part of that, where did you see upside relative to where you guided before? Was that isolated to industrial or auto or any particular end market?
Yeah. C.J., can you help me with the first part of your question? I'm not sure I quite got it. Could you just-
If I look at the midpoint of your guidance versus what you actually did, it was about $560 million better.
Yep, yep.
In your initial guidance, you told us a $500 million China uncertainty haircut. Really trying to understand, you know, how that $560 came in better. Was it all China, or were there other drivers within that?
Yeah. I would say that, as we talked about, right, that the haircut was, so to speak, using that term, was primarily due to the COVID restrictions. Yeah, as that, you know, as they loosened up, again, customers were pulling to those original forecasts. We really didn't see anything different than what we would have expected, at the beginning of the quarter, you know, with the exception of the weakness that we talked about inside of personal electronics. Do you have a follow on?
Yeah, please. On the depreciation guide for the year, you know, roughly up 35% half-over-half, and considering for RFAB 2, you're gonna start to depreciate the equipment when you actually qualify the wafers and begin revenuing, is that kind of a ballpark kind of estimate? Maybe it comes in more like, you know, $925, $950, or just trying to understand the moving parts there given that it's qualification of wafers, revenue of wafers, which sounds like it's really gonna be later Q4 that really starts.
Yeah. It is an estimate, and it could come in a little lower or a little higher, but right now, I would say $1 billion is a fair estimate. As I said earlier, to go beyond that, you can think about it roughly linear from that point in 2022 to $2.5 billion of depreciation in 2025, and then you can easily get a good model for 2023 and 2024.
Thank you, Rafael.
Thank you, C.J. We've got time for one more caller, please.
We'll take our last question from Ambrish Srivastava with BMO Capital Markets. Please go ahead.
Hi. Thank you very much. Dave, I had a question. Dave and Rafael, I had a question on pricing. Industry pricing has been up high single-digit%, low double-digit% last couple of quarters. Did the Q2 see a similar benefit from pricing, Dave? I know last quarter you had acknowledged that you did see the benefit from pricing, so I was wondering what was the impact, and do you expect that to continue over the next couple of quarters?
Yeah. We did see a benefit in Q2 on pricing. Again, our pricing practices haven't changed, so you know, we'll continue to price aggressively. To ensure that we're gaining share and so you know, no changes from that standpoint. We'll just see what happens in the marketplace.
Dave, sorry, just a clarification. As imperfect as the SIA data is it a reasonable proxy to use to ascertain what pricing advantage TI got from whatever the SIA data spits out?
We're just cautious to give a specific number as we look at it. You know, we've got if you just took units and divided by revenue, that'd give you an average price, which is what SIA is doing. You know, we've got customers that are buying through ti.com, you know, they're enjoying the convenience of having product that's immediately available. In some regions, you know, we're doing shipments more than once a day to the docks of those customers. There's a convenience that they're enjoying. They pay a higher price for that. But that, you know, you've got that now mixing in. There's other factors besides that. There's mix in the types of products that we ship.
You know, we have products that we sell for a couple of pennies and products that we sell for thousands of dollars each. Depending on either end of that spectrum, it can move your ASP or your average selling price around. That said, you know, in an environment like we've seen over the last several quarters, just in price increases that customers, for like-for-like product, that we have seen that benefit as well. I'm sorry, I can't be more specific.
Thank you.
Any follow-up or?
No, that was.
That was just fine. Okay. Thank you, everybody.
Thanks.
Let me wrap up by reiterating 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 long-term value for owners is the growth of free cash flow per share. While we strive to achieve our objective, 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're personally proud to be a part of and would want as our neighbors. When we're successful, our employees, customers, communities, and owners all benefit. Thank you, and have a good evening.
Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may disconnect.