Texas Instruments Incorporated TXN CEO Rich Templeton on Q1 2020 Results

Thanks, Dave. At the highest level, understand how we will approach the likely significant recession resulting from COVID-19. I remind you of the three ambitions that for decades have driven all decisions inside of TI. These ambitions are: first, we will act like owners who will own the company for decades; second, we will adapt and succeed in the world that is ever-changing; and third, we will be a company you are proud to be part of and would be proud to have as a neighbor. When we pursue these ambitions, our employees, customers, communities, and owners will all benefit. These guiding ambitions have served us well for decades, but they are enormously valuable in these times because they help simplify many decisions in an uncertain environment. Like many companies in the COVID-19 crisis, we have acted aggressively, keeping our people safe and able to support their families. We have kept our operations running to support our customers, with special emphasis on our medical customers. And in the communities where we operate around the world, we have provided direct financial support and medical supplies to provide some relief. The list of actions is lengthy. So, starting with the economic framework: no two economic recessions are identical, but the 2008 financial crisis provides us the most recent significant recession and therefore is the best example to study and inform decisions on operating plans, revenue forecasts, and investment and spending plans. As a reminder, if you look back to 2008, and specifically to September of 2008, our new orders turned off overnight. This led to a 26% sequential drop of revenue in the fourth quarter of 2008, an additional 16% sequential decline in the first quarter of 2009, and then a rapid snapback for the next six quarters. By the second quarter of 2010, or within two years of the start of the sharp decline, revenue moved back above the level of the third quarter of 2008. With the benefit of hindsight, our customers overcorrected to the downside, and we then spent a year and a half chasing backup to support demand. With this in mind, we are not trying to predict this economic recession and recovery, but instead we want to ensure that we have the highest degree of optionality so that we can deal successfully with any outcome. Therefore, regarding our operating plan, looking at the pattern from pre- and post-2008, in the second quarter of 2020, and quite likely the third quarter of 2020, we will be running our factories at about the level they ran in the first quarter of 2020. This will likely result in an increase in inventory during the second quarter. This will be important to support our customers during a time when they have limited ability to forecast. Our product portfolio, primarily long-lived products, makes it an easy decision and maximizes our optionality. Regarding second quarter revenue guidance, Rafael will elaborate in a minute, but with reduced visibility of customer demand, we have used the historical transitions that I mentioned from 2008 and adjusted for seasonality. We are not implying precision but explaining the assumptions we are using, an expanded range to account for the current uncertainty. Regarding spending and investments: first, research and development spending will be essentially unchanged as these are five- to ten-year time horizon decisions. We will continue to make ongoing portfolio adjustments, but these are unlikely to make meaningful changes to investment levels. On SG&A, we will maintain critical investments in new capabilities, such as strengthening ti.com, because these are important times to gain ground, but we can minimize expense, and we will certainly continue to do so. On capital spending, our plans are generally unchanged because the bulk of capital spending is driven by roadmap capacity needs in the 2022 to 2025 timeframe. We will continue with previously announced construction plans that are underway for the next-generation 300-millimeter analog fab in Richardson, Texas. Lastly, regarding how we are operating in the current environment, we were fortunately prepared for the unforeseen disruptions of COVID-19. As presented, we updated our customers in late March that our lead times remain short and unchanged and that we could respond to short-term demand. This is because we invested in inventory, a robust business continuity plan, and invested in a geographically diverse internal manufacturing footprint. Our manufacturing teams are operating throughout the world, including countries like Malaysia and the Philippines, where local restrictions have resulted in curtailed operations. We have adopted protocols quickly to keep our people safe and minimize any disruptions. Our team was prepared and is comfortable getting our work done remotely. We continue to actively work new design wins with customers via virtual selling processes that we instituted several years ago. On most days across TI, we are averaging a peak of 10,000 VPN connections and two million meeting minutes per day, about four times higher than normal. We all look forward to things getting back to normal, but in the meantime, we are focused on execution. Let me hand it back to Dave.

Yeah, so let me, I'll start, and Dave, you want to chime in on that. But as we said in the prepared remarks, April has in fact behaved very differently than 2008 in the comparison. March was not only, April, March was strong coming out of the Chinese New Year. As presented in the prepared remarks, we came out a little slowly, but then things perked up. And into April, those things have abated in the second half of April. But we think that is due to the concern that many customers have on a supply disruption. So we arranged, particularly the midpoint of our range implies an expectation that demand will drop as customers internalize better their end demand. And frankly, they're going to have very low visibility. We expect them to have very low visibility of demand. That's why the important point here is that we're keeping high optionality throughout this process so that if things snap back, we can support that. We can support it on the other side of this. Dave, I think this was said, yes, follow on that.

Yeah, thanks for that question. So Vivek, just as you framed, I'm trying to frame it that way. It is a capital allocation decision. So we are allocating capital in the form of inventory. Capital is going to go into inventory instead of going to other places. And the inventory will increase, we expect very likely to increase into the second quarter. But that is what gives us the optionality that I mentioned, of having that inventory on hand. The key thing to remember, and you know very well, the vast majority of our products are long-lived. They're highly diverse, sold to many, many customers. They live a long time on the shelves and the customers' product life cycles are very long. So that inventory will not go bad. So it's an option we were fairly low cost upfront to have that option.

And Stacy, this is Rich. Given the recollection of 2008, I'd be careful of too much precision in where you're trying to draw that. I do think the valid comparison, and I think you know this very well from the history, is that 2008 was a reasonably, 2007 and the first half of 2008 were reasonably hot semiconductor markets, not overheated but pretty hot. And clearly, 2019 and the first quarter of 2020 were cooler compared to the heat of 2017 and '18. So when you try to get peak-to-trough, that's a little more complex. We just tried to basically look through what did we think demand was doing for a couple of years prior, and that was what helped inform and help set where we would put the operating plans.

Yeah, I think as you imagine, I don't think we have any precision on that. I think that, you know, as we saw after Chinese New Year, as we saw a spring, you know, we believe that that was due to the customer concerns. You know, it's hard to have any precision around what percentage of that was due to that concern with any degree of accuracy. But yeah, and Rafael, you want to add to that?

And Rafael, and I might add to that, you know, Stacy, 65-70% of our revenue is on confinement, so we're not flying blind. But we see plans that are in our customer factories, but as they have reduced visibility, all those plans are not updated. So they're being updated slowly as they're deciding what's building in those factories. So those updated plans are rolling through, and that's what's creating the uncertainty, as you'd imagine.

I mean, let me have Rafael. You know, Ross, just to help on that, I think Rafael covered this in some ways. If you think back to 2008, and a bunch of folks know, we were very much different. We had a large wireless business, we had portfolio reprofiling we had to do, we had a high percentage of our product that wasn't exactly custom but it behaved a lot like custom. So, you know, building inventory was a much, much more difficult game. And the beauty about where we are today is, as Rafael pointed out, is that high percentage of the portfolio is long-lived product. We've got our R&D and our resources well deployed in the areas that we want to be long-term, and that's what really puts us into a wonderful position where the cost to have maximum optionality is actually pretty low in our particular case in 2020 versus where it was back in October of 2008.

Yeah, John, you know, I'd say that when we looked at last quarter, it was very distinct. You know, we saw strength in PCs, we saw strength in data center, we saw distinct slowing in Auto, as we talked about. I'd say that the relative strength in orders that we saw in the quarter, that happened in March and continued into April, was broad-based generally and across the board, with the exception of auto. And then the slowing, I would say that it is also broad-based.

Yeah, you know, John, if you think about it, and you can even, you've watched this for a long time, you can go back to 2008 and then look at what we did through 2009, '10, '11, and such. And clearly, if you...

Think about capital allocation. The things that I step through: keeping on the right R&D investments, keeping on the right capital expenditures, making the right capability investments on things like ti.com. You know, that's where you get just very excited about we will be getting stronger during this period and those strengths will help us. Even as the secular trends and more semiconductors in your life are growing, for the degree that we have an opportunity to buy used equipment or used factories or potentially M&A, as with anything on capital allocation, I think that one just goes down to the dependence type comment, meaning it would have to be probably a more prolonged downturn. If you think about what the mood was in 2010 and 11, well 2009, 10, 11, that mood had to be there for a while before opportunities became available. But we're certainly, we try to just be wise over the long term.

You know, Chris, I think it's early. I think, you know, I know your world tries to get ahead on trying to guess what will happen. I in general think that the secular trends we've seen with semiconductors and more semiconductors coming into people's lives are going to continue. And I think somewhat as John alluded to in his question, it's obvious in the near term, server sales and PCs are going to do well as working from home continues. But I just think longer-term, you look at industrial products, industrial equipment, and even automotive, even though in the near term people will see our numbers come down, the secular trend on semiconductor growth inside of automotive is going to make it a great market to be in for the long term. So no, I don't think from that point there'll be a big structural change. I do think we've got a great advantage of having structural channel advantage. So the changes that we've been working towards for a number of years are building closer to real-time solutions with customers, things you now see playing out with a higher and higher percentage of inventory being in our hands to where we can be more efficient. That's going to be a fantastic trend. TI is well prepared to take advantage of that with our breadth of channel reach through the industry.

You know, Chris, I think if you and Dave, I thought was very direct with what he described. We saw orders rise starting the first, second week of March. You saw them rise up, you've seen them start to trend down. They're still at that level we saw approximately ending February and in early March. I think that's starting to filter through for us especially, and they will have the number where we're 60, 70 percent consignment. It takes a while for those consignment feeds to really get updated because companies have got to start getting better numbers on that front. So I think customers are just still processing through what their customers are telling them, and we will see that play through. It's why we've made the assumptions that May would be down from April and June down versus April as well for the range.

Rich and Rafael follow up. Yes, and let me set up and all that. Let Rafael cover it. The answer is no change in the first because we really have tried to have a very thoughtful long-term plan. But I think it's helpful for Rafael to summarize some of those points.

You know, Umbr, it's why we included in my remarks comments about how we're operating. It's one of these deals, I produced an update for internal and basically I had a bunch of people telling me, gosh, we got lucky on some things. And I explained there's this great quote that luck is what happens when preparation meets opportunity. And we put in place this mass-market selling, really virtual selling technique starting three years ago. It's an instituted standard process. Our sales teams work it, applications people work it comfortably with customers. And so it's almost been like nothing has changed in terms of where we spend our time working between ourselves and the customers. They all want to do it on the phone anyhow. Our products group connecting in on that. So the readiness that we had to operate in this world is actually enormous. Having ti.com more capable to support customers' decisions to be able to support online commerce as we're bringing more customers direct, the comfort of our product groups, design engineers, and people to work collaboratively because we've always had to do that is really very, very unchanged. I do think people are working more hours just because the days and hours tend to blend into one another as I'm sure everybody on this call is experiencing. But it's very impressive to watch the team performing and watching what's getting done. We're at the point where all of a set of customer visits, even next week, those customer visits will be virtual as well. So we're just well into the way of operating this way.

Yeah, and I would say that we've had customers actually contact us and they're rather surprised that our lead times are stable and they can get the product that they need. So they're very, very happy with that.

Yeah, I'll start and please chime in Rafael. Again, I'll give the numbers of products of where we've actually shipped the product, but always offer the caution that it's where the box ships from. So we've got 50% of our product ships into China, but again, like solar phones as an example, may be built there, may be designed in California and end up in Europe as an example. So yeah, we are seeing those factories coming back online as we talked about in our prepared remarks. But I think the uncertainty is how much demand will actually be there as those factories come back online. And I think that's what's creating that uncertainty.

Yeah, I would just, you know, Harlan, amplify as I suggested earlier that the secular growth themes that are embedded in things like automotive, or embedded in industrial, are alive and well. They're going to be with us. They are not going to offset a 20% drop in any one year, and I think everybody does. But when it comes to making investments, as Dave said very well, you got to be looking five and six years out. And we think automotive will continue to be a great average upper of our long-term growth and our performance.

Yeah, totally. I think you've almost answered the question. I think you described a couple of secular tailwinds if we do our job well, with a secular headwind depending on trade tensions. But even there, if we do our job well, I think we can mitigate some of that. I think you also, and I'm sure Dave is smiling, you got to the right context, which is you've got to look at this over two, three, and four years. I think he reminds everybody all the time. And so you look at the share we gained going into and then the position we were coming out of the 2008 downturn, and we gained momentum in that. And that's certainly what our plans are right now. And that's about both analog and embedded, and it's about the markets that we focus on, it's the customers, the products, the technology, the capability like ti.com where we put the place, and it's where all our energy is going on a weekly and daily basis is to get there.

Okay, just to follow up, Rafael and Tim, Rafael said this before, so it's just me repeating his comment. The other thing to keep in mind, and he spelled this out, is while our inventory would be growing in second quarter, we will drain yet again distribution inventory. So we've just got to keep these multiple variables in mind, and it just keeps putting us in a better and better position when we're doing that. So if our balance sheet may show higher inventory, but we love the fact that that channel inventory will be getting leaner and leaner, and the inventory will be in one place where we can get the most effective use out of it.

Yeah, so let me just wrap up by reiterating what we have said previously. History has shown us that it is times like this when we can make the most strategic progress. We will continue to invest in and strengthen our four competitive advantages, which are manufacturing technology, portfolio breadth, market reach, and diverse and long-lived products. We will also continue to pursue the three ambitions Rich mentioned. We will act like owners who will own the company for decades. We will adapt 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 be proud to have as a neighbor. When we're successful, our employees, customers, communities, and owners will all benefit. It is this ambition that will guide our decisions in the weeks and months ahead as we navigate these uncertain times. Our best to you and your families.