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Texas Instruments Inc. (NASDAQ:TXN)

Q1 2013 Mid-Quarter Update Conference

March 07, 2013 5:00 pm ET

Executives

Ron Slaymaker

Analysts

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

Blayne Curtis - Barclays Capital, Research Division

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Sumit Dhanda - ISI Group Inc., Research Division

David M. Wong - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen. Welcome to the Texas Instruments First Quarter 2013 Mid-Quarter Update Conference. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon. Thank you for joining TI's mid-quarter financial update for the first quarter of 2013. In a moment, I'll provide a short summary of TI's current expectations for the quarter, updating the revenue and EPS estimate ranges for the company.

In general, I will not provide detailed information on revenue trends by segment or end markets, and I will not address details of profit margins. In our earnings release at the end of the quarter, we will provide this information.

As usual with our mid-quarter update, we will not be taking follow-up calls this evening. Considering the limited information available at this point in the quarter and in consideration of everyone's time, we will limit this call to 30 minutes. For any of you who missed the release, you can find it on our website at ti.com/ir.

This call is broadcast live over the web and can be accessed through TI's 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 Safe Harbor statement contained in the news release published today, as well as TI's most recent SEC filings for a more complete description.

We have narrowed our expected ranges for TI's revenue and earnings to the upper half of our previous ranges. We now expect TI revenue between $2.80 billion and $2.91 billion. We expect earnings per share between $0.28 and $0.32 on a GAAP basis. As in our original guidance, EPS still includes about $0.06 of acquisition and restructuring charges and about $0.06 from a discrete tax benefit that is resulting from the reinstatement of the R&D tax credit that was retroactive to the beginning of 2012.

Since the net impact from the acquisition and restructuring charges and the discreet tax benefit is essentially 0, EPS on a GAAP basis and on a non-GAAP basis should be the same this quarter. Looking ahead, the vast majority of our ongoing acquisition charges, or about $80 million per quarter, will be from amortization of intangibles, an amount that will remain consistent for the next 7 years or so. We also expect that restructuring charges will remain low from here.

In consideration of this, we recommend that those of you that submit estimates to organizations that compile consensus estimates, such as First Call or FactSet, should now transition over to GAAP submissions only. While the non-GAAP estimates were beneficial over the past 6 quarters to help out [ph] investors understand the underlying trends of our business operations without the noise of acquisition and restructuring charges, we believe they will be unnecessary going forward. Of course, we will continue to provide full transparency for you into these expenses as they will continue to be reported as separate lines on our income statement.

Operator, you can now open the lines for questions. [Operator Instructions] Operator?

Question-and-Answer Session

Operator

We'll take our first question from Stacy Rasgon with Sanford Bernstein.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Ron, I had a -- I wanted to dig into the order trajectory a little bit. On your last earnings call, you had said that, I guess, orders had bottomed in December, and January, on a sequential basis, was looking better. Could you give us some feeling how that trend is -- has it moved through February and even through the little bit we've seen in March so far?

Ron Slaymaker

Okay. Sure, Stacy. Let me just say, in general, the stronger demand environment that we discussed back in January has continued through the quarter and, overall, is tracking better than our initial expectation. So we see this in our revenue trends and even more so in our orders, as we are now building backlog for the first time in several quarters. So I would just say, quarter-to-date, orders have been growing strongly and turns levels have been high as we're able to support our customers with short lead times. And also, our good inventory position clearly is contributing to that. So as I noted, we're building backlog. I would note that given the high turns, visibility remains low, but we have no reason to believe that the strength we've seen thus far will not continue as we go forward. Do you have a follow-on, Stacy?

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

I do. If you could give us a little bit of color on where the strength is coming from, or at least areas that might be stronger or weaker versus your initial expectations?

Ron Slaymaker

Okay, sure. And this will probably apply to both about orders and revenues, but I specifically was looking at revenue when I came up with these. But I would say, the strength is most notable in the industrial market. And as you'll note, that's where we have a strong presence with Analog products, specifically our High Performance Analog and our Silicon Valley Analog businesses. On the flip side, we see continued weakness in some of the vertical markets, such as notebook computers and communications infrastructure. I'll also note that handsets and tablets are up overall compared with our initial expectations. But I'd also note that results there really vary by customer. Thank you, Stacy.

Operator

Our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Ron, Just a follow-up to the last answer you gave. On that handset and tablet commentary, do you still -- does your guidance still encompass a $135 million sequential drop in your Wireless business?

Ron Slaymaker

Ross, that's a good question that -- I guess, what I would say is, we expect our Wireless revenue still to decline sharply this quarter, although Wireless has seen some strengthening, as well as these other areas that I just noted. So the decline would be less than the $135 million that we called out in our January call, but I don't have a specific updated number for you at this point. Do you have a follow-on, Ross?

Ross Seymore - Deutsche Bank AG, Research Division

Yes, just on the OpEx side of things in a general sense. I know you talked about $450 million in savings from exiting the Wireless business. How should we think in general about the slope of that reduction, as well as how the core OpEx within TI is likely to trend relative to revenues going forward?

Ron Slaymaker

Okay. So just as a reminder, what we said back in November I guess when we announced that Wireless restructuring, we noted that we would expect $450 million of savings by the end of 2013. I can't say that will move exactly linear, but I don't have a specific profile for you either. What I would say is that we also have the revenue and the associated profit with that revenue declining sharply as well. So I guess what I would say is, the net effect of it all, by the end of the year, the loss that our Wireless business was incurring, we would expect it will be essentially offset via that -- both the wind-down of revenue as well as the restructuring cost savings. But I don't have a quarter-by-quarter breakout for you. Okay. Ross, thank you.

Operator

Chris Danely with JPMorgan has our next question.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Ron, can you just remind us what normal seasonality is for Q2? And just a quick clarification, so are you saying that your book to bill is above 1 so far this quarter?

Ron Slaymaker

Okay. Normal seasonality in second quarter is about -- is upper single digits, clearly. So probably 8%, 9%, something in that general range. And that -- I would just remind you that it's a sequentially -- or seasonally strong quarter for both our semiconductor chip shipments, as well as for our calculator business. Our calculator business alone typically will contribute 2 to 3 points of company-level sequential growth just with its -- what often is a doubling of its revenue between the first quarter and the second quarter. So again, seasonally, second quarter is our strongest. I don't have a specific forecast for you. We'll provide that in April. But we're clearly expecting growth in the second quarter ahead. To your question on book to bill, I guess I would again just reiterate, orders that we've seen are strong. I think I've said we're building backlog for the first time in several quarters. So I guess, by definition, if we're building backlog, then that implies the book to bill is above 1. And we'll have a specific number for you as usual in April. Do you have a follow-on, Chris?

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Yes, just between the 2 areas of strength, I guess, if we take industrial versus handsets/tablets. Are either of those contributing more strength or more upside in terms of revenue? Or are they both about the same?

Ron Slaymaker

They're not both the same, but I really don't want to get into, at this point, trying to break out the differences there. I'll say both industrial and the handset/tablet space are up. But we'll give more detail in April. Okay, Chris. Thank you.

Operator

And Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

In terms of the better demand, do you guys have a sense of how much of that is just an end-market improvement versus some inventory restocking on the part of the customers from the low [ph] levels?

Ron Slaymaker

We don't, Jim. And what I would say is it tends to be -- as I said before, the orders that we're seeing is a lot of kind of in-quarter turns type activity. So our sense is that the customers are still running pretty lean on the inventory front. They're not committing to a lot of extended backlog. Our lead times, the vast majority of products are under 6 weeks. We're delivering well to that schedule, and customers are leaning on us accordingly. So again, my -- so I guess I would -- that would -- the end result of that would be yes, it's reflecting in-demand as opposed to inventory build. But as you're aware, it's really difficult for us to say with much precision exactly what's going on other than kind of the high-level turns activity to me would reflect probably more in-demand as opposed to -- or at least preparation for a higher level of in-demand. Do you have a follow-on, Jim?

James Covello - Goldman Sachs Group Inc., Research Division

Yes, please. If I could, on the factory utilization. Anything you could quantify from us? We've heard from some of your sort of tangential competitors about what kind of increases in factory utilization they might be seeing. So anything you could maybe tell us about Q1 or plans about factory loading setting into Q2 to help us think about margin leverage, that'd be great.

Ron Slaymaker

Okay. Jim, I would say that, in fact, we have increased production starts this quarter to support the higher level of anticipated demand we have for the second quarter. The only thing you have to be cautious about when you try to translate that to a gross margin impact is that there is some lag time. Because again, we can start an extra wafer, and that won't necessarily impact utilization all through the lines. But over the course of time, as we continue to increase production starts, that lifts utilization. So just with that caveat. Okay, Jim, thank you.

Operator

And we'll take our next question from Ambrish Srivastava with BMO.

Ambrish Srivastava - BMO Capital Markets U.S.

I apologize for the background noise. Just one question on the -- first on the overall in-demand environment. And just please help us contrast with past head fakes versus past sustainable recoveries. So what can you point to us and say, okay, this looks a little more sustainable than the head fake that we had last year?

Ron Slaymaker

Well, I think -- I don't know that we can perfectly. I think -- again, what we are encouraged by is when we look through our distribution channels and we look at customers, we generally see lean levels of inventory and, therefore, a pretty quick read-through from changes in in-demand to our own -- or demand for our own products. But as you pointed out before, sometimes, these things happen, and it translates to a full-blown cycle. In other cases, it's a head fake, as you've described. So I can't provide perfect certainty other than again, we're preparing in terms of our factory utilization, in terms of our inventory position to support a growing demand environment. Do you have a follow-on Ambrish?

Ambrish Srivastava - BMO Capital Markets U.S.

Yes, Ron, and that is helpful. And the follow-up is on the comp [ph] side. So Xilinx and [indiscernible] were more bullish about the comps [ph] than in the turnings. What have you guys seen specifically when you say that you continue to see weakness?

Ron Slaymaker

It's what we're not seeing, which is not increased demand from that segment of the market. And again, the FPGA players tend to play much more concentrated at the very leading edge of wireless infrastructure equipment. We play there also, but we also play much more broadly than they do. So I don't know that I can sit there and compare and contrast and explain what they're saying versus what we're seeing. However, we are confident in our design-in position across the range of base station equipment. We have not yet seen it lift. It could potentially even be differences in lead time for those players versus TI. Again, our lead times generally are short. We've heard through our customer base, and this is not necessarily a communications infrastructure-specific note, but we've heard more broadly through our customer base that several of our customers are in the process of extending lead times. We are not in the position where we have to do that. But of course, that could reflect in just timing of when certain competitors or certain other suppliers might see increased demand versus when we might see it. We'll all see it in the end.

Operator

And Blayne Curtis with Barclays Capital.

Blayne Curtis - Barclays Capital, Research Division

With the better strength in Analog, are all your segments still down? And then maybe you could just comment on the computing segment, whether you see a build -- how we should look at the seasonality? Obviously, new platforms are coming in the back half. Are you seeing the channel clean? And when will we see -- start a seasonal build there?

Ron Slaymaker

So, Blayne, the -- let me ask for a clarification. What was your question on the seasonal builds for -- was it specific to an end market?

Blayne Curtis - Barclays Capital, Research Division

Computing.

Ron Slaymaker

Computing. Okay.

Blayne Curtis - Barclays Capital, Research Division

Are all segments still down with the strength in Analog? And then could you comment on the computing end channel? That seems to be solely accretive [ph].

Ron Slaymaker

Okay, computing. I thought you said competing. Okay. So Analog, Embedded Processing and Other, all 3 of those segments we expect to be down. As we described somewhat in January, we're in the process of aligning [ph] our segment, financial segment reporting structure to our new organization. The Wireless segment has been eliminated, and the legacy wireless products will be included in the Other segment, and that is the biggest factor in the Other segment's sequential decline. We'll get more information for you on the various segments and some of their historical trends probably within the next couple of weeks, as we noted back in January. But Analog will be down. Embedded Processing, we would expect will be down slightly. And then Other will be down. So again, consistent with our initial expectations in the quarter. However, all 3 of those would be down less than what we had expected back in January. Did you have a follow-on, Blayne? The question on when we expect computing to be lifting, I can say that we would have expected stronger from computing already. So computing is actually running weaker than we had expected back in January, as is the communications infrastructure. Do you have a follow-on question, Blayne?

Blayne Curtis - Barclays Capital, Research Division

Yes, just in the strength you're seeing in wireless. It seems like your customer there has new platforms you're on, and I'm assuming that's where a lot of the strength is coming from. How does that -- you've talked about Wireless kind of fading for you by the end of the year. With this customer continue to build on your products, how do you see the trajectory with your connectivity products?

Ron Slaymaker

Okay. It's not a customer. It's still a breadth of customers that we're engaged with in Wireless. And it's different -- as I've said before, different results from different customers. We do expect it to continue down. Just as I said, it's down sharply, even in first quarter, not -- it's just not down as much as we had expected. And a lot of that sequential decline from fourth to first, part of it is tied to the wind-down of those product lines, part of it is just the seasonal trends within those customers. So I guess I'll just leave it at that. Okay, Blayne, thank you.

Operator

Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Ron, back in January, Kevin said that the utilization charge would be about the same in Q1 versus Q4. Does that still hold now with the nice improvement you've seen in bookings?

Ron Slaymaker

We probably have taken our production starts up a little more than what we had expected back in January, and you could see some impact. But in general, Kevin's statement still holds, which is that the underutilization charge in fourth quarter roughly would be about the same as what we would expect in first quarter, maybe a small improvement from that. Okay, Tore, do you have a follow-on?

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Yes. So on the distribution channel, obviously, if industrial is driving the strength, I assume DSPs are doing quite well for you. I was just hoping you could qualitatively talk a little bit about what they're seeing especially in relation to their sell-through on your product.

Ron Slaymaker

Okay. Yes. So distribution sales -- or resales from distributors, or their sell-through, will decline about the same as our revenue overall. So they're tracking pretty closely with TI. From an inventory standpoint, interestingly, distribution inventory that's owned by those distributors will decline. But that really is just a function of them relying more heavily on consignment inventory from TI. When we look at the combination of what they own and what we have in place for them on consignment, inventory is at about the same level as it was at the end of the year. But again, what they own, what they have on their balance sheet will actually go down this quarter, which says that is a successful program.

Operator

Sumit Dhanda with ISI Group.

Sumit Dhanda - ISI Group Inc., Research Division

One question I had for you was the industrial piece of the business seems to be pretty strong. Is it fair to assume that as your -- as the benefit of higher production starts come through gross margins in second quarter that the incremental fall-through is higher than the 75% typically that you talk about versus average cycles in the past?

Ron Slaymaker

Well, I think, over the course of the cycle, that 75% is the right number. And whether it happens in any particular quarter or not has a lot of different factors, including the amount utilization charge or the less or more charge. Whether your cycle's going up or down, that falls through. So in this case, I don't know that I would -- I think 75% is still a good general number to use quarter by quarter, but it will always varies somewhat. And I think it also could just be the effect being delayed by a quarter in terms of the underutilization impact versus, did it go away? Or is it higher or lower in a particular quarter? But Sumit, we'll give you some more specific guidance on second quarter once we get into April. Do you have a follow-on?

Sumit Dhanda - ISI Group Inc., Research Division

Just a quick housekeeping item. Can you update us on exactly what percentage of business is industrial today?

Ron Slaymaker

Yes. Hang on just a second. Let me pull out the -- pull that up for you. I thought I had it here. Okay. So industrial is right at just below 20%, 17%. Sometimes -- and let me just be clear, because different people look at different things in terms of what they include in industrial. So the very, call it, broad-based type of industrial is 17%. Separately, and not included in that 17%, is automotive, which is 11% of our revenue. And then education, which is our calculator products, runs about 3%. So -- but what I believe you would typically consider industrial, I would call 17%, with automotive 11% above and beyond that amount. Okay. Thanks for your questions.

Operator

We'll continue on to David Wong with Wells Fargo.

David M. Wong - Wells Fargo Securities, LLC, Research Division

This slightly, better-than-expected strength that you're seeing. Is this a constant high level? Or are you actually seeing momentum grow, that -- each week, each month is a little bit better than the last, leading to the upside?

Ron Slaymaker

David, it varies somewhat because keep in mind, we had Chinese New Year in the month of February. And so we had a very strong January. February fell back a little bit, as you would expect for Chinese New Year. And then as we moved through that, it came back very strong again. So it's doing -- it's not this nice, smooth profile where you can look at the second derivative and say it's X or Y. But it is doing what you would expect in terms of a, what I'll call an improving market environment. But you have to allow that Chinese New Year within there as well. Do you have a follow-on, David?

David M. Wong - Wells Fargo Securities, LLC, Research Division

Yes, a quick one. And the upside, is it both in terms of your sales related to distribution, as well as the sales that are going directly to end customers and manufacturers? Or is it more weighted to one or the other?

Ron Slaymaker

Well, it's both. That being said, industrial tends to move heavily through distribution. So clearly, that channel is an important one for us right now with the industrial exposure. But as I said, the handset space is running better than expected as well. And a lot of that business -- not all, but a lot of that business tends to be direct. Okay. Thank you, David.

Operator

And Timothy Arcuri with Cowen and Company.

Unknown Analyst

This is Josh Shanker [ph] on behalf of Tim, and I have a question on the rates guidance. I just want to understand, is this a function of overall TI's end market? Or is it that every other semi company is seeing this kind of uplift? Or is it because you guys have guided a little bit more conservative than peers, and you are increasing your guidance?

Ron Slaymaker

I think, as I've indicated, industrial is a big part of the strengthening environment. I don't know is -- if somebody else guided more aggressively versus TI, then they may not see as much lift as we're seeing versus those expectations. But I think, given the broad base of the industrial markets, anybody that's a player in that space is going to see an improving environment. And again, just -- at an absolute level, forget guidance, whether it was conservative or aggressive. I think that environment is showing very clear signs of improvement. Do you have a follow-on question?

Unknown Analyst

Yes. So on the industrial market, so if you look at the [indiscernible] data, the overall -- the Analog ASP has come down over the past 6 to 8 quarters, and it seems like mostly it's due to the weakness in industrial. And do you see -- I mean, I know the industrial has picked [ph] up in Q1, but do you see that continuing on over the rest of the year?

Ron Slaymaker

I think I've indicated we expect growth to continue into Q2. I've probably stuck my neck out far enough with that forecast. We'll talk about Q3 and Q4 as we get closer to those quarters. So I don't really have any specific comments or forecasts for that. Okay. Thanks for your questions.

And let me just say, before we end the call, let me remind you that the replay is available on our website. Thank you, and good evening.

Operator

Thank you. And again, ladies and gentlemen, that does conclude today's call. Thank you all for your participation.

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