Good day, everyone, and welcome to the Texas Instruments 4Q '18 and 2018 Year-End Earnings Release Conference. Today's call is being recorded. At this time, I'd like to turn the conference over to Dave Pahl. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining our fourth quarter and 2018 earnings conference call. Rafael Lizardi, TI's Chief Financial Officer, is with me today. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. A replay will be available through the web. This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in the earnings release published today, as well as TI's most recent SEC filings for a more complete description. First, let me provide some information that's important for your calendars. We plan to hold a call to review our Capital Management Strategy on February 5 at 10 AM Central Time. Similar to what we have done in the past, Rafael and I will provide insight into our strategy. For today's call, let me start by summarizing what Rafael and I will be reviewing. I'll be covering three topics: first, a high-level summary of the financial results for the fourth quarter. Second, I'll provide some details of the fourth quarter by segment and end market, and I'll include some additional color in light of the market weakness we are currently experiencing. And finally, since this is the end of a calendar year, I will provide a summary of our performance by end market for 2018. Rafael will then review profitability, capital management results and the outlook. We'll then open the call for Q&A. Starting with the high-level summary of our fourth quarter financial results; the weakness in demand for our products that began in the third quarter continued into…

Thanks, Dave, and good afternoon everyone. Gross profit in the quarter was $2.41 billion, or 64.8% of revenue. From a year ago, gross profit decreased primarily due to lower revenue and reduced factory loadings. Gross profit margin decreased 30 basis points. Operating expenses in the quarter were $814 million. Operating expenses for the year were up 1% and were 20.5% of revenue, within our range of expectations. For the year, we have invested $1.56 billion in R&D, an important element of our capital allocation. Acquisition charges, a non-cash expense, were $79 million. Acquisition charges will be about $80 million per quarter through the third quarter, and then decline to about $50 million per quarter for two remaining years. Operating profit was $1.52 billion, or 40.8% of revenue. Operating profit was down 3% from the year ago quarter. Operating margin for Analog was 46.7%, and for Embedded Processing was 29.6%. Our focused investments under best sustainable growth opportunities with differentiated positions enable both businesses to continue to contribute nicely to free cash flow growth overtime. Net income in the fourth quarter was $1.24 billion, or $1.27 per share, which included a $0.01 cent discrete tax benefit not in our prior outlook, as we have discussed. As a reminder, the year ago quarter included non-cash charges associated with the tax law changes. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $2.15 billion in the quarter, up 11% from a year ago. Capital expenditures were $323 million in the quarter. In the fourth quarter, we paid $736 million in dividends and repurchased $2.01 billion of our own stock for a total return to owners of $2.75 billion in the fourth quarter. Our balance sheet remains strong with $4.23 billion of cash and…

Thanks, Rafael. Operator, you can now open the lines up for questions. In order to provide as any of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator?

We will take our first question from Vivek Arya with Bank of America.

I'm curious, how are you managing your utilization in this downturn that you are seeing? I know Rafael, you mentioned that you have long-lived parts but how are you managing utilization? And are you making any distinction by the end-market that the specific part is going into? And as part of that, should we continue to assume the same 75% or so incremental gross margin fall-through?

So let me answer the last one first, yes. And now let me go back to your question. So as I -- there is a bit of an echo on the call, but as I -- as we talked a lot on the call 90 days ago, we have reduced our wafer starts to align our operating plan better with our revenue expectations; we did that in fourth quarter, and we are doing that again in the first quarter. That does drive lower factory loadings, and that does have a P&L effect but the way we're thinking about it is as an owner, is from a cash standpoint. So inventory is a use of cash, as we drive down inventory that actually helps cash. And more importantly, it sets us up to support our revenue expectations for the coming year. As to revenue expectations, those revenue expectations change overtime, then we'll adjust the factory loadings and utilization in order to manage that appropriately.

And I'll just add to the second part of your question; we've got tens of thousands of products across 100,000 customers, so you can imagine the complexity of that planning. The strongest signal that we get is the orders from customers, as well as the demand signals that we get through our consignment programs. So as we go through and planned wafer starts, that is -- that's what we pay close attention to. And obviously in a time like this, we'll be very diligent in watching that, and then proactively moving when we need to. So with that, do you have a follow-up Vivek?

So the second part is, I know you mentioned that it's hard to predict when we come out of this downturn. But are there any other signs that you look at, even if there are qualitative, that can give us some indication whether this is a one or two or three quarter issue? I understand it's very trade dependent but have you seen cancellations that are any different or similar to prior downturns? Any other color that you could help -- that you could give us to help us try and at least predict somewhat when we come out of this would be very useful. Thank you.

Yes Vivek, so maybe just a couple of things. I think when we look at different things that we can look at like cancellations, they were up in the quarter, but just up a little. Lead times, overall, they continue to be stable. We can always find pockets where we're working aggressively with customers to close but by and far, they tend to be very stable. So we'll look at all of those signals. I think on the broader view, I've been in the industry for over 30 years now, and we looked at data over that period of time, and I've been through 9 up cycles, and obviously, we're entering into the ninth down cycle. And if you stare at the data, and I've seen in your reports, Vivek, that you've done some analysis on that too, there is no typical or average to those numbers but if you had to pick a number it's probably around the 12 months that a cycle could last. And things like that trade tensions could lengthen that, but it doesn't mean it has to be that long; as you know, it could be longer or shorter than that. So again, the best signal that we get is those orders from customers. Rafael, you want to add to that?

Yes, just to add to that, we are proactively setting the operating plan so that we can manage whatever comes at us. So it's at a level that if we can run sideways for a while, we are prepared to support our potential snapback. Or if it's deeper and longer, then we have to make further adjustments but we are in a good position to make those adjustments and protect the cash flow and have the company in a position going forward.

We'll move to John Pitzer with Credit Suisse.

Just Rafael, going back to kind of utilization and inventory; I know you said in your prepared comments, you'll be above sort of your inventory targets for next several quarters. I'm just kind of curious relative to how you see the world today and what action you've already taken on utilization? Do you think 152 days will represent kind of the peak in inventory days or would you expect it to migrate to higher before migrating lower? And I guess as you answer the question, if you could just remind us with the consignment plan, kind of -- what are the new targets for inventory longer term?

Yes, so that's a good question, let me just give you a few things to think about on that. First, as I said before, at the end of the day our objective here is to maximize long-term growth of free cash flow, so that's how we think about all these norms [ph]. Loadings and inventory is one of them, CapEx is another one, that all we're doing is trying to maximize that long-term growth. With inventory, as we say, we see value in owning that inventory, that's part of the reason why we are building that low volume, those low-volume buffer that we talked about is also the reason why we are increasing the consignment inventory. And that does push -- put upward pressure on inventory. At the same time, we -- overall we have lowered the operating plan, so that is to control the cash that's used for inventory, more or so than any particular inventory days target. Now to get to the heart of your specific question, it depends, right. So if this thing gets weaker, then inventory days could theoretically go up higher than 152. If it stays above stable, then over one, two or three quarters, we'll get back to the insider range.

Then Dave, as a follow-up, you talked about sort of -- there has been times where discrepancy in growth between Analog and Embedded; I'm wondering if you could just help us understand kind of from an end market perspective, where the discrepancy is sort of the largest? For example; I know in the comm space, there is a really good content story on the Analog side that might not be there on the Embedded side. So when you look at the difference of growth rates, is there any sort of end market color you can give us?

Yes, and certainly, both of those segments do have different end market exposure. We talked about the benefits that Analog is staying in comms equipment. You know, most of our PE revenues in Analog is well, so that's the difference, we do have some inside of Embedded. But -- and John, if you look at year-over-year growth rates for as long as we've had the segments out there, you'll notice in times that they are actually moving in opposite directions but overtime, if you look at those numbers, they really do perform more similar. And then, also if you look at just industry data for the Analog market and compare that to the Embedded market, those behave differently. So I think that that's just kind of the facts of how those two businesses behave. Thank you, we'll go to the next caller please.

We'll move next to Harlan Sur with JP Morgan.

What was the book-to-bill in the December quarter? And near-term, kind of looking at bookings and the rolling forecast on your direct and consignment base customers, have you guys seen any signs of stabilization or do the near-term trends still suggests kind of continued weakness along the same sort of the slope?

Yes. So our book-to-bill, and I always make this comment whenever it's asked, we've got now 65% of our revenues on some type of a consignment program, so you're seeing that number begin to move up as we implement further stages of our consignment programs with distributors; so book-to-bill is somewhat you just have to be cautious with the number. But this past quarter it was 0.98, it was 0.98 a year ago and 0.96 in the last quarter; so that's just what the facts are. I think if you look at things like order linearity, orders decreased each month of the quarter. To some degree, that's not completely unusual that in a fourth quarter that you'd see weakness as you got into the third month. But I'd just say that those orders and the demand feeds that we get from our customers has really driven us to give you the guidance that we have; so that's really where we are Harlan. You have a follow-on?

Yes. Given the growth this year, you guys drove another $1 billion of Analog revenues to your 300-millimeter fabs, you've got probably about $3 billion left to go. So, if I assume kind of high-single digits type of normalized revenue growth for Analog, your 300-millimeter fabs are going to be full in about 1.5 years. So it would seem that that the team would be having to make a decision soon about your new fab expansion initiatives. So you guys have any updates there?

Yes, let me give you my view, and then Dave may go ahead and chime in. But capacity planning for new 300-millimeter tranche of capacity, that's something we've got to take very seriously, and something that has a very long-term horizon. So this is something that is not changed by small fluctuations in short-term expectations, so we are continuing the planning process on that and right now we have options to consider and we'll continue thinking of that. As we have said, I think 90 days ago, whenever we do decide to go that route, if we do build our factory, that'd probably be a $600 million to $700 million cost on the shell, the actual building, and that will probably spend over a couple of years. So that's not the only option we have for -- to expand capacity, we can always buy an existing factory and that's another option that we're considering. And also I would say, the -- if we do build a factory, there are multiple locations that we're considering.

And I'd just add Harlan; that last year we had about $4.8 billion of our Analog revenue on 300-millimeter footprint, that was up from about $4 billion, that's real close to what the Analog segment actually grew. So again, we plan to talk about as Analog would grow, that it would be 300-millimeter that would support the growth. And roughly, that's what we've seen again this quarter.

We'll take Chris Danely with Citigroup.

Dave, first of all, congratulations on surviving 8 downturns. Can you guys talk about the ability to manage CapEx and OpEx this year if this sluggish time period continues? Could you work OpEx down on a year-over-year basis? And then, I think you said CapEx was 7.2% of sales or something like that; what should we be thinking about CapEx as a percent of sales this year?

Let me give you some background there. First, as I mentioned earlier on the call, all the knobs that we have at the end of the day are to optimize and maximize long-term growth of free cash flow per share; so that's the main objective, as you know very well from knowing us for many years and our capital management strategy. So CapEx is one of those knobs, and for CapEx specifically, what is the objective, it's to invest and support in new technology development, it's revenue growth and to expand our low-cost manufacturing advantage. So in 2018, we spent $1.1 billion for CapEx and as you pointed out, that was 7.2% of revenue. At the same thing, we generated $6.1 billion of free cash flow, that was 30% growth on free cash flow from the previous years. So despite that CapEx, we increased free cash flow, that 30%. Now that CapEx is positioning us to grow the top line and free cash flow for a long time to come. Now given, as you pointed out and as our midpoint and our range implies, decelerating market, then we can do things differently on CapEx. Going forward, I expect -- if conditions continue, a slowdown in CapEx, probably not in the first quarter, maybe not even in the second quarter, but over 2019. We'll just keep that in mind -- keep in mind that is all dependent on expectations of growth beyond that for years, not just 2019 or even 2020. So we'll adjust those -- we'll adjust the CapEx plan as those expectations change.

And I'd just add; I think when you look at 2019, that we'd expect CapEx to run into the future even beyond 2019, closer to 6% of revenue. And that's higher than what it's been in the past just because of the availability of -- use the 300-millimeter equipment on the market, so that's where our expectations there are. You have a follow-on, Chris?

Yes. Can you guys just talk about how the slowdown is impacting your two biggest end markets, industrial and automotive?

Yes, I think that when we look at them, they both slowed in the quarter. We actually saw industrial; it was really broad-based growth on -- from a year-on-year basis, it was double digits but inside of the quarter, it actually grew upper single digits. And then automotive again, it had slowed, but it grew double digits in total for the year but for the quarter, for year-on-year quarter it grew in low-single digits. So again, both of those markets are growing but certainly not at the rates that we have seen over the past few years. Okay, thank you, Chris. And we'll go to our next caller, please.

Thank you. That will be from Timothy [ph] from UBS.

Dave, can you give us an idea of OpEx for March? I know it's typically up like 5% seasonally, but it's also a little more fixed now than in the past. So is it going to be up a smidge [ph], both year-over-year and on a quarterly basis? Thanks.

Yes, so I'll go ahead and take that. First, step back real quick, OpEx is just another knob that we have to optimize long-term growth of free cash flow per share, right; at the end of the day, that is the long-term objective. And in the case of OpEx, it's an opportunity to invest in R&D, so to put more products for industrial and automotive is an opportunity to invest in demand creation on the SG&A side and other things, other initiatives that's going to strengthen our competitive advantages. If you look at 2018, that OpEx came in at about 1% growth versus the previous year and 20.5% of revenue. On a go-forward basis for 2019, for dollars of OpEx, I would expect somewhere in the neighborhood, maybe up a couple of percentage points for pay and benefit increases, something along those lines. But generally speaking, at about that same level, all OpEx. Now you asked specifically about the quarter, we give you a range for revenue, a range for EPS; we don't get in the lines between, but I will tell you we're not expecting anything unusual. You can look at the fall-through -- expected fall-through on revenue to GPM [ph] and do your own models, and you should get to a reasonable assumption or conclusion for those lines in between.

Do you have a follow-on?

I do, actually. So Rafael, the Repo [ph] was the biggest in -- as a percent of free cash flow, I'm thinking about 3 years. I know that you don't think of it that way on kind of a quarterly basis but it's historically been a little more mechanical than opportunistic. So should we kind of read into that that you were a little more opportunistic because of the stock pullback? Thanks.

Yes, thanks for the question. So, again, let me step back and remind everybody, what's our intent when it comes to repurchases; and our intent is to return all free cash flow to the owners of the company and that objective has not changed. We do that through a combination of dividends and buybacks, and we will be -- we have been and will be opportunistic with repurchases as it makes sense. So for example, in 2018, as I mentioned earlier, our free cash flow was $6.1 billion, that was an increase of 30% from the previous year. And we'd return $7.7 billion throughout the year through a combination of dividends and buybacks. And that year-on-year free cash flow growth was the biggest driver of that increase in returns, as a $6.1 billion increase from $4.7 billion in the previous year.

Okay, great. We'll go to the next caller, please.

That will be from Chris [ph] with Raymond James.

First question, I wondered if you can talk about geographic differences. And you mentioned China in your opening remarks, and I think that's obvious right now. Maybe what did you see there and contrast that with what you saw in the U.S. and Europe; was that weak also, just perhaps not as weak as China business?

Yes, that's exactly right, Chris. So when we looked at China, it was weaker than the other regions. And then when you drop down into the end markets within China, I just described it as really performing very similarly, directionally, meaning that comms equipment was up as it was in other areas, we saw the markets of auto and industrial, as well as enterprise get weaker from that standpoint; so we did see that difference this quarter. You have a follow-on?

Yes. And I guess, you would also mentioned in your remarks the impact of the trade issues and tariffs. And obviously, it's very hard to disassociate that from what's going on in the end markets. But with that, have you also seen -- I guess we've heard this from some others that perhaps there was some activity of either pulling forward orders to get ahead of tariffs, or pushing out things because of the tariffs; and obviously, the deadlines have changed and we've got another deadline coming up. I guess the question is what effect it may have had on order patterns as we went through the quarter?

Yes, I think it's hard for us to actually distinguish that specifically. But the one thing that we did see was, distributors did get more cautious on their inventory late in the quarter. As I mentioned in the prepared remarks; I think that kind of coupled with the signs of weakness that we saw in China, that's really led us to the belief that that's part of the caution that they are seeing from a trade tension standpoint. So -- okay, thank you, Chris and we'll go to the next caller, please.

Thank you. That will be from Ross Seymore with Deutsche Bank.

This is Jerry [ph] on behalf of Ross. I just have a quick question on -- you mentioned consignment transition; is there -- could you quantify an impact to the 1Q '19 guide and 2019 as a whole [ph]?

Yes, I'd say that we saw probably about $50 million impact in the fourth quarter. In the third quarter -- Rafael, you can remind me, it's about $20 million or $30 million…

Yes, in the third quarter.

In the third quarter of 2018. We'd expect as we go through next year that that impacted to be about in that range. And by the end of the year, we should have that next phase fully deployed. You have a follow-on?

Yes, there has been some questions about end markets; I just want to ask in a different way. Could you just talk about quarter-on-quarter what the end market did, specifically focusing on the fourth quarter?

Certainly. So industrial declined upper single digits, I'd just say those declines were broad-based. Automotive declined upper single digits with all sectors decreasing, personal electronics declined low double digits, comms equipment grew single digits, and enterprise systems declined. So with that, I think we have time for one more caller.

And that will be from Amit [ph] with RBC Capital Markets.

I guess two questions from me as well. I mean, first off, when I look at the March quarter guide and the implication is revenues will decline from 1% in December year-over-year to about 8% in March. What is driving that acceleration in revenue declines? Is there a couple of end markets you would specifically call out that's driving it where perhaps the challenge was adjusting [ph] aggressively or is it more or less broad-based?

Amit, when we give our guidance we don't do it by end markets unless there is something specific that is going on that kind of would be discontinuous with how things are operating. So we'll finish up the quarter and let that -- it will provide the details by end markets then. But clearly, the weakness that we saw in the third quarter continued into the fourth. Obviously, that -- we're continuing to expect that to continue into first.

And just to add to that, as we've said in prepared remarks and during the call; we think this weakness is primarily due to the semiconductor cycle. We've grown for third quarter in a row [ph], and that's the sort of thing that happens in the semiconductor industry. And in addition to that, the macro environment, including the trade tensions could also be having an impact and could affect that and the duration of [indiscernible].

You have a follow-on, Amit?

I do. In the past, best you have talked about your ability to keep picking up 30, 40, 50 -- 30 to 40 basis points a share across your end markets. As you look at '19 where revenue or broader industry trends are somewhat more challenging, is it easier for larger analog company to pick up more market share or is it more difficult for you guys? How would you kind of stack that up?

I think when you look at the quality of the opportunity in the Analog and Embedded space, if market share just doesn't move quickly across any of our peers in these marketplaces; and I think that just really speaks to the quality of that opportunity. So we continue to invest in our competitive advantages which are our manufacturing and technology we talked about earlier, the breadth of our product portfolio, the reach of our market channels which includes our sales force and the size of it but also our presence at TI.com, and then diversity and longevity. So we're not dependent on any particular customer or product or technology to drive that revenue. So we're working and investing to make those stronger, it's just hard to pick up market share; I can tell you that everyone here at TI will be focused on that even as we go through the downturn, and probably have even more diligence and intensity around that overall. But again, if you could make that number higher, we absolutely would, but it is a hard thing to move. So with that, let me turn it over to Rafael to add some final comments.

All right. So let me finish with a few comments on some key items for you to remember. First, during this period of weaker demand, we will stay focused on what will make us stronger long-term and diligent in the short-term. Second, we will remain focused on the Analog and Embedded, the best products, and Industrial and Automotive, the best markets. Third, we will continue to be disciplined in executing our capital management strategy and remain committed to returning all free cash flow to the owners of the company.

Okay, thank you for joining us. Again, please plan to join us for our Capital Management call on February 5 at 10 AM Central Time. A replay of this call is available on our website. Good evening.

That does conclude our conference call for today, everyone. Thank you all for your participation. You may now disconnect your lines.