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    Texas Instruments Inc (TXN)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$174.12April 1, 2024
    Final Price$194.60July 1, 2024
    Price Change$20.48
    % Change+11.76%

    What went well

    • Investment in geopolitically dependable, large-scale, and affordable 300-millimeter manufacturing capacity in the U.S. is attracting increased customer interest and positioning Texas Instruments to gain market share.
    • Robust sequential growth in China indicates that inventory corrections are largely behind, signaling potential growth opportunities as demand recovers.
    • Strengthening of the embedded processing business, with an improved product portfolio and increased design win momentum in industrial and automotive markets, positions the company for significant future growth and free cash flow per share.

    What went wrong

    • Texas Instruments is experiencing declines in key markets, with the industrial market down low single digits and the automotive market down mid-single digits in Q2 2024. This marks the third consecutive quarter of decline in automotive revenue, which is down about 13% from where the revenue peaked.
    • The company is facing increased depreciation expenses due to significant capital investments, which may pressure gross margins in the coming quarters. Depreciation is expected to increase by approximately $100 million per quarter in 2024, impacting profitability.
    • Embedded Processing revenue is declining, with sequential declines and an accelerated year-over-year decline in Q2 2024. The embedded business is facing corrections as customers adjust their inventories, and it is also absorbing a disproportionate amount of fixed costs, posing a headwind to operating margins.

    Q&A Summary

    1. China Market Recovery
      Q: How did China revenue perform this quarter?
      A: TI's China business grew sequentially by about 20% compared to the first quarter, marking a strong recovery after seven quarters of sequential decline. All markets in China, including automotive and industrial, showed strong growth between 15% and over 20%, indicating customers have worked down their inventories and are now shipping to end demand.

    2. Gross Margin Outlook
      Q: Are gross margins bottoming now?
      A: Gross margins could be bottoming, depending on revenue trends. Depreciation is expected to increase by $100 million per quarter next year, but as utilization rates rise and revenues grow, margins may improve. With a fall-through of 75% to 85% excluding depreciation, gross margins can be modeled accordingly.

    3. CapEx and Long-Term Growth
      Q: What is the outlook for CapEx and long-term revenue growth?
      A: TI remains committed to its CapEx strategy, supporting revenue growth and providing flexibility. More details will be provided at the upcoming capital management call in August. For 2024, depreciation is expected to be between $1.5 billion and $1.6 billion , and CapEx is planned at $5 billion.

    4. Competition in China
      Q: Is increased Chinese capacity a concern for pricing and supply?
      A: Competition in China has intensified over the past several years, with ambitious local competitors offering more than just simple parts. Despite this, TI can compete and win business at attractive margins, aiming to continue gaining market share in China.

    5. Embedded Processing Performance
      Q: Why did Embedded Processing revenue decline?
      A: The decline is due to customers adjusting their inventories in industrial and automotive markets that peaked later. However, the embedded business is strengthening, with an improved product portfolio and strong design win momentum in areas like real-time control for EVs, connectivity, and radar systems.

    6. Industrial and Automotive Demand
      Q: Are industrial and automotive markets bottoming?
      A: In industrial, about half the sectors are forming a bottom, while others continue to decline. The automotive market has declined for three consecutive quarters, down about 13% from its revenue peak, but the decline is shallow compared to other markets.

    7. Bookings and Order Trends
      Q: Are bookings increasing month over month?
      A: Revenue and orders increased throughout the quarter, which is typical for the second quarter. Cancellations continue to decline, and lead times are stable, indicating supply and demand are becoming more balanced.

    8. Customer Inventory Behavior
      Q: Will high inventory prevent future shortages?
      A: TI's investments in capacity and inventory aim to improve customer service and prepare for future upturns. By maintaining high service levels and short lead times, the company hopes to discourage customers from holding excess inventory.

    9. ti.com Investments
      Q: What are the trends and investments in ti.com?
      A: TI continues to invest strategically in ti.com to digitize customer interactions and improve service. While orders through ti.com are down from their peak, its long-term value is significant, enabling customers to access inventory and automate ordering processes.

    10. CHIPS Act Benefits
      Q: What's the update on CHIPS Act funding?
      A: TI is still going through the process of obtaining CHIPS Act grants. The company has accrued about $1.8 billion under the 25% investment tax credit, which has begun reducing depreciation expenses. TI received $312 million in cash benefits in the second quarter and expects another $200 million in the third quarter, totaling $1 billion for 2024.

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