Perfect. Why don't we go ahead and get started now that the mics are live? My name is John Pitzer. I cover the semiconductor industry here at Credit Suisse. It's my distinct pleasure this morning to welcome everyone to the fireside chat with the management team of Texas Instruments. To my immediate left, Rafael Lizardi, who you all know is the Senior VP and Chief Financial Officer of TI, and to his left, Dave Pahl, who's Vice President and Head of Investor Relations. You know, the format is fireside chat. I'm gonna start out. If you have any questions, please don't be shy, raise your hand. We'll make sure we get you a mic. With that, Rafael, David, first I wanna thank you for joining us today. It's great to have this event live in person. It is. not virtual over Zoom. I really appreciate your participation. You know, Rafael, my first question's always very open-ended. It's a very easy question for TI because it never changes. Can you talk a little bit about your core mission statement and kind of how you view creating value for all of your stakeholders, whether that be customers, employees, suppliers, and importantly, the people in this room? Yeah. It's great to be back, and thanks for the invitation. Our objective is to grow free cash flow per share over the long term. We think of that as the kind of overarching objective for the company. How we do that is one, focus on the best products out there, analog and embedded, the best end market, industrial and automotive. Then we have four competitive advantages that we have built over time, and we continue to strengthen, the broadest portfolio in the industry, about 100,000 different parts, manufacturing and technology. We own our own manufacturing and specifically 300 mm manufacturing. Owning that in our space, analog and embedded, is rare for our competitors. We have a reach of channels that is the broadest as well, and then the diverse and long lead positions that yields. That just puts us in a great place to continue gaining market share. No, that's helpful, and I love the fact that that never changes. I don't think that's changed in the last seven or eight years, which is the key point of a mission statement. I'm wondering if we could spend a little bit just kind of recapping Q3 earnings 'cause and then I wanna hit some of the key questions that I've been getting from investors. You know, you beat your guide for the September quarter, but perhaps not as much as people thought. You guided December down, and I have a couple questions here. One, what do you view as normal seasonality in the December quarter, and was the guide supposed to indicate a better than normal seasonal? The other point is, you're the only broad-based chip company to actually guide sequentially down in December. Especially given your strategy of having more inventory, having more control over your manufacturing, given how tight supply is in the industry, it just looks optically odd. Any explanation that can square the circle would be helpful. Yeah. I'll take the first shot, and Dave, you wanna chime in after that. Sure. I think, first, seasonality is a bit of a misnomer, in my opinion, to begin with, and especially in an environment where in a heated cycle environment, right? You know, you look at, yeah, you can always pick an average, but there's such a wide discrepancy. Divergence. Divergence on that average, right? I don't really, you know, we don't really pay that much attention to that. We put together the forecast based on the range, based on our best information that we have, data points from customers, backlog, inputs from the businesses and our own sense of where things are headed. Dave, anything to add? I think that's good. Yeah. Do you actually think your strategy works against you? Because you were also one of the companies that talked about customers being a little bit more selective about filling out their kits instead of just rush orders, you know, rushing, ordering everything. Is the fact that your customers might have more confidence in your ability to get them the things they need when they need them mean that that you're somewhat of a counter indicator to some other companies that are having more supply issues? Maybe I'll comment. I don't think it works against us. I think first of all, we've got closer direct relationships with our customers. As you remember, John, over the last 10 years, we've been working towards that end, whether that's investment in our sales and apps teams, whether that's investments in ti.com. Just last year, we made investments to transact more business directly with customers. I think that benefits us strategically longer term. We've also taken action as we went into the pandemic to ensure that we had good availability of product and very aggressively built as much inventory and started in a good position there. I think all those things you know work for us not. I wouldn't say against us. End demand is going to be what end demand is, right? Long lead times or non-cancelable orders won't create demand, it won't create market share. If you ask a customer to give you demand 52 weeks out, you know, their visibility doesn't. You know, they can't tell you with precision what their demand is going to be 52 weeks out. We really wanna make it as easy as possible for customers to deal with us. We wanna have that product available. That's not the case in all of our products, as we've talked about before. We're working very hard to make sure that long term we've got the capacity in place to support growth. To add to that, and I'm sure it'll bridge to other questions that you have on this topic. You know, for the last 10-15 years, we have put capacity ahead of demand, and you've known us for a while, and you know that's been the case with our RFAB1 and DMOS6 and others. In addition to that, we've had inventory strategies that are very different than our competitors, where we build inventory ahead of time, that we can do that because of our strategy of focusing on catalog parts that sell to many, many customers, have very low risk of obsolescence, have long product life cycles, et cetera. We are continuing that approach. As you know, our RFAB2 will come online in about six to eight months or so, we'll have production. We acquire a factory in Utah, in Lehi, Utah, in November, we close, and that will come online as far as production in first quarter 2023 or so. Recently, two, three weeks or so, we announced further expansion of factories in Sherman, Texas, just right south of the border from Oklahoma. That space, that area will host as many as four factories over time. We're gonna have our plans to break ground on two of those next year, and those will be ready for production in 2025. That's with the secular growth in this space. We're setting up the company well for growth for the next 10-15 years. Yeah, you preempted my whole set of questions. I figured at some point you were gonna ask all that. By the way, I'm assuming Sherman, we can just contract to SFAB. Is that? We already have a factory there that is 50 years old, and these four factories will go kind of right next to those. Yeah. Got it. Mm-hmm. To your point about growth rates, you guys haven't hosted an analyst day in a while. A bunch of your peers have in the last couple of months. You know, I'll preface this by saying it's always dangerous to change secular growth rates in a year that's been benefiting from cyclical tailwinds, but they did it anyhow. Everyone's talking about a growth rate that looks like 2x, maybe historical. Now, I like that 'cause that's kind of in line with what our structural thesis on semis have been. As you look at the fab expansion, I think a lot of people were surprised, especially by the Sherman announcement, even though I think people understand it's far out. You know, we look at sort of our RFAB2, you look at LFAB, you know, there's probably $5 billion worth of revenue that you can grow into with those two fabs. Are you signaling to us that you also believe that growth is accelerating? Or would you be doing this in a, you know, if we were in a 3%-5% world for semiconductor growth versus a 6%-8%? Yeah. Few things on that. One, we are not projecting higher growth rates than what we've had in the past. What we're doing is we are preparing the company for the possibility that that happens. In our case, the bet is so asymmetric, right? The potential upside is so high in terms of revenue margins, you know, free cash flow, free cash flow per share at the end of the day, versus the cost of building, I mean, two buildings in Sherman. Yeah, it is about $1 billion each, so it's, you know, it's not nothing. Yep. It's from an optionality standpoint, you spend the money, you build the buildings, and then if the demand is not quite what you thought, you can always let them sit, right? That's how we're thinking about it. If the demand does come in stronger than in previous years, then we're ready for it. You've already signaled that you're gonna wait till the allocation day call to talk about CapEx for next year. That's right. I doubt you're gonna wanna make news on this stage. I'm gonna try. Correct. I guess one of the things that's interesting to me is next year will clearly be an above CapEx to rev year for TI. Whatever the number ends up being, it's gonna be above trend. Almost every one of your peers are also above trend. They're all claiming that this is just timing, cyclical. I guess there's an element of that, but I'm just kinda curious. There's not a lot of memory fabs that go out of business anymore, which you guys have done better than anyone, buying cheap equipment from companies that go out of business. Should we just start to think about a structurally higher sort of capital intensity to the business? To put it in perspective, we're not talking about digital, where it's 25%-50% of your revenue. We're talking maybe 3%-4%, going to 5%-6%. CapEx is going up. You figured that. Yes. You figured that out, you know, a few quarters ago, I think. We've been talking about that, so that was not a surprise to anybody when we announced Sherman, right? By how much exactly? In February, we're gonna give you guys a better framework, a good framework to think about that. Yes, it is going up both in dollars and percent of revenue. At the end of the day, those are investments, right? We invest that money because over the long term, that's gonna drive higher revenue, which drives, of course, a higher free cash flow. The other thing I would tell you. Oh, you mentioned the used fab. You know, in the past, you know, we were fortunate in 2011 that we were able to buy key equipment. We were fortunate, or maybe not fortunate, but we had the good vision to have a factory, a building ready. Mm-hmm for our RFAB1. That worked out really well, and that gave us essentially 10 years. That combined with DMOS6 and, you know, some other assets we had, on a manufacturing front, that gave us about 10 years. Now we're looking at the next 10-15 years, you know, used versus fully new, roughly speaking, you know, we're talking $3 billion all-in investment versus about a $6 billion all-in investment for a fab. Yeah, that's $3 billion. That's a lot of money. These factories, once they're fully equipped, they produce $5 billion-$6 billion a year of annual revenue, depending on the mix and depending on things. They can last, you know, we're about to shut down factories that lasted 50 years, right? You know, the $3 billion investment does, in the big scheme of things, it's not gonna deter us from making the investment. Well, I'm curious, though, 'cause I know you guys look at a lot of data, and if I kinda look historically, your CapEx to rev ratio bounces around. If you kinda smooth it out over, like, a 12-month basis, it's sitting at, like, 4%-4.5% of revenue is kind of the long-term trend. Does that still hold after this period of accelerated investment, or do you think actually there is an argument to be made that the capital intensity is just going up? It's going up, at least for the next four or five years. Again, yeah, we'll give you good details on that, in February. I want to talk a little. Maybe I'll just add, as Rafael in his opening remarks talked about, you know, manufacturing and technology is one of our competitive advantages. Mm-hmm. You know, investment in that, we're gonna build 300 mm factories, and that just gives us lower costs, which is fairly obvious versus what we've had in place. But it also gives us more control of our manufacturing and control of that whole supply chain as well, right? As we look at that, you look at our business model going forward, free cash flow growth will be predicated on driving top line. To drive top line, you've got to have manufacturing assets in place to be able to grow that. That's gonna require investment. You know, so the great news is as we make those investments, the business will get stronger, because we'll have more 300 mm in that footprint as we grow. You know, like any investment, it's negative cash flow in the beginning, right? We're confident that this is gonna yield good fruits over the long term, versus not doing it and relying on a foundry, right? The costs are higher there. Yes. You don't control your supply, as Dave was mentioning. Rafael, it's nice to see that world governments have finally figured out something that I think you and Dave have known for a while. You're in a pretty strategically important industry, and you're seeing a move by world governments to try to incentivize domestic production. Now, I think most of the time on Wall Street, we focus on bleeding edge, but there's a lot of what you do which is very mission critical, you know. If not bleeding edge, it's mission critical. I mean Absolutely. How should we think about kind of the CHIPS Act? Yeah ... as it pertains to kind of your capital investment plans? A couple things on what you say, yeah. On the type of equipment that we focus on, type of technologies, 45 nanometers-130 nanometers, that is the optimal area for the products we do, and there's some technical and different reasons for that. Just think of that as the optimal level for analog and embedded, which works very well for us. On the other angle of your question, you know, we do believe, and it's very important, we've talked about it for many years, the United States needs to have parity as far as the competitive landscape versus other countries, in order to incentivize production here, right? Generally that's to the tax rate for many years, the U.S. was at a disadvantage, and in 2017 with the law that was passed, that essentially put us at parity. Not quite an advantage, I would argue, but at least on an even level playing field. With that, you know, we've decided to make these investments. Beyond that, as you alluded to, there's the CHIPS Act, there's the FABS Act within the Build Back Better legislation. Neither one of those has passed yet, so we have to wait and see if those pass, and if they do, in what form. They're also increasing the tax rate according to the current version of the marginally. Mm-hmm. Much less than it could have gone. Yes. That is good news, even though it's going up slightly. Once that legislation is out, we'll look at that, and we'll see what it means, and whatever programs we can take advantage of, we will. In the vein of sort of capital allocation and use of cash, I wanna talk buybacks. Yeah. You guys have been fantastic over a long period of time, actually retiring your share count. You know, I think it's 25% of the company has been bought back over, I don't know if it's a 10 or 15-year period, but it's a meaningful- It's at 44%, I think. Over since 2004. Since 2004. You're not shy at returning cash to shareholders. That said, over the last couple of quarters, it's been noticed by everybody. I'm sure I'm not the first person to ask this question. Hey, why has the buyback not been as aggressive? What parameters can you give us? Is this you making a call on the CapEx you're going to be laying out over the next several years? Is it you trying to make a call on the cycle? Is it you trying to make a call on the valuation of your equity? Let me give you my, first the bigger picture, and then I'll try to address some of the nuanced questions. Big picture, our commitment to return all free cash flow to the owners of the company has been solid for, you know, 15, 16, 17 years, and will continue to be over the long term. That doesn't mean any one quarter or even any one year, right? And look at our track record on that. We do that through dividends and buybacks, both of those, right? And if you look at that, dividends versus buybacks, and it's changed from year to year depending on what's going on, obviously buybacks are more discretionary. The proportion of dividends to that overall return has increased significantly over the last, you know, over that time from 18 years to the point where now we're running close to $4.3 billion or so per year, essentially committed to dividends. The lack of buyback over the last couple quarters? Should we read into it? We have bought back. Yeah Shares every quarter over the last four or five quarters. In fact, I think every quarter for 18 years. But it all depends, you know. We have increased the dividend over that time. We have accumulated cash, as you probably noticed as well. We just got done talking about the higher expected CapEx. Those things are not coincidence, right? One of the questions I always get in relationship to the buyback is M&A. You guys have done a fantastic job with your M&A. I think you've done a fantastic job getting out of businesses as well. How do you think about M&A from sort of these levels? Is it still an analog-focused M&A strategy, not an embedded-focused M&A strategy? Correct. It's Analog focused, it's Auto and Industrial focused, so it matches well with our strategy. Frankly, big picture. We're not missing any big pieces of our portfolio, right? Which would be the catalyst for an acquisition, at least a big one, right? We haven't done any acquisition, big or small, since National in 2011. There's really not a catalyst out there to do that. However, we consider things, right? You know, the bankers know that we have the cash. You know, we have the ability to do acquisitions. We look at things. We have a team that looks at these things. In addition to a strategic fit, you have to look at the price, and we haven't seen anything that makes sense to us. Rafael, it's a good segue to talk about the embedded business overall. Can you help us understand again why that's not part of the M&A strategy? I know you've said in the past that you don't see the leverage of buying a lot of different MCU families and putting together. That said, there was one of your peers that's actually done very well with that strategy over time. If I juxtapose that with the business that you're clearly going through some sort of repositioning. The growth in embedded, I think by your own admission, hasn't been as strong as you thought. Why not augment that with M&A? Question number one. Question number two, talk about the organic funnel for the embedded business. What, when should we start to see growth rates begin to accelerate? Yeah. Given what you have in your design funnel there? I'll take the first shot, and Dave, you wanna Sure. A few things. Just as you said, the way we think of the embedded business, the play there is to leverage the platforms. The fewer platforms that you have, the better. That is different than the way Analog works. It's not so much the platforms. You can more plug in an acquisition and go from there. Whereas with embedded, the customers kind of marry the platform, and they don't wanna leave. You have to support multiple platforms, and you don't get the leverage. The other one you alluded to a competitor. You know, competitors have different focus- Mm-hmm. The way we focus is on long-term growth of free cash flow per share. I would argue that, you know, the way we do things, the way we run the company optimizes that. The way other companies run their companies, they don't necessarily optimize that, which we think over the long term, not any one quarter, even any one year, over the long term, that's what drives shareholder value. On the organic side, Dave? Yeah. On the organic side, as we've talked about, our first objective with that business was to get it to stabilize. I think we're pleased with the progress that we've seen there. You know, and what we're trying to do is to build a high quality business and one that's going to contribute to free cash flow over the long term. We believe that that market and the business and the position that we have will do that. That's why we're investing in it, and it'll take time. We haven't set an artificial boundary or a, you know, stake in the ground that says at this quarter, it's gotta be growing at this rate. We want that business to be built, and high quality and diverse positions, both from a product standpoint as well as from a market standpoint. You know, a couple of years from now, we'll look back and we believe we'll be just as pleased with the progress of the growth, as we are with just the progress of getting the business stabilized. Dave, can you unpack that a little bit? What end markets are you particularly focused on in embedded to reaccelerate organic growth? The reason why I ask the question, you know, there's clearly a different, you know, design-in time for- Right. Auto industrial versus consumer, as an example. That's right. There will be opportunities in all markets. The types of products that we're building. The focus of the company is disproportionately towards industrial and automotive. Again, there'll be opportunities in those other markets that we'll see and we'll take advantage of those. There will be a priority in industrial and automotive. We're not building large SoCs that Rafael and I will be talking about, a design win pipeline that will show up on any given quarter. It will be high quality designs that'll be, you know, products that we sell to multiple customers that will build revenue over time. Rafael, I had a couple of questions about the scale advantage you guys have been talking about. Clearly, when you look at manufacturing, when you look at your distribution, that advantage has been there. It's unclear, though, whether or not it's actually driven significant outsized growth. Again, I think part of the appeal of your business is that you're in markets where things don't change all that quickly, and that's a good thing. I guess I'm curious, you know, your closest competitor just closed an acquisition. It looks like that gap in your scale advantage is starting to close. I was actually, as I was prepping for questions, and I know you guys don't look at the business this way, but you know, they're now spending more in R&D than you guys are, which is kind of... I think that I don't know what next year is gonna look like 'cause they've got some synergies, and I don't know what your organic investment's going to look like. That was a little bit surprising to me. Can you help us understand, you know, what advantage you think or what benefits you think you got from scale over the last five years? Now that that gap's closing, how should we think about the competitive position? Yeah. Again, I'll give you my take, and Dave, you wanna chime in. Sure. You never hear us talk about scale advantage. We don't think of scale as an advantage by itself. It's the pieces underneath that, right? The broadest portfolio in the industry, that's a competitive advantage. The manufacturing technology, having our own manufacturing technology and specifically 300 mm, which that competitor that you're referring to does not have, they don't have 300 mm. Yep. They're not expanding their manufacturing. Those are the real advantages. On the R&D front, there are some advantages on size, but the more important thing is looking at what are the opportunities in the next five or 10 years, where do I wanna put our money, where we think we're gonna get the best return or at least a return that's above the required rate, right? You'd be surprised, you know, of X amount of dollars that we spend in one year, not all of that is successful. The idea, you know, the most optimal way to address that is not to spend more, is to make that R&D work more efficiently and get the success rate higher. Now, within that, we have been, you know, increasing R&D marginally. Overall, maybe that's not the case. Mm-hmm. Inside of certain spaces, because we have been reprofiling some things. You know, over time, we will continue to increase where it makes sense, but the bigger picture is to invest where it makes sense, where we're gonna get the best return over time. Well, I've actually asked this question in the exact opposite way historically. Have you? Well, to you. I've said, "Hey, you guys done a great job bringing down your R&D as a% of revenue burden." I would argue that actually helps the multiple, because if it, you know, the less you need to spend to maintain kind of your dominant position, the more valuable the asset is. Given the focus in industrial and auto, you would think longer duration cycles would mean that could actually continue to creep lower. I'm now kind of throwing that back on its face and saying, "Hey, you're at 10, they're at 15% of revenue. Is that the right balance?" Again, I know you don't think about the business, the R&D as a% of revenue. You made a great point on the industrial automotive space. That is. You know, industrial automotive are great for many reasons. One is the angle that you just talked about, just the investments, just pay back a lot better. And not initially, because you invest R&D and then you don't get the revenue nearly as quick as you do- Yep. with personal electronics, but you get it over a long time. You get it from many customers. It's more sustainable, it's more diverse. You know, those customers tend to be less sensitive about pricing and different things. There are a lot of advantages over the long term to investing in those spaces, and that's also part of the reason why we look the way we look. I don't wanna monopolize the conversation. I haven't seen any hands go up, but I haven't been looking all that closely. Are there any questions in the audience? Rafael, can you talk a little bit about the distribution strategy? It was a headwind to revenue, you know, about a year and a half ago. Is that now fully behind you? You know, help us understand kind of the margin benefit or, you know, the customer closeness benefit that you get from your desire to go more direct. Yeah. Roughly speaking, to get everybody on the same page here, about, was it two years ago, three years ago? Yeah. We announced that we are shrinking our distribution footprint and moving closer with our customers. More direct engagements with our customers. We have roughly moved from 35%, where we were, 35% direct, 65% distribution to we finished last year. About flipped that, right? We about flipped that last year, and we've continued to make progress, and we'll give you more details on that in February. Essentially, we have continued to make progress on that. The main reason for that is the strategic advantages that you get, the better engagement, higher engagement that you get with your customers. Anytime you have an intermediary between you and your customers, that's a problem, right? It's a potential problem, because that intermediary, they're optimizing for their benefit, not your benefit. You can't just announce that and do it without a lot of preparation, right? We have done a lot of things to make that engagement more fluid. One of them is our ti.com engagement- Mm-hmm. That's another topic we're gonna talk about in February to some detail. We have expanded to close to 50 countries where customers can buy with their currency, in 20 of those with their currency. We do the importation of record for them, which is a big deal. Before, we were not doing that, and imagine having to order and you do your own importation from a foreign country, right? The payment terms and the payment processing, we facilitated that. The logistics, we've expanded product distribution centers around the world, particularly in China to facilitate that. Out of our Shenzhen product distribution center, 2/3 of our shipments ship the same day that they're ordered. Those are the type of things that we're doing that facilitate, in addition to the engagement with the actual design, engineer, who now, by virtue of ordering online, having all the tools online, has a closer engagement. We know more about those engineers, what they really want, how we can help them better. Rafael, as a guy who works in the business who is the middleman, I understand when you cut out the middleman you tend to retain more- Less. more profitability. Less friction. Is that the driver behind this, or should there be, I guess, a revenue growth driver behind this as well? Like, if you're truly improving the engagement. The reason why I ask is, I think it's clear in this bucket that there's been benefits. It's a little bit less clear here, and again, this might just be the long duration nature of the markets that you're in. As you think about the philosophy, is it more about, you know, your margin, or is it more about your revenue growth? Absolutely more about revenue growth and gaining share. Absolutely. No question about it. There is a side benefit on the margin, okay? But that is, you know, incidental, secondary, and relatively marginal. No pun intended. But it is about gaining share. Remember, share gains, that happens over the long term, and we're in the middle of a cycle. You know, we're confident we have gained and we you know, gained share over this time, and we'll continue, but you cannot measure in any, you know, any short amount of time. Great. With that, we've come to the end of this session, but I'd like to thank both Rafael and Dave for joining us this morning, as well as everyone in the room. This was a great conversation. Thank you. Thank you. Thank you.