Texas Instruments Inc Capital Management Review Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Joe Quatrochi - Wells Fargo - Analyst : I just wanted to ask about the free cash flow ranges that you put out for 2026. In contemplating this, why do we not include the $1.6 billion of CHIPS Act direct funding? And I know that maybe not all of it hits in 2026, but just maybe help us understand just contemplating not including that in the free cash flow targets?

Question: Joe Quatrochi - Wells Fargo - Analyst : Yeah. And then just, I guess, as I think about like the direct grants, is there any help that you can provide in terms of how to think about the -- them applying to machinery and equipment versus building just given there's quite a bit different depreciable life there? I'm just trying to think about how that flows through the model for depreciation.

Question: Joe Quatrochi - Wells Fargo - Analyst : Yeah. Just the direct grants applying to machinery and equipment on the PP&E balance relative to buildings, trying to think about that mix because there's quite a bit different depreciable life of maturing equipment versus buildings?

Question: Stacy Rasgon - Sanford C. Bernstein & Co. - Analyst : Haviv, I wanted to ask about these 2026 revenue scenarios. So I know these are not guides. I understand that. But at the same time, just given where you're running it, what do you really think is realistic? I mean you guys just cut utilizations 10 quarters into a downturn, which doesn't suggest to me that you see a snapback coming anytime soon. I think even to get to the low end of those scenarios, you can need a pretty sizable snapback at some point over the next year, 1.5 years. So how really should we be thinking about like how realistic those scenarios are?

Question: Stacy Rasgon - Sanford C. Bernstein & Co. - Analyst : Understood. I do. Thanks. Maybe just to follow up on that a little bit. So you talked about clearly, you'll have more flexibility, more visibility. Like if that -- if in '26, the revenue was to come in at say, $18 billion instead of $20 [billion], is there more flexibility on the CapEx to the downside or just REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 04, 2025 / 4:00PM, TXN.OQ - Texas Instruments Inc Capital Management Review some of the other constraints around the ITC and everything sort of hold that CapEx at $2 billion as a minimum regardless of where the revenues might come in?

Question: Vivek Arya - BofA Securities - Analyst : For the first one, you are keeping a 25% to 35% free cash flow target for '25. I'm curious what kind of sales growth is required in '25 to -- given the $5 billion that you will have in CapEx? Because if I were to assume, whatever, 50%, 55% EBITDA margin, then $5 billion CapEx, it suggests sales will be somewhere in the high teens, right, or so, billion range? I just wanted to make sure that I'm doing my math right. And if not, what kind of sales range is required to achieve your 25% to 35% free cash flow target?

Question: Vivek Arya - BofA Securities - Analyst : Yeah. Thank you, Dave. So my follow-up is on your Embedded business. I think Haviv you suggested 2013 as a baseline year, going out to '24. If I look at your Embedded business, there was no growth -- in that time period, was $2.5 billion in 2013, same in '24. And if I look at the last five years, it has actually declined since 2019. So I'm curious, what has been different in Embedded historically? What are you planning to change? And if it doesn't work, will TI need to consider inorganic growth for your Embedded business? Thank you.

Question: Tore Svanberg - Stifel, Nicolaus & Company, Incorporated - Analyst : Yes. Thank you. So I had a question on your cyclical/trendline analysis. I'm just curious why you're using units and not billings in that analysis? I mean if pricing had been stable, I would understand it, but it's been anything but stable the last five years. So just curious why you look at that? And when we do include billings, do you still feel like we are sort of way below the trend line at this point?

Question: Tore Svanberg - Stifel, Nicolaus & Company, Incorporated - Analyst : Yeah, that's fair. And thank you, Dave. Yes, my follow-up, there's a lot of focus here on front-end manufacturing. But I think we all know that in analog, back end is as important or more important. So could you maybe update us on what's going on there? My understanding, you still have some heavier footprint in Asia. So any updates you can give us on the back-end side would be helpful.

Question: C.J. Muse - Cantor Fitzgerald & Co. - Analyst : I guess first question, building geopolitically dependable capacity in the U.S. clearly proved to be very prescient, given U.S.-China challenges. But given China requires being local, I'm curious how your strategy has evolved to meet the requirement of acting or looking more local, at least within your China footprint?

Question: C.J. Muse - Cantor Fitzgerald & Co. - Analyst : Yeah, Dave. Thanks. Just to go back to the reiteration of the $2 billion to $5 billion in CapEx in 2026. If I'm hearing correctly, it sounds like it's more of a question around having appropriate mix, the right node, the right specialty products as dictating where you'll end up, as opposed to kind of what your revenue outlook is for '26. Is that accurate?

Question: Joshua Buchalter - TD Cowen - Analyst : I wanted to start with a bit of a big picture one. I mean, the chart on Slide 10 clearly shows that this trend -- that we're running sort of below the trend line and a deeper level and for longer than any of the past cycles. I would just be curious to hear your perspective on 1, why that's happening and 2, what are the catalysts that are needed really to have it inflect back towards that trend line? And should we -- is it a given that it needs to inflect more quickly because of how deep the correction has been? Thank you.

Question: Joshua Buchalter - TD Cowen - Analyst : Thanks for the color, Haviv. For Rafael, you gave a sort of outlook for depreciation for fiscal 2026. And assuming that we're towards the low half of the $2 billion to $5 billion range in 2026 CapEx, is it -- should that be the peak year of depreciation expense? Or would there be an upward bias for another year or two as the CapEx flows through the model? Thank you.

Question: Ross Seymore - Deutsche Bank AG - Analyst : I guess the first one, I think it was Rafael, you had the slide about the structural cost advantage. This is nothing new to TI from the perspective that moving to 300mm wafers for analog was a great cost advantage starting almost a decade ago. In the original implementation of that, it seemed like your market share steadily increased, but your margins really exploded to the upside. So I guess my question is, in this iteration of the structural cost advantage, is this going to be more about maximizing market share than margins? And how do we think about the pace with which market share can move in a kind of naturally fragmented market?

Question: Ross Seymore - Deutsche Bank AG - Analyst : A perfect segue, Rafael, to your final statement. In the past, a couple of quarters ago, I think you talked about a decent framework for gross margin for all of us to be 75% to 85% incremental gross margins ex depreciation. Does that still hold true? Because it seems like, at least this year, that will prove to be challenging. And I know you tend to give targets that are not any single year, but any adjustments to that framework?

Question: Timothy Arcuri - UBS Investment Bank - Analyst : I also had a question on China and how the tariffs sort of play into the forecast. I know you have the facility in Chengdu. But do you have enough balanced supply that you can source non-China demand outside of China?

Question: Timothy Arcuri - UBS Investment Bank - Analyst : So Haviv, there's obviously -- pretty much every investor I talk to expresses some doubt that you can get to the low end of this forecast for the next year, and you're hearing some of that on this call. But what are the leading indicators that you're looking at? I mean if I look, even since you reported, the ISM came in better this week, new orders jumped 3 points month-on-month. There were some large companies on the industrial side, but with some pretty strong bookings last week for the first time in two years. Has this increased your optimism that you can get to that, at least that low end of that range? And has it increased your optimism even since the earnings call last week? Thanks.

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Haviv, on your Embedded business, you mentioned this, I mean, one of the big changes in the manufacturing strategy is the shift of your historically outsourced embedded products, right? MCUs, processors, your internal 300mm network, primarily LFAB. For your core analog products, you've described the cost savings internal 200mm to internal 300mm at 40% lower die cost. Can you just give us the comparable sort of long-run cost savings comparison, outsourced MCU die cost versus insourced 300mm MCU die cost? Because with the renewed focus on Embedded, the potential for a better growth profile going forward, would be good to know the cost advantages in this segment?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : On the enterprise systems segment, you've historically characterized R&D investment profile here as slightly up today. You actually articulated the focus on data center, Haviv. Can you just give us a sense on where the focus on data center is being directed? I can think of power delivery, power management? What about networking connectivity? Any other areas I'm missing? And any metrics you can share with us on your success in data center?