TXN
#Thanks, <UNK>, and good afternoon everyone
Gross profit in the quarter was $2.66 billion or 64.5% of revenue
From a year ago, gross profit increased primarily due to higher revenue
Gross profit margin increased 240 basis points
Operating expenses in the quarter were $787 million, and on a trailing 12-month basis, were 22% of revenue, within our range of expectations
Over the last 12 months, we have invested $1.5 billion in R&D, an important element of our capital allocation
Acquisition charges were $80 million, all of which was the ongoing amortization of intangibles, which is a noncash expense
Operating profit was $1.79 billion, or 43.4% of revenue
Operating profit was up 27% from the year-ago quarter
Operating margin for Analog was 47%, up from 41.2% a year-ago, and for Embedded Processing was 34.9%, up from 28.2% a year ago
Our focused investment on the best sustainable growth opportunities with differentiated positions enable both businesses to continue to contribute nicely to free cash flow growth
Net income in the third quarter was $1.29 billion or $1.26 per share
This included a $38 million discrete tax benefit that was $18 million higher than our original guidance for the quarter, adding about $0.02 to earnings per share
Let me now comment on our capital management results, starting with our cash generation
Cash flow from operations was $1.72 billion in the quarter, up 18% from a year ago
Capital expenditures were $186 million in the quarter
On a trailing 12-month basis, cash flow from operations was $4.82 billion
Trailing 12-month capital expenditures were $574 million or about 4% of revenue, consistent with our long-term expectation
Free cash flow for the past 12 months was $4.25 billion or 29% of revenue
Our cash flow reflects the strength of our business model
As we have said, we believe free cash flow growth, especially on a per share basis, is most important to maximizing shareholder value in the long term, and will be valued only if it is productively invested in the business or returned to owners
As <UNK> mentioned already, in September we announced we will increase our dividend by 24% and also increase our share repurchase authorizations by $6 billion
Our quarterly dividend went from $0.50 per share to $0.62 per share, or $2.48 annualized
This is our 14th consecutive year of dividend increases
And over the past five years, we have increased the dividend by a compounded average rate of 24%
Our total outstanding repurchase authorization was about $10 billion at the end of third quarter
For the third quarter, we paid $495 million in dividend and repurchased $650 million of our stock, for a total return of $1.15 billion in the third quarter
Over the last 12 months, we paid $1.99 billion in dividends, or about 47% of free cash flow, evidence of their sustainability
Outstanding share count was reduced by 1.5% over the past 12 months and has been reduced by 43% since the end of 2004, when we initiated a program designed to reduce our share count
Total cash returned to owners in the past 12 months was $4.32 billion
These combined returns of dividends and repurchases and our recent announcement to increase the dividend and share repurchase authorizations demonstrate our confidence in our business model and our commitment to return excess cash to our owners
Our balance sheet remains strong with $3.44 billion of cash and short-term investments at the end of the third quarter, 76% of which was owned by the company's U.S
entities
This is consistent with our long-term objective to have onshore cash readily available for multiple uses
Inventory days were 119, up 1 day from a year ago and within our expected range
Our total debt is unchanged at $3.6 billion with a weighted average coupon rate of 1.93%
Turning to our outlook
For the fourth quarter, we expect revenue in the range of $3.57 billion to $3.87 billion and earnings per share in the range of $1.01 to $1.15, which includes an estimated $20 million discrete tax benefit
Our expected annual operating tax rate for 2017 continues to be about 31%
For fourth quarter 2017, we expect our effective tax rate to be about 29%, which includes about $20 million of discrete tax items, up from our previous guidance of $10 million
This is the rate you should use for your model for fourth quarter
For 2018, we're providing you with our quarterly tax rate expectations for both the operating and effective tax rates
You can find this detail on our Investor Relations website under the Financial Summary Data section
Now to wrap up, we remain focused on growing free cash flow per share over the long term and investing to strengthen our competitive advantages
We believe our third quarter results continue to demonstrate our progress
With that, let me turn it back to <UNK>
Yes, <UNK>, thanks for giving me opportunity to talk about that
On free cash flow, it grew 4% on a trailing 12-month basis, and that is compared to a higher number for revenue on the same basis
And the difference is higher working capital, particularly accounts receivables and tax payments
If you look at the accounts receivable from 3Q 2015 to 3Q 2016, that actually drained whereas from 3Q 2016 to 3Q 2017, it built
So that is a source of cash in one case and a use of cash in another case
But, and in the case of the tax payments, we had a higher, disproportionately higher tax payment in the most recent comparison versus the previous trailing 12-month comparison
Yes, I'll take that
For OpEx, we think of that in terms of, from a model standpoint, we think of it as a percent of revenue on a trailing 12-month basis, and for the last couple years, we've actually been running at about 23%
And in the current trailing 12-months, we're about 22% of revenue
So we have said that in a stable environment, which we are, we can run in the bottom half of our expectations of 20% to 25%
So we've been running at about 22%, so that's well within that
Of course to us, OpEx are investments, and obviously that goes for R&D, but even inside of G&A we think of a large portion there as investment
So in R&D of course we're focusing on industrial and automotive, because those are the best markets
where semiconductor growth is happening
But in the G&A front, we have many investments there on ti
com and demand creation just to continue building on our reach of channels, reach of markets, competitive advantage that we have talked about
Before we go to the next caller, I'd like to just make a comment on the previous question on working capital
I want to stress that while our accounts receivables increased in that last comparison, the delta days sales outstanding actually decreased by 1 day
So it's at 34. So that just goes to show you how healthy the account receivable balance is
I wanted just to clarify that
Yes
What I would tell you is that generally what we suggest and what we recommend to analysts and investors to think about our fall through – in the 70% to 75% range
But that is over the long haul, over a relatively long amount of time
In any one quarter, that fall through can be a little different
Now for example, in the comparison versus a year ago, which arguably, I would argue is more relevant as it has more time obviously in between, that was close to an 85% fall through, right
The increase in gross margin was 240 basis points, just as an example of a comparison to the sequential basis
Well, to your point, the profitability of that business has in fact improved significantly
On a year on year basis, profit from operation is up 673 basis points
But at the end of the day, the main objective here is to grow free cash flow
We think that is – we believe that is what really drives value for the owners of the company, so and then return all that free cash flow to the owners
So we're not particularly focused on any one of those percentages because there are many ways to drive that free cash flow and one of them is expanding the margins
But then the other one is just growing the top line at the same margin, right
So that's the key message that the core objective that we're trying to achieve
Book-to-bill was, it was 1.0.
Well, it came in about as expected
So I wouldn't characterize it as a bit light
And as I mentioned earlier on an earlier question, on a trailing 12-month basis, which is how we think is appropriate to look at, is, came in at 22%
I think in the last couple years it's been at 23%
So it's trended a little down over the last few years, but it is well within the bottom half of our expectations of 20% to 25%, which is our expectations when things are stable, which they are now
On gross margins, what we have said before, and we'll continue to say, really hasn't changed our guidance on that is that our general expectation is revenue to pull through at about 70% to 75%
And that's over the long haul, right, not in any one quarter
So you should think about it that way
And as we continue to grow the top line, driven by our investments in analog and embedded from a product standpoint, and industrial, automotive from an end market standpoint, we expect to continue gaining share and that additional revenue to fall through at about those rates
