Texas Instruments Incorporated : TXN-USQ Transcript 2025-06-04

Published: 2025-06-07 14:31:06 ET TXN

Published on 06/07/2025 at 14:31

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EDITED TRANSCRIPT

TXN.OQ - Texas Instruments Inc at Bank of America Global Technology

Conference

EVENT DATE/TIME: JUNE 04, 2025 / 6:20PM GMT

OVERVIEW:

Company Summary

Good morning. Welcome back. Really happy to have the management team from Texas Instruments join us today, Rafael Lizardi, chief financial officer, and Dave Pahl, head of Investor Relations. I'm Vivek Arya from the BofA semiconductor team.

‌Typical fireside session. I'll have my questions, but please feel free to raise your hand if you would like to bring up anything. But really delighted to see you, Rafael and Dave. I appreciate you joining us.

Thank you. Good morning. Happy to be here.

So maybe let's start, Rafael, with the state of the union, how you're seeing the demand environment shape up. Macro crosscurrents obviously, but how are you seeing the demand environment shape up right now versus what you thought at the start of the year?

Yeah. No. As we said at the last earnings call, we're starting to see a broad recovery. In this space is what appears to be the beginning of a semiconductor cyclical upturn, and it's coming in at a time when we are very well prepared -- bless you. Very well prepared for it.

We've been investing in inventory, but more importantly on CapEx over the last four or so years. And we have RFAB2, we have SM1, SM2. We have LFAB1 and LFAB2 at different levels of completion, and we're ready for what the market throws at us.

Okay. When you came up with the CapEx plan, Rafael, a few years ago, at that time, the industry looked very different than what it is today. What would you have done differently, right, if you had a better sense of how this market was going to go through? Or maybe a better question to ask is, what would you like to do differently now, given where the industry is?

No, absolutely. It is what we are doing, which is the capacity expansion, and to do that well ahead of demand and to do that in the phases that we're doing it.

So Phase 1 -- we've described our plan as having three phases. The first phase is transferring products that run externally internally and growing our base. The second phase is to build buildings that will be required for growth and to qualify those new factories. And then once we get to the third phase, it's all about incremental capacity. So the first two phases require a significant amount of CapEx. But once we get to the third phase, it's just incremental CapEx to match that capacity to expected demand.

I see. Now a skeptic would say the industry, right, not just TI specifically, if the industry was not very good at spotting when it was overshipping, why should we believe the industry now when it says it's been undershipping, right? So what checks do you have in the system to make sure that this -- what you are seeing as a recovery is not just pull-ins and some temporary because of the macroeconomic issues -- that this is true recovery?

Yeah. Big picture, we look at macro trends. And when I say macro trends, I mean, semiconductor macro trends. Go to slide 19 of our capital management presentation, and you'll see what I'm talking about. And it's over the long term, this industry is very cyclical, and it goes up and it goes down. And it's pretty clear that now it's hit bottom a couple of quarters ago, maybe last quarter, and now is on a recovery. So that's one.

But frankly, more importantly, we're just prepared for whatever the market throws at us. If it happens to be that this recovery is going to delay some time, then it's okay. The inventory that we built is very safe. It's very long-lasting. We hardly ever scrap parts, and we do it very little as a percent of our revenue. So our business model is such that it protects the downside in those situations.

If you look at that chart, what -- in your capital management presentation and what I've seen right across the SIA and all the data, it has shown that in the last three cycles, semiconductor sales have gone up for like 10 quarters, then they come down for four quarters, right? So it's like 2.5 years up, one year down situation.

So if we are starting on this upcycle, do you think we are at the start of what is normally a 2.5-year upcycle? Or is -- I know there's no cycle that will be the same, but where would you describe where we are, in like very early stages, middle stages? Or how would you describe where we are?

Yeah. And of course, to your point, you alluded to it, but it's very difficult to draw conclusions from three or four data points. It's all we have in the last decade in terms of how many cycles we've had. So it's really not enough for a distribution, right? But our sense is that we're early in the upturn, so probably in the first or second inning. And then we still have ways to go. History seems to -- if you look at the previous peaks, 2014 was a peak, 2018 was a peak, 2022 was a peak. So it's kind of every four years. So potentially '26 is a peak year, but that could -- I wouldn't be surprised given the dynamics of the last downturn, that could extend to '27. But at the end of the day, we'll be prepared for any scenario.

I see. And one of the interesting analysis TI has shown in that peak to peak is that across peaks, you have grown, what is it like 40%, right, or so?

7% CAGR.

7% CAGR.

That probably works out to about 40%, right.

Exactly. So you think we should expect the same from '22 to whether it happens to be '26 or '27?

Again, unclear. It depends, but we want to be prepared for that. So that's why when we put the framework of the various revenue levels that we could get to in 2026, one of them was -- it was as low as $20 billion and as high as $26 billion. And again, that could happen in 2027 instead of '26, but the $26 billion, that was a representative of a 7% CAGR over four years.

I see. What does $26 billion mean, Rafael, in practice? Does it mean that you will have deployed capacity that can support $26 billion in sales or you have the capability to be up to $26 billion, i.e., let's assume that in '26 or '27, your top line is, I don't know, $20 billion, $21 billion, $22 billion, right, some number lower than that. How does that reflect in your financials? What is the cost of getting that?

Yeah. So we are going to be prepared for that level of revenue in terms of capacity, in terms of inventory. If instead we hit -- and we -- as you know, we're going -- later this year, we're going to tell the market if we're going to target $2 billion or $5 billion for CapEx next year. So that plays into it. So we still have some flexibility on that front.

But regardless, if we don't get -- I think maybe where you're getting to, if we don't get all the way to $24 billion, $26 billion, we'll probably have some excess capacity versus what we could have done because -- but that's the dynamic of this industry. If you don't have the capacity, you're for sure not going to get the revenue. Now you've got to have the capacity in place.

The good news is that capacity is long-lived. So it's okay to have it ahead of time. And if we don't use it this time around, you use it in the future. We're about to close a factory in Texas that's 60 years old, and it has equipment that -- some equipment is probably 60 years old, but most of it is probably 20, 30 years old. So that equipment lasts for a long time.

Got it. I guess, a different way of asking the question is that, even if you are at peak sales in one of those years, hypothetically, but you're not at the installed capacity level, does it mean that you may not be at peak gross margins or peak free cash flow? Like how does that delta reflect in your financials?

Well, let me answer it this way. The way we are modeling -- the way we were asking you or suggesting that you model our gross margin -- which then falls through to free cash flow per share, which is what we focus on -- is to use 75% to 85% fall-through and then adjust for depreciation, which, of course, depreciation is noncash, right? But you got to adjust for that in order to get to the gross margin. So that 75% to 85% includes most scenarios.

So for example, if we are at the higher end of that revenue, you're probably up to 85%. And that accounts for the fact that you'll be highly utilized and therefore, you get better fall-through. If you're at the lower end of those revenue scenarios, you'll be at the lower end of that fall-through, and therefore, your gross margin will be lower.

But in any case, I think what we modeled was the $22 billion, $24 billion and $26 billion scenario will get us back to the low to mid-60%s gross margins and only the $20 billion scenario would keep us in the high-50%s gross margin.

Got it. Makes sense. And then if you look at the $2 billion to $5 billion CapEx range for next year, right, based on whatever consensus expectations are, and it doesn't have to be the right number, it says that your CapEx intensity, even when you tone CapEx down to what maybe a more normalized level is still quite high, right? 10%-plus.

And as long as your top line continues to grow and you're spending at least -- and if your top line is in the $20 billion-plus range and your CapEx is in the $2 billion-plus range, it stays that your CapEx intensity, right, will consistently be double digit. Is that a fair representation of CapEx intensity?

Yes and no. It is -- I think it's factual what you're concluding, or it's a good conclusion. But it's only because '26 still includes some CapEx that is for Phase 2, meaning building buildings. And you cannot -- it's hard to build half a building, right? So you just build a full building, and LFAB2 is a pretty expensive fab, and we're going to be spending money on LFAB2 in 2026, even in 2027.

So once we get to Phase 3, which is incremental, that's when we're on a more steady state on CapEx intensity. And what we have suggested that is a good way to model is pick a long-term growth rate for revenue, say, 5% to make the math easy, and CapEx intensity should be 1.2 times that. So 6% CapEx as a percent of revenue. If instead it's 7% revenue growth over the long term, then CapEx intensity is 8.4%. And that is before ITC incentives and anything on grants. So that's a gross CapEx number that then comes down after we get incentives.

Got it. Makes sense. But $2 billion is the minimum, right, you would say to support a $20 billion-plus sales.

Disclaimer

Texas Instruments Incorporated published this content on June 07, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on June 07, 2025 at 18:30 UTC.