Good day, and welcome to the Texas Instruments Q2 2021 Earnings Release Conference Call. Please note that today's call is being recorded. At this time, I would like to turn the conference over to Dave Paul. Please go ahead.
Good afternoon, and thank you for joining our Q2 2021 Earnings Conference Call. For any of you who missed the release, you can find it on our website at ti.com This call will include forward looking statements that involve risks and uncertainties that could cause TI's results to differ materially for 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. Our Chief Financial Sir, Rafael Lizardi is with me today and will provide the following updates. First, I'll start with a quick overview of the quarter.
Next, I'll provide insight into 2nd quarter revenue results with more details than usual by end market, including some sequential performance since it's more informative at this time. And lastly, Rafael will cover the financial results, Some insight into one time items and our guidance for the Q3 of 2021. Starting with a quick overview of the 2nd quarter. Revenue in the quarter was $4,600,000,000 an increase of 7% sequentially and 41% year over year, driven by strong demand in industrial, automotive and personal electronics. On a sequential basis, analog grew 6% And embedded processing grew 2%.
On a year over year basis, analog grew 42% and embedded grew 43%. Our other segment grew 30% from the year ago quarter. Moving on, given the current environment, Again, this quarter, I'll provide some insight into our 2nd quarter revenue by end market and comment on our lead times. First, The industrial market was up mid teens sequentially and up about 40% from the year ago. The strength was seen across most sectors.
The automotive market grew sequentially following the strong Q1 2021 and more than doubled from a weak year ago compare. Personal Electronics was about even sequentially and up about 25% compared to a year ago. The strength was broad based across sectors and customers within Personal Electronics. Next, communications equipment was up Low single digits sequentially and was down upper teens from the year ago. Enterprise Systems Grew upper teens sequentially and was about even from the year ago.
Regarding lead times, The majority of our products continue to remain steady. However, the growing demand in the Q2 of 2021 again expanded Our list of hotspots, which required extending some lead times. As planned, we continue to add incremental capacity in 2020 1 and first half of twenty twenty two with additional support from the start up of our 3rd 300 millimeter wafer fab, As discussed during our capital management review in February, our competitive advantage of manufacturing and technology Delivers the benefits of lower cost and greater control of our supply chain, which really shows through in a market environment like this. Rafael will now review profitability, capital management and our outlook. Thanks, Dave, Good afternoon, everyone.
As Dave mentioned, 2nd quarter revenue was $4,600,000,000 up 41% from a year ago. Gross profit in the quarter was $3,100,000,000
or 67 percent of revenue. From a year ago, gross profit margin increased 2.90 basis Operating expenses in the quarter were $816,000,000 up 5% from a year ago and about as expected. On a trailing 12 month basis, operating expenses were 19% of revenue. Over the last 12 months, we have invested $1,600,000,000 in R and D. Acquisition charges and non cash expense Were $48,000,000 in the 2nd quarter and are related to the National Semiconductor acquisition.
This acquisition charges will remain at about this level through The Q3 of 2021 and then go to 0. Operating profit was $2,200,000,000 in the quarter Or 48 percent of revenue. Operating profit was up 80% from the year ago quarter. Net income in the Q2 was $1,900,000,000 or $2.05 per share, which included a 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 $386,000,000 in the quarter. Free cash flow on a trailing 12 month basis was $6,500,000,000 In the quarter, we paid $942,000,000 in dividends and repurchased $146,000,000 of our stock. In total, we have returned $3,900,000,000 in the past 12 months. Over the same period, our dividend represented 56% of free cash flow, underscoring its sustainability. Our balance sheet remains strong with $7,400,000,000 Cash and short term investments at the end of the second quarter.
Regarding inventory, TI inventory dollars were down $34,000,000 From the prior quarter and days were 111, which are below desired levels. In the Q2, we signed an agreement to acquire Micron's 300 millimeter fab in Lehi, Utah. This investment continued to strengthen our competitive advantage in manufacturing and technology And it's part of our long term capacity planning. The Lehigh fab will be our 4th 300 millimeter fab joining Demo 6, RFAB 1 and soon to be completed RFAB 2 in our wafer fab manufacturing operations. We continue to believe that our competitive advantage of manufacturing and technology will be of growing importance in owning and controlling our supply chain.
For the Q3, we expect TI revenue in the range of $4,400,000,000 to $4,760,000,000 And earnings per share to be in the range of $1.87 to $2.13 We continue to expect our Annual operating tax rate to be about 14%. In closing, we continue to invest to strengthen our competitive advantages and in making our business stronger. With that, let me turn it back to Dave.
Thanks, Rafael. Operator, you can now open the lines up for questions In order to provide as many of you as possible the opportunity to ask a 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. And we'll go first to Vivek Arya of Bank of America.
Thanks for taking my question. Rafael and Dave, when I look at the last few quarters, your reported sales have been significantly above Your guided range and I mean like between 5% to 13% above your original outlook and that's just making it very hard to distinguish We're right between how to read your guidance because even now you're guiding to a flattish outlook in what's supposed to be a seasonally stronger quarter. Should we take that to be conservatism? Should we take that to be a peaking in the cycle? And how is it that the demand is so strong, You're increasing supply, but yet your sales outlook is very flattish.
I think it's a very confusing message and I would love your insights into how to interpret Your guidance, are we reading them in the right way?
Yes, Vivek, thanks for the question. I think First, I'd say perhaps normal seasonal patterns may not be the best measure to look at things in periods like this. Certainly, the last few quarters we would all agree have been unusual periods that we've gone through And as we continue to move through. So, and as you said, the last few quarters have been exceptionally Strong. 2nd quarter was certainly strong both sequentially and year on year.
So if you look at Our guidance, it would suggest that next quarter will again be a very strong quarter. So, and as you know, our guidance is The best estimate that we have at this time. So that's what we try to do and try to give you that insight. Do you have a follow on?
Yes. Thanks, Dave. So from what you said, I assume that you're again implying conservatism, unless you suggest otherwise. My real question is, when I look at the share buyback activity, it's been very low the last few quarters. And there are only a Few reasons why that would be, right?
One is the simplest reason that maybe the stock is perhaps not attractive at these valuations or it could be that you're preparing for some M and A or is Some large CapEx or some caution about macro. I'm trying to understand why is there such a material shift in terms of your return of free cash flow Strategy, right, we understand the dividend part has been very strong, but the share buyback activity has been very low over the last Almost a year now. So we just appreciate your views as to why you are not buying back your stock at the pace at which you have historically done so. Thank you.
No, happy to address that one, Vivek. So first, let me take you back to how we think about Cash return, and you know us very well. You follow us for many years. And you've heard us talk about this during Capital Management year in and year out. And Our objective when it comes to cash return is to return all free cash flow to the owners of the company.
We do that through dividends as well as buybacks. Now that has never meant and doesn't mean that every single quarter or even every single year, where that return is going to be Exactly 100%, right? If you look at our history over 15 plus years, it has been actually above 100%. So that shows our commitment To that, and that commitment has not changed. We are committed to returning all free cash flow to the owners of the company over time.
Great.
Thank you, Vivek. And we'll go to the next caller, please.
And that next caller will be Toshiya Hari of Goldman Sachs.
Hi, guys. Thanks so much for taking the question. I had 2 as well. I guess one Clarification, Dave. I think when you talked about automotive, you said up sequentially in the Q2.
Did I catch that right? Did you not give a specific number for automotive?
That's correct. It was up low single digits, Harshim.
Okay, got it.
Follow on?
Yes. So in terms of gross margins, I realize you guys don't run the business management business for gross margins, but clearly you had a very, very strong quarter In Q2, and I know you don't guide gross margins going forward, but based on how you're thinking about utilization rates In your factories, given what you know about pricing in your business, both on the analog side as well as the embedded side going forward, How are you thinking about gross margins and kind of the OpEx leverage going forward in your business? Thank you.
Yes. No, so First, let me emphasize a point you made. We do not focus on gross margins in how we run the business. Just like you said, Our focus is on free cash flow generation, in fact, free cash flow per share and how we can grow that over the long term, right, because we think Ultimately, that is what drives value for to the owners of the company. And you can do that at 67% margin, you can do it at a lower Margin, you can do it at a higher margin, depends on a number of factors.
So and then to answer your specific question, As we have always guided, over the long term, not any 1 quarter or even any 1 year, but over the long term, 70% to 75% fall through It's the right way to generally speaking, the right way to look at to model the company as we go forward. So as you Put whatever revenue expectation you have there and fold that through at about that rate and you'll be in the ballpark.
Okay. Thank you, Toshiya. We'll consider that 2 questions, if that's okay. And we'll move on to our next caller.
And the next caller is going to be Stacy Ruskin of Bernstein Research.
Hi, guys. Thanks for taking my question. So I know you don't think about running the business gross margins, but I'm going to ask a gross margin question anyways. In Q2, you were at $65,200,000 Obviously, you did very strongly this quarter, but You said you had $0.06 of royalties that was unexpected. That should have been about 1.4 points of gross margins as I understand it, if I do the math right.
I think you had something like $50,000,000 in Austin costs last quarter that should have rolled off this quarter. That would have been another 100 basis points give or take. So I'm actually wondering why gross margins were in fact, if I take out the royalties, they would have been up 60 basis points Only with 100 basis points of cost, it should have rolled off with a massive revenue increase. Like what's going on with what happened with gross margins in the current quarter given all of that?
So Stacy, I let me address one and then I have to ask you a question. I didn't quite understand part of your question, but
Or maybe royalties weren't in gross margins, maybe they weren't in
gross margins. Exactly. That's the part I didn't. Okay. So you were assuming royalty, okay.
So let me address that first. We took our royalty, it used to be in revenue and gross margin, but that was years ago. I think 3 or 4 years ago, we Yes. We moved that to other income and expense. So that is in that line, other income and expense.
So it has nothing to do with margins. It has been for 3 or 4 years or so since we and the reason we moved that is very de minimis. It's a relatively small amount. It averages about $100,000,000 a year. Of course, in the big scheme of things, given our revenue level, it's a relatively small amount, and we expect that to be continue to be small going forward.
On the other part of your question, so last quarter we had about a $50,000,000 hit to our gross margins that was because of the winter storm in Texas. We did talk about that during the call. We mentioned it and that was all in gross margin. So yes, you can adjust that you can adjust however you wish For Q4 to get you the gross margin without that impact, right? And that may make more sense when you look at the trends.
Yes. Does that answer your question?
No, that's good. That's very helpful. Thank you.
I think you have a second one, right? You still have a follow-up?
So my follow-up, yes, you're guiding revenues flat and you're guiding EPS down slightly. So either gross margins are going down or OpEx is going up. Normally, OpEx, I think, seasonally into Q3 would be down a few points. I guess, are you expecting any sort of different OpEx Trends in the Q3 as you would normally see like in the normal Q3, is there something else going on? Because normally it's down a few times sequentially.
Yes. Well, so the reason that EPS is moving at the midpoint The royalty that we just talked about, right? So you just take out that $0.06 from the EPS that we just delivered, You get to a more normalized EPS without that royalty and then compare that to the next quarter. And you'll see that there's nothing unusual there. Obviously, we only gave revenue and EPS range, but if There was something unusual in between the lines we would point it out and there's nothing unusual.
Nothing's changing much between the other lines. Right. Yes. Okay. Thank you, Stacy.
And we'll go to the next caller, please.
And next we have John Pitzer of Credit Suisse.
Yes. Good afternoon, guys. Thanks for letting me ask the question. Dave and Rafael, I just want to go back to the revenue guidance sort of flat at the mid Point with down sequentially, I guess I'm just trying to wrap my head around the fact that your deficiencies kind of increased in the June quarter. You said your hotspots went up.
It sounds like demand is still relatively strong and yet there's a part of your guidance that could be down sequentially, which I'm having a hard time grasping. Dave, maybe you can talk about end markets. Are there any end markets that particularly look like they're cooling off sequentially into the Under Q3 or why the down sequential, I think I have to go back to quite a bit of time to see you guys have a flat to down sequential Q3.
And John, when you say down sequentially, just to clarify, are you saying that part of our range would imply that it could be down and other part would imply that, yes, that's what that's just to clarify that part of the question. I got you. Yes. So, yes, John, there's something that's unusual going on within an end market Or region or product area, we've always provided insight into To help understand an outlook or even something that's happened in a current quarter, I'll just say that there's nothing unusual like that, that we feel that we would need to explain what's going on. I think that As I mentioned earlier to Vivek's question on the topic, seasonality probably isn't the best thing to be looking at As we've been moving through the last few quarters, and I would say, what that range implies that The revenue still will be strong.
So you have a follow
on? Yes. Just as my follow on, on our Fab 2, I'm just curious with the proposed purchase Lehigh, should we think about sort of the building going on as planned, the pilot line going on as planned, but capacity at RFAB 2 kind of Slowed or how do we think about kind of now your mix of capacity as Lehigh comes in next year and what that means for CapEx And the ramp of RFAB too?
Yes. No, let me tell you about that. So first, let me step back, remind everyone objective when it comes to It's to invest to support new technology development and revenue growth and specifically extending our low cost manufacturing advantage, Primarily 300 millimeter, right? So we have talked about that for a long time and it's a core part of our strategy. It's one of our competitive advantages Having that manufacturing and technology advantage.
Our Fab 2 will be the 3rd 100 millimeter factory. Lehigh will be our 4th 300 millimeter factory. Our 5.2 will become operational sometime in the middle of next year. That's when the shell Will be completed and then we'll be deploying equipment there and then in current CapEx because of that. So CapEx, As I said at the last call, we'll be higher, both in absolute dollars and as percent of revenue because of that.
And then on top of that, add Lehigh, right, which we didn't have last quarter when we had talked when we had the earnings call. So now Lehigh is going to be on top of that. That's a $900,000,000 purchase price, which will run through CapEx. But then in addition to that, that factory It's ready for production once we qualify, but at relatively low volumes, right? We still have to add CapEx to that factory to take it to the volumes that we want.
And That will happen over time. And think of that CapEx, it's probably going to be it's probably going to run about half of what R52 CapEx will run. I'm talking over years, right, as we deploy equipment there. And both of those will add to the strength We'll strengthen our competitive advantage of manufacturing technology with 2 more 300 millimeter factories.
Okay. Thank you, John. And we'll go to the next caller, please.
And that will be Blayne Curtis of Barclays.
Hey, thanks for taking the question. Actually, I just want to ask on I know you're not going to probably guide December, but just kind of Any feel you can for that quarter. Obviously, seasonality has been out the window. It's typically a down quarter. Just trying to get a better handle on the back half here.
Obviously, the flattening market, but at much higher levels, anything you can throw out there for December?
Yes, Blaine. And certainly, I know there's lots of speculations on how long the strong demand will last. And certainly we've read the ranges that it's going to end soon and others that say it is going to continue For quite some time and obviously as you stated, we're not going to forecast the 4th quarter Or even comment on how long the cycle lasts because honestly, as you know, we don't know. I don't think anyone knows. But I think we can frame how the actions that we've taken and our approach as we've gone through the cycle.
And in the first phase, you've seen us accelerate into the widely anticipated decline and that really enabled us to gain ground. And really in the second phase, we're working to ensure that we gain strategic ground, particularly in industrial and automotive. And that those gains will reward us for years to come. And independent of that, We're investing for the long term. So some of the obvious things that you can see are the new manufacturing investments in RFAB If you're down here in Texas, you'll see cranes up over the building.
I think I counted 6 or 7 at the max So that we're up over that, the addition of Lehigh, some of the less visible ones are the R and D investments And new capabilities at ti.com and those investments are continuing. So we won't we'll go through cycles. We won't be able to predict it, but we can make the place stronger. We can continue to invest in our competitive advantages. So do you have a follow on?
Yes. I just wanted to ask you on inventory levels, obviously, way down at these sales levels on a day's inventory, but your ability to grow that Absolute amount and if you're able to do that in the September.
I'll start and Dave you want to follow-up. But inventory levels, First, let me remind everyone the objective there, maintain high levels of customer satisfaction, while minimizing obsolescence, Frankly, it's not an issue given our business model. We are clearly below the SIR levels, just like we said during the remarks, right? We're running about 111 days, and our target is 130 to 190 days. That's part of the reason why we have the hotspots that we talked about.
At the same time, I tell you, we go back to Q2 last year When the pandemic was started, in fact, March of last year, everybody, all our competitors were decreasing their inventory levels, slowing down factories. We went the other way, right? We maintain and in fact increased our production levels. We increased our inventory levels. They went from about 140 days to 100 and And that, along with our business strategy, our business model, helped put us in a great position To take advantage of the situation and has helped us do significantly better than our competitors over the last 3 or 4 quarters, right?
But we have gotten to a point where, yes, things are inventory is now below desired levels. We'll continue To add incremental capacity, as we have talked about, that is in all of our factories, especially R51, But the next bigger tranche of capacity will come in with our 5.2, as we talked about earlier. Once that is operational, Sometime in 2nd quarters of next year, then that's when we finish and that will be to produce revenue sometime in the second half Of next year, then that will add a significant amount of capacity. And then shortly after that, Lehigh will also come in line for additional Revenue capacity there.
Yes. And maybe just quickly what I might add to that, obviously, Whenever things do slow, we will then use that period of time to rebuild inventories in those positions to I'll be able to support growth in the future. Yes.
And I'll just add one more thing. Both Rfab II and Lehigh, those are long term plays, right? This is to strengthen our manufacturing advantage, owning our own manufacturing, which clearly has proven over the last We knew that already, but it has proven that how important that is in the current In the current environment, they're going to happen to help in the medium term most likely. But if they don't, if things slow down and It doesn't work out that way. That is completely fine with us.
That's not why we are equipping those factories. That's not why we bought what we're buying Lehigh. It's for the long term positioning of the company to support long term revenue growth in both analog and
embedded. Okay. Thank you, Blaine. And we'll go to the next caller, please.
And next we will go to Ambrish Srivath of BMO.
Hi, thank you very much, Rafael and Dave. I had a question on free cash flow per share. And you guys know I don't look at So if I look at the last two years, if I look at 2020 free cash flow per share down 3%, 2019 it was Flat. And I know that if I look at this year on a trailing 12 month basis, it is up double digit, But it has lagged, sorry for the background noise. It always happens when I'm on a conference call.
If I look at The trailing 12 month and then so that's in line with what you have said consistently. But should we expect this to come back to the double digit on an annualized basis? What's the right way to think about the lag over the last 2 years? And how should we think about it going forward?
Yes. This is one most financial metrics are this way too, but you want to look at this over the long term, right? Any 1 quarter or even any 1 year, They could be a little choppy. You mentioned a couple of years when 2019 and even 2020 Where that trajectory does not represent the longer term. And arguably the same thing for 2021, right, or the 12 month number that you just quoted, right?
So you want to look at this over the long term, and that's how we look at it, and that's what's going to ultimately Drive value for the owners of the company, right?
Yes, I did. With all the tightness and contrast with the way you guys have managed the business, And these share shifts probably don't show up that quickly because these designs are such long lasting and they don't change on a dime. Are you seeing any discernible change in your design in activity as a result of what we have seen from your peers with the tightness And you managing your lead times and inventory much better than some of your peers. Thank you.
Yes, I'll start off and Rafael if you want to add. I would say that as you know Ambrish, we have Started on the journey to have closer direct relationships with customers really 7, 8 years ago With our investments in ti.com, investments in our sales applications teams, Investments in processes and how we do business and just our structure inside of the company. And last year you saw a pretty major step of taking more customers direct and Operating with fewer distributors as well as transacting business through ti.com. So, you kind of mix that together with the pandemic and our ability to do virtual sales calls, I think all those things have positioned us well strategically, especially in markets like industrial automotive, Those markets where we want to gain that strategic ground, you couple that with availability, and like you say, things don't move quickly. But the supply shortages really started showing up in the beginning of 2020, Took a break in the Q2 when the pandemic hit and then reaccelerated after that.
So There are cases, they're unusual, but there are cases where customers redesign boards just because of availability. I'll describe that as an outlier, But we do see cases of that, but we see more cases where you have designs that are being intersected as they come through. And again, our sales teams are engaged from production all the way back into engineering. That gives that visibility is a great strategic advantage. And those benefits again will be things that will pay rewards for us for a long time to come.
Okay. Well, thank you, Ambrish. And I think we've got time for one last caller.
And that caller will be Chris Danely of Citigroup.
Thanks guys. Hey Dave, by the way, thanks for letting the other analysts go first and beat you up on Flat guidance, so I don't have to. My question is on the auto revenue. So if we look at the headlines and talk to the folks in the auto There's still a lot of shortages, etcetera, etcetera out there. And I think your revenue is only slightly up.
So can you just explain The discrepancy, it seems like it would be up a little bit more than that if there's all these folks clamoring for parts out there?
Well, I'd point out it over doubled from a year ago, Chris. So it's a little bit more than up a little bit and I think you're pointing to the sequential. But again, last quarter it was up over 25% from pre pandemic levels. I don't think we're shipping 25% more cars from pre pandemic levels, right. So our shipments into automotive are up and up Significantly, and we continue to add capacity and to continue We believe we're gaining share there as well.
You got to measure it over time. But yes, so we are our shipments are up there and up strong. So you have a follow on?
Yes. Just I guess a hotspot question. So you said that you're seeing a few more hotspots Last quarter, do you think that the situation gets a little bit worse this quarter? Or do you think it gets better? When do you guys think you'll start to get a handle All these sort of supply issues out there, I guess?
Chris, it's Kind of depend on demand, right? We are on the supply side. As we said, we are adding capacity incrementally. We have been and we'll continue to do that. The bigger tranche of capacity doesn't come in until about a year from now, right, as we just talked about, we are 52.
And then 6 months later with Lehigh. So it will be a while before we have big tranches of capacity coming online. So it's going to depend on demand. At the end of the day, we don't fully control that. It's more of a macro situation.
But we are Better prepared than our peers and have been in both the tactical decisions we have made during the pandemic, but more importantly, Our business model and how we run the company, specifically owning our own manufacturing, that has been key in this whole process, and we're just Really doubling down on that with what we're doing with all those factories that we just talked about.
Thank you, Chris. Rafael, you want to wrap up for us? Yes.
I'll go ahead and wrap up. So let me just emphasize what we have said previously. At our core, we're engineers and technology is the foundation of our company, but ultimately, our objective and the best metric to measure progress and generate long term value for owners It's 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 are personally proud to be a part of and would want as our neighbor. When we're successful, our employees, customers, communities and owners