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Texas Instrument (NASDAQ:TXN)

Q1 2009 Earnings Call

April 20, 2009 5:30 pm ET

Executives

Ron Slaymaker – Director, Investor Relations

Kevin March – Chief Financial Officer

Analysts

Doug Freedman – Broadpoint

David Wong – Wachovia

Craig Burger – Fbr Capital Markets

Quinn Bolton – Needham & Company

Tore Svanburg – Thomas Weisel Partners

Christopher Danely – J.P. Morgan

Daniel Berenbaum – Auriga USA

Steven Smigie – Raymond James

Ross Seymore – Deutsche Bank

Glen Yeung – Citigroup

David Wu – Global Crown Capital

Tristan Gerra – Robert W. Baird

John Pitzer – Credit Suisse

Sumit Dhanda – Bank of America, Merrill Lynch

Cody Acree – Stifel Nicholaus

Tim Luke – Barclays Capital

James Covello – Goldman Sachs

[Alex Guana – JMP Securities]

Adam Benjamin – Jefferies & Co.

Operator

I would like to welcome everyone to the first quarter 2009 earnings conference call. (Operator Instructions) Mr. Slaymaker, you may begin your conference.

Ron Slaymaker

Good afternoon and thank you for joining our first quarter conference call. As usual, Kevin March, TI's CFO 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 TI's website. The replay will be available to the web.

This call will include forward-looking statements that involve risk factors 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 earnings release published today as well as TI's most recent SEC filings for a complete description.

Our mid quarter update to our outlook is scheduled this quarter for June 8. We expect to narrow or adjust the revenue and earnings guidance ranges as appropriate with this update. In today's call, we'll address key questions such as what drove the upside on revenue and EPS from our mid quarter guidance and does this upside indicate that we are now in a cyclical upturn. We'll also update you on the progress of our actions to reduce inventory and costs at TI.

Business in the quarter did in fact exceed our expectations. Revenue of $2.09 billion in the quarter was above our guidance as was the penny of earnings. You'll recall that in the mid quarter update we raised the middle of our guidance range and referenced that 3G communications infrastructure in China was the most notable area of better than expected strength.

In the last few weeks of the quarter, in addition to bay stations we also better than expected demand from notebook computers, some areas of the hand set market as well as from LCD based HDTV's.

Regionally, most of the strength is coming from Asia while the other regions remain subdued. Therefore we wouldn't characterize this stronger demand as broad based, as it was concentrated in a few high volume end markets in the Asian region. Nonetheless, it is encouraging to see our revenues stabilizing, albeit at what remains a low level.

We also caution that the stabilization is likely being driven by customers that are slowing their inventory reduction and not by broad based increased in end consumption or by customers rebuilding inventory.

Let me explain. Over the last few quarters, we saw a dramatic drop in demand for our chips because customers slowed their production and began to reduce the chip inventory they had in stock. Now that they're realigned their own production with a lower level of consumer end demand and reduced their existing chip inventory, order trends for our chips have started to improve.

This leads us to believe that the worst of the inventory drain is now finished, and our shipments will more closely reflect our customer's production levels. However, the most important determinant of our business levels in the second half of this year will be the real end consumption trends.

From our perspective there remain significant uncertainty about the direction of end consumption. As a result, we are careful not to misread the completion of inventory reduction as a return to higher end demand. Our approach is that we will keep our operations highly flexible to respond to whatever direction demand will track, while remaining highly diligent to inventory and cost.

Our execution in the quarter was solid. Most notably, we reduced our own inventory by $277 million in the quarter and worked with our distributors to reduce inventory in our channels by $132 million, and we achieved this despite the headwind of a $405 million sequential decline in revenue.

At this point we have essentially completed our inventory reductions and have begun to increase loadings in our factories again. As a result, we expect utilization to increase in the current quarter from the record low mid 30's first quarter level.

Over the past couple of quarters, we disclosed factory utilization levels to help you understand the decline in our profitability. As our inventory correction has now wound down, factory utilization will begin to more closely track our revenue trend and we will stop detailing this going forward.

Another execution highlight is that we are achieving our cost reductions ahead of schedule and as a result are seeing these deliver savings earlier than we had planned. Kevin will provide more of these details in a few minutes.

Importantly, with these actions now largely behind us, our employees are moving forward to execute on our strategies for growth in analog and embedded processing. Also, we now have a higher proportion of our resources focused on these areas than we did previously. Moving early and aggressively to realign our operations with the realities of the economic environment, has allowed us to get these issues behind us while also accelerating our transition into an analog and embedded processing company.

Let me make just a few brief additional comments about our revenue in the quarter. TI revenue of $2.09 billion declined 36% from a year ago and 16% sequentially. The decline was broad based with our analog, wireless and other segments all tightly clustered in a decline of 35% to 40% from a year ago.

Our embedded processing segment fared a little better with a decline of 26% from a year ago due to relative strength in communications infrastructure revenue which was up. The details of revenue performance for each segment are included in the release.

At this point, I'll ask Kevin to review profitability and our outlook.

Kevin March

Thanks Ron and good afternoon everyone. As Ron said, we reduced TI inventory by $277 million in the first quarter. Over the past three quarters we have reduced our internal inventory by more than $550 million and have worked with distributors to reduce almost $.25 billion of inventory out of our channels.

At the same time, our revenue was down 38% over that period. The combination of low customer demand and our aggressive inventory reduction resulted in our factory utilization declining to a record low level in the first quarter.

We discussed previously that we were challenging ourselves to remain profitable in the quarter while also committing that we would not trade off our future financial performance to achieve that short term goal. Due to the determined efforts of many TI employees around the world, we were able to remain profitable while also completing our own inventory correction and realigning the company's costs in what will likely be a sustained weaker economic environment.

The combination of lower revenue and manufacturing costs that were expenses in the quarter due to under utilization of assets resulted in lower gross profit. Gross profit of $806 million declined by $950 million from a year ago and $291 million from the fourth quarter. Gross margin was 38.6% of revenue in the quarter.

Although this is well below our 55% long term goal, it was a reasonable level considering the low level of factory utilization in the quarter. In fact, as factory utilization increases in the second quarter, we expect a corresponding increase in our gross profit and gross margin.

We reduced operating expenses in the quarter by $258 million or 27% from a year ago and by $101 million or 13% sequentially. Both R&D and SG&A expenses were reduced. Restructuring charges in the first quarter were $105 million for 5% of revenue. The distribution of these charges across our segments is included in our earnings release.

You will recall at the mid quarter update, we expected restructuring charges of $80 million. The difference is primarily due to actions being executed ahead of schedule. As a result, operating profit for the quarter was $10 million. Excluding the restructuring charges, operating profit was $115 million or 5.5% of revenue.

We had a $5 million discrete tax benefit that resulted in a $2 million net credit for our tax provision in the quarter.

Net income was $17 million or $0.01 per share. Excluding the restructuring charges, net income was $85 million or $0.07 per share. I'll leave most of the cash flow and balance sheet items for you to review in the release, however, let me make just a few comments.

Cash flow from operations decreased to $251 million in the quarter. Much of the decline from last quarter was associated with the increase in receivables that resulted from strengthening of business late in the first quarter as compared with the deteriorating conditions late in the fourth quarter. We continue to constrain capital expenditures, spending just $43 million in the quarter.

We used $101 million in the quarter to repurchase 6.6 million shares of TI common stock and paid dividends of $141 million in the quarter. We ended the quarter with $2.43 billion of cash and short term investments. Our balance sheet continues to remain strong.

The reduction in inventory that we achieved resulted in inventory days declining to 77 at the end of the quarter compared with 94 days at the end of the year ago quarter and 89 days at the end of the fourth quarter.

TI orders in the quarter were $2.19 billion, up 18% sequentially. After a five month slide, product orders bottomed in the month of December and increased each month through the first quarter. TI book to bill increased to 1.05 in the quarter from .75 in the prior quarter.

Turning to our outlook, we expect TI revenue in the range of $1.95 billion to $2.40 billion in the second quarter. You will note this is a decline of about 7% to a growth of about 15%. Our range continues to be wider than normal, reflecting the potential for upside and downside that continues to exist. This outlook included about $60 million of seasonally higher calculated revenue.

We expect earnings per share to be in the range of $0.01 to $0.15. This EPS estimate includes $0.05 per share negative impact resulting from about $100 million of expected restructuring charges.

For 2009 our estimate for R&D capital expenditures, depreciation and the annual effective tax rate are unchanged and are described in the release.

In summary, we are encouraged by the stabilization in our revenue although we remain cautious about the overall weak economic environment. We're pleased with the progress we made in reducing inventory and costs and are confident that our early and aggressive actions in these fronts will serve us well.

With that, let me turn it back to Ron.

Ron Slaymaker

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

Question-and-Answer Session

Operator

Your first question comes from Doug Freedman – Broadpoint.

Doug Freedman – Broadpoint

You talked about where we are in the cycle. Could you go into a little bit more detail on what you are looking for that would enable you to think that we are at the beginning of a new semi conductor swing.

Kevin March

I would just comment as Ron pointed out, what we saw was just one region, primarily Asia and just a couple of large verticals, primarily the comps infrastructure, notebooks and some handsets, and LCD TV's picking up a little bit late in the quarter. We did not see it importantly, in other regions around the world and we did not see it in the industrial or consumer sectors.

So until we see demand pick up in other regions as well as in other sectors, we don't believe that we're looking at something that suggests there's an overall increase in demand to be anticipated. Right now it feels more to us like our demand is lining up our orders to our customers lining up to their end demand which is a lower overall level than it has been for quite some time.

Ron Slaymaker

I would just add also Doug, as call it the end of the inventory correction moves out of that one region and other end markets, that is still phase one which is just getting through the inventory correction. We'll also look at more on a macro level for signs that end demand is picking up and economies are stabilizing as opposed to just what a near term effect of an inventory correction coming to an end.

Doug Freedman – Broadpoint

Great job on the cost savings. Kevin, do you care to offer us a new target of how much ultimately you're going to save? Is this faster than your $700 million cost savings or are you going to ultimately going to save more than the $700 million, if you could offer some implicit absolute total OpEx that you expect to crop out and when?

Kevin March

We're not providing the cost savings outlook just yet. What we really had was an acceleration versus our prior plan and for the rest of the folks listening, you may recall that we had characterized and expected $700 million annualized cost savings by the end of the year and that split was going to be about 20% in cost of revenue, about 50% in R&D and 30% in SG&A.

We pulled a fair amount of that forward into the first quarter. The target will still be the same. It will probably be incrementally just a little bit smaller over the next couple of quarters with about a total run rate occurring in the fourth quarter actuals.

Operator

Your next question comes from David Wong – Wachovia.

David Wong – Wachovia

With your current level of capital spending, can you give us some idea of how your total capacity will be changing over the next few quarters in analog and in digital?

Kevin March

Our CapEx for the quarter just came in at quite a low level of $43 million and clearly with our overall factory utilization in the mid 30's, our need for capital is going to be quite a bit constrained versus what we've had in recent years.

I'd also remind everybody that in the last year, we've been building a new factory in the Philippines which was part of what actually had our CapEx at the level it was at last year. That's now largely behind us as we begin to quality that factory.

Going forward, we anticipate for this year that we would spend upwards of $300 million on capital for the year, and principally that's going to be going into our back end or the assembly test sites, namely that new assembly test site I just mentioned a moment ago.

I would also just mention that in this environment we would not be adverse to taking advantage should we find certain equipment become available as other manufacturers decide to sell equipment. That's certainly an attractive alternative to us so we will not artificially bound ourselves by that CapEx number I just mentioned if an opportunity should come up that would give us capacity at extremely low values.

Ron Slaymaker

Think of it probably in terms of maintenance level spending plus targeted new capabilities. For example, the Philippines assembly test site will have a wafer chip scale packaging capability that brings in some new technology capabilities for TI to service our customers, but not broad based capacity increased.

David Wong – Wachovia

Just a clarification of that comment. So what you're saying, your wafer manufacturing capacity does pretty much flat over the next quarter, neither up nor down, is that correct?

Kevin March

Our utilization is very low so there's not much need there. There might be certain bottleneck needs as we bring in certain new production lines, but by and large, most of the expense is going to be on the assembly test side of the house.

Operator

Your next question comes from Craig Burger – Fbr Capital Markets.

Craig Burger – Fbr Capital Markets

What do you expect utilizations to rise to in the second quarter and how should we be thinking about the increase in gross margins for Q2?

Kevin March

We're not providing a specific level for our expectations. I think as we indicated in our prepared remarks, certainly as our inventory adjustments basically are now behind us, our utilization will move up accordingly in the second quarter and of course along with higher utilization, gross profit and gross margin will trend positively as well. But again, we're not providing that specific targeted level.

And in fact, it very well may flex as we move through the quarter depending upon how we see development of demand for third quarter and what that might necessitate in terms of inventory adjustments as well?

Operator

Your next question comes from Quinn Bolton – Needham & Company.

Quinn Bolton – Needham & Company

I was wondering if you could talk about the guidance. It sounds like you said the first quarter recovery especially in the month of March was really from Asia and a couple of the end markets. Any outlook when you think U.S. and European demand will recover or is that still fairly uncertain?

Kevin March

I think you answered the question well there. I think it's fairly uncertain at this time. Look at all the macro indicators; it's not clear when we'll see a recovery on that front so we have prepared ourselves for what would be a sustained weaker economy than what we've seen for a number of years now.

Quinn Bolton – Needham & Company

But it does sound like some of the lift in March was really the end of the inventory correction in Asia and the specific end markets, but it sounds like you still feel we have that end of the inventory correction ahead of us in Europe and the U.S.?

Kevin March

I think to maybe answer that a little differently, we probably get around 60% of our revenues out of the Asia region and so it's pretty important to us when we see the inventory correction there. As to the other regions, our sense is that the inventory correction is largely done for our material so we don't expect to see much more adjustment on that front from our customers.

The real key is are there pockets that need to be replenished at their levels as they try to meet their end demand levels, the lower expected end demand levels.

Quinn Bolton – Needham & Company

The inventory, you talked about you think you're at the end of the inventory reduction efforts, should we sort of read that that you're looking to try to keep your inventory levels now roughly flattish or do you think you may actually see inventory on your balance sheets grow in the June quarter?

Kevin March

That's going to be really a function of where our revenue lines up. Our inventory is really destined for what we think our revenue expectations are going to be and you note that our guidance is actually quite wide. So if we come in at the lower level of that inventory, that revenue range, then our inventory levels are apt to be a little higher than perhaps what the mid points would suggest. If we come in at the upper end, it would probably cause us to drain inventory again.

Ron Slaymaker

And certainly it's not only inventory in the second quarter, I'm sorry, revenue in the second quarter. It's also our outlook for the third quarter that will drive our inventory moves as well.

Operator

Your next question comes from Craig Burger – Fbr Capital Markets.

Craig Burger – Fbr Capital Markets

Can you comment on whether you're seeing any lead time increases yet for any products and also what you're seeing in pricing in analog?

Kevin March

Lead time and pricing I would say in both cases are stable and even in, I think we made the comment at the mid quarter update and it remains unchanged, even some of the commodity area pricing is stable. And that's not necessarily what you would expect, but it is the case. So analog overall pricing in fact, I'll make the statement broader probably for our business overall even beyond analog, I'm not aware of any significant pricing anomalies or trends.

With respect to lead time, I'd say the same thing. Lead times tend to be relatively short. Customers are able to place demand on us with not a lot of long term visibility but that's the nature of where we are in this cycle and it's a good thing because we don't have customers trying to, in a market where they have minimal visibility for their own product demand, they don't have to get out ahead of that visibility with placing orders on us.

So again, lead time is short and stable, and then pricing is also stable.

Operator

Your next question comes from Tore Svanburg – Thomas Weisel Partners.

Tore Svanburg – Thomas Weisel Partners

Could you talk a little bit about your distribution channel at this point, where you are in inventories? Do you feel like you're now matching real consumption or are you maybe still under shipping what true demand is?

Kevin March

Let me just make a couple of comments in terms of what we saw in the first quarter. As we noted before that we continue to work with distributors to reduce end channel inventory in the first quarter. Think of it along the lines of sell out or resale decline. But of course our sales into the channel were well below that resulting in the inventory reduction that we referenced was $132 million.

So inventory levels, we're just over eight weeks in the first quarter. And that's about the range where they've historically run. I would say generally eight to nine weeks so where they finished first quarter was probably at the low end of that range. I'm not aware of their specific plans for second quarter that we would want to be trying to communicate at this point, so we'll just have to move into the quarter and see how distributors are feeling about their demand before we have visibility to provide you on their inventory trends in the quarter.

Tore Svanburg – Thomas Weisel Partners

What are the variables on your wide guidance? Is it just simply turns business or is it something else?

Kevin March

I guess turns business from the perspective of, and I'll put in that same category a lot of the revenue that we do with consignment customers where there's a fair amount of variability and flexibility that they're provided on exactly when they take the product that's in those consignment hubs. But generally how the inventory correction plays out followed by do we see any changes in end demand and how all that plays to us in terms of turns business in the quarter.

You'll notice from the book to bill clearly we had backlog increase through first quarter, but that was also off of a very low level coming into the first quarter so visibility increased somewhat coming into the quarter, but we would characterize it as still at historically low levels.

Operator

Your next question comes from Christopher Danely – J.P. Morgan.

Christopher Danely – J.P. Morgan

Can you talk about why wireless is a little stronger than expected during the quarter? Do you think that that's end demand or share gains or maybe the fall in wireless revenues isn't as rapid as you thought?

Kevin March

I would characterize it as simply that some of our customers in that space moved pretty aggressively on getting their inventory corrected and came out of it a little faster. So that inventory correction began pretty aggressively in the fourth quarter and so I would just characterize it as a consideration of timing for when those customers got through their inventory correction.

Christopher Danely – J.P. Morgan

Looking at the rest of the year, how do you expect the wireless business and wireless profitability to trend throughout the rest of the year?

Ron Slaymaker

I think to try to provide quarter by quarter guidance on wireless is more than what we're prepared to do.

Christopher Danely – J.P. Morgan

Just roughly or relatively for the year versus quarterly.

Ron Slaymaker

I'll try to move maybe a little bit longer term. We've clearly talked about our investment in base band or in the process of winding down. That revenue, we would expect basically to wind down over the next I guess three to four years, basically by the end of 2012 we would expect that revenue to be wound down.

So quarter by quarter, it likely is going to have some bumps in it, but a general trend from where we are today, that revenue will decline until the end of 2012 would be our best estimate at this point.

Operator

Your next question comes from Daniel Berenbaum – Auriga USA.

Daniel Berenbaum – Auriga USA

Maybe a little bit related to that, when you talk about your revenue perhaps matching demand a little bit more closely, do you think we're going to see roughly historically seasonal patterns for TI if not patterns, perhaps seasonal magnitude. And then the follow up on that would be specifically in the embedded processing business which maybe performed a little bit better because of China 3G, would we expect to see seasonal patterns there a little bit less because you saw China 3G or a little bit more because you continue to gain share?

Ron Slaymaker

I'll start and Kevin may have something to add on. I would say in general, other than our calculator business which has a very specific seasonality with that revenue increase in second quarter. As Kevin said, I think we have built into our guidance a $60 million sequential increase second quarter, stays strong, potentially even get stronger in third quarter and then decline again in fourth.

Beyond that, I don't think we want to try to go out on a limb, or at least I don't. I'll leave that for Kevin. On any kind of seasonal patterns just because there are too many other forces that are potentially stronger than seasonality as we move through the year.

Second quarter as we've said, we're actually just highly encouraged to see revenue stabilize as we get through the inventory correction that our customers have been moving through for the last couple of quarters.

Once we move into the second half, as we indicated in our prepared remarks, it really is just going to depend upon what end consumption does. If the economic forces that are there at a global level start to show some signs of stabilization and that opens up for more seasonal patterns associated with the holidays that would be great news.

But as we described we would just say those end consumption trends to us remain highly uncertain. So that's probably all I would say.

Kevin March

I think the only thing I'd add, just if you look at the last five years or so of history for us, there has been a seasonality in our semi conductor revenue where it's typically up about 5% in the second quarter, but clearly we are not in a time right now that compares to anything in the past five years of history. That's more a point of reference as opposed to a guidepost to the future.

Daniel Berenbaum – Auriga USA

Just more specifically on the embedded processing, should I, and maybe it's not really relevant given your answer to the first question, but should I expect or can you comment on what that boost gave you, that one time, does that trail off?

Ron Slaymaker

I guess we have some questions on that because clearly some of the strength that we saw driving growth there in the first quarter likely had to do with customers in that space, and this is probably the only space we would identify where you probably had customers building inventory.

Otherwise we would say customers outside of that space were generally just stopping the end of correction or reducing the correction and not actually moving to the point of building inventory. But I think due to the strength of some of that China 3G infrastructure demand, we saw customers that were associated with that actually putting inventory in place getting ready for shipments through the rest of the year.

So we like what we saw in first quarter. It's a natural positioning that will take place, but we're not sure at this point that we would see that same level of strength continue through the course of the year. In any case, we're fully confident that TI has a great position in those systems and we'll participate in whatever demand is ultimately there. But again, the specific pattern is a little bit difficult.

Operator

Your next question comes from Steven Smigie – Raymond James.

Steven Smigie – Raymond James

Can you talk a little bit about your expectations for analog revenue in the second quarter in terms of high volume versus power versus high performance analog?

Ron Slaymaker

We don't break out guidance down into the various sub pieces. The only real product level guidance we want to provide is just a reminder of seasonality on calculators, but beyond that we don't break it down below the top level.

Steven Smigie – Raymond James

You took some charges and analog this quarter I think was the highest charge if I remember correctly. Can you talk a little bit about what was changed with those charges, what stuff was kept and what was deemed less important?

Kevin March

Those charges were a completion of some of the charges we announced actually in the first quarter. Actually if you go back and look at the last couple of quarter, the bigger charges in the fourth quarter were in wireless and that was attributable to the announcement we made in October about restructure actions we were doing there as a result of our de-emphasis on digital base band space.

And then in first quarter with our announcement there of a restructuring for the company of a voluntary retirement program and some involuntary departures, the rest of those charges have flowed through, more of those charges have flowed through into first quarter. And frankly, some of those charges are a function of the regions in which we operate, but we have to take them as we identify people in the regions, and this just happened to be the timing of how the charges for analog worked out this quarter that in some of the regions that sign up as higher for them than other areas.

Operator

Your next question comes from Ross Seymore – Deutsche Bank.

Ross Seymore – Deutsche Bank

On the revenue guidance with the $60 million of incremental calculator business, what's the reason why you're expecting the semi conductor business to be flat to very slight up given the booking strength and your inventory burn off being completed commentary?

Ron Slaymaker

A couple of points I would make there and keep in mind we have a pretty wide range so I figure you're focused on the mid one of that range. But again, as we indicated there is both upside and downside potential for that.

But the other consideration is if you just look at some of the pieces, for example 18% increase in orders, remember that orders in fourth quarter were down by over 40% sequentially, so again that 18% increase is off a very weak compare in fourth quarter.

Also, book to bill in the quarter that Kevin mentioned of 1.05, you probably have, let me just say a little bit of help on that from associated with seasonal calculator orders in preparation for that back to school string.

So you put it all together, and again allowing that what we're seeing or what we believe we're seeing is end of inventory correction as opposed to clear signs of end consumption gains. We put it together in the guidance that we put in front of you is our best estimate of what we believe will happen.

Ross Seymore – Deutsche Bank

On the OpEx and more specifically on the restructuring charges with it, when you gave the total amount of charges you expected to take, you gave a remainder for the second and third quarter on how much that would total to. Does the fact that the second quarter restructuring charge, and for that matter the first quarter being larger than your prior guidance, does that take away from what the charges may be further out and so the third quarter charge might be closer to zero?

Kevin March

That's a good question. We're going to be providing some more color on that later in the quarter, perhaps in the mid quarter update. We actually have a large activity underway in one of our non U.S. subsidiaries and we'll know more about how that shapes up this quarter. We know enough now that we can give you the estimate that we've given to you.

I would anticipate there would be some trailing off in the second half of the year but it's premature for me to be able to quantify that for you just yet until we get the final sign in the subsidiaries.

Operator

Your next question comes from Glen Yeung – Citigroup.

Glen Yeung – Citigroup

When you talked about the end of the first quarter you mentioned wireless infrastructure, some end markets getting better, but when you look into the second quarter, which end markets do you feel most confident can grow and where you do you see some risk from an end market perspective?

Ron Slaymaker

I don't know that we have a lot to say there. Again, we'll probably see, I don't think we anticipate seeing any of those where we were seeing some strength start to move into place. We don't necessarily expect to see those fall off, but as Kevin said, our real question what we're watching, not what we're projecting, but what we're watching will be when do we see some of the other regions start to strengthen and maybe areas like industrial that would represent a much broader view of the economy start to strengthen as well.

We not seeing that, but those are the data points that we're watching.

Glen Yeung – Citigroup

In your comments, you're quite careful to say that you're not seeing restocking of inventory, just a deceleration or decline in the rate of inventory reduction. I wondered if you can just clarify that point. I just want to make sure what I heard was right. And then maybe address the idea of whether or not you're still seeing destocking in some of those regions you're looking for growth so in Europe or the U.S. or industrial or the consumer.

Ron Slaymaker

I'll give it a stab here. I think it's difficult. Not all customers are going to move at the same pace and as we said already, we have a lot of variance in different regions so it's difficult for us to say at this point whether we think it's totally behind us. We certainly believe the worst of that correction is behind us, but do you still have some of it going on, you very well could.

You're right. We're not saying there is a restocking process going on, if by use of that word you mean customers starting to build inventory levels again. I think what customers generally are doing, they're just like TI. They've basically gone through the worst part of them correcting their own inventory to the realities of a lower level of consumption. They have that behind them and for the most part they're now stabilizing their inventories at targeted levels.

So they're replenishing only to the extent they're pulling TI product out to go put it in finished goods. They're replenishing that inventory but they're not building their chip level inventory. So hopefully that helps as opposed to further confuses.

Operator

Your next question comes from David Wu – Global Crown Capital.

David Wu – Global Crown Capital

I have a question around costs. Should I assume based on the schedule of cost reduction that all the economies from the cost reduction would actually be achieved in the September quarter as opposed to the December quarter. Then I was wondering since your capital spending is down to $300 million this year, whether there's going to be a big drop in depreciation from the $900 million you are booking for calendar '09 and calendar 2010?

Kevin March

On the cost front, most of the activity that remains now for us is in our non U.S. subsidiaries and based on the labor laws and some of the other elements that occur in those countries, we don't expect the timing of that cost to adjust much more from what we've already talked about. In other words, you asked would we see the full benefit in the third quarter rather than the fourth quarter and I would suggest for your model purposes you can keep it as you had and that is expected in the fourth quarter.

On the CapEx and depreciation front, you are exactly right. With those kind of spending levels, we should see depreciation begin to work its way down. We don't have a forecast just yet, but I would just point out that if you look at our depreciation over the last 12 months, it's worked out to just a little bit less than 9% of revenue.

If you look at our CapEx over the last 12 months, it's worked out to about 5% of revenue. So be definition that's going to suggest our depreciation will begin to tail down on those lower level capital expenditures. But I'd just remind everybody that we generally depreciate our equipment on a five year straight line basis so you can do the math for your models and figure that out.

Operator

Your next question comes from Tristan Gerra – Robert W. Baird.

Tristan Gerra – Robert W. Baird

If we look at the revenues you had last year in wireless, specifically one customer which I think was around $400 million, your analog revenues declined year over year was almost the same as in wireless where you lost market share. Is this because the [inaudible] in Q1 which had an impact on year over year comp in analog as opposed to share loss, and as such should we expect analog to be down more than wireless in Q2?

Ron Slaymaker

I won't give a forecast on Q2, but I believe your analysis is correct. In fact our analog revenue was down about 36% year over year while our wireless was down about 40% year over year. But in fact, you may recall from our earlier comments that we substantially reduced our inventory not only internally but also in our channel, our distribution channel.

A significant portion of the analog revenue does go through the distribution channel, so what you're really seeing is the effect of that adjustment in their channel as opposed to any similar customer changes you're seeing over wireless.

Tristan Gerra – Robert W. Baird

Could you give us a sense of the amount of revenues in merchant base that you generated in the quarter and which you said was winding down in 2012?

Ron Slaymaker

You used the term merchant based. Let me just broaden that to total base band. So it will be custom based band and merchant and that was reference I was making to the revenue that would decline in 2012, by the end of 2012. And if you look at it, last year as a total, about 75% of our wireless revenue was base band and it was approximately that same level in first quarter so that should give you something to work with there.

Operator

Your next question comes from John Pitzer – Credit Suisse.

John Pitzer – Credit Suisse

I know there's a lot of different ways to look at the inventory cycle, when I look at the mid point of your June guidance, you're down about 35% year over year and I'm hard pressed to find any of the end markets that are down that much, so why isn't June considered another quarter where you're shipping below consumption and hence there should be catch up sometime in the second half of the year?

Ron Slaymaker

Again, we don't have perfect visibility into this but we're giving the best estimate that we can. We've seen stabilization which is a good sign. We're seeing stabilization of that inventory correction and therefore their demands on TI in what is arguably still a weakening overall economic environment and so when you talk about inventory correction being complete, that's based upon certain assumptions of what end demand will look like.

If end demand starts to increase, then more inventory is necessary to support it. If end demand falls then even less inventory is required. But in general, what we believe is happening is there's a convergence between those end demand trends, our customers production levels and our customers inventory levels in terms of component levels of TI products and we're calling it the best we can at this point.

John Pitzer – Credit Suisse

From a question earlier that you don't think base band will mute the cyclical recovery. I'm kind of curious when you look at some of the initiative you've had in HVA over the last six to nine months, any expectation that actually market share gain might actually accelerate your growth off the bottom and when can we see that?

Ron Slaymaker

You're saying specific to base band?

John Pitzer – Credit Suisse

Earlier it sounded like base band revenue and the disinvestment there isn't going to hurt growth off the bottom. i.e., you talked about phasing out the revenue in 2012. I'm kin of curious when you look at some of the initiatives you have in HVA around share gains whether or not we're starting to see the evidence of that and that might actually help you grow faster than the industry off the bottom.

Ron Slaymaker

I see what you're saying. So just to be clear, the base band revenue will decline year by year until by the end of 2012 we would essentially, that would be gone. You are correct that we do have in our high volume analog group we have programs that are targeted and addressing hand set opportunities that we for over a year now I think have been describing that we expect the second half '09 to represent a period when those programs would be ramped into production.

We've also described that was a, probably since '04 a pressure on that part of our analog group in terms of revenue in that we've seen declining revenues for that period. So again, high volume analog, wireless revenue is in the process of bottoming, and then in fact we're in the early stages of production today on some of those new programs and we should start to feel it more in terms of second half ramp for those programs.

So absolutely no change to the expectations we previously described. Those programs are being executed and executed well and we still expect them to be ramped into production. And again, it's not one program, but we will see initial programs ramping into production second half of this year and then continuing into 2010 in terms of other programs.

Operator

Your next question comes from Sumit Dhanda – Bank of America, Merrill Lynch.

Sumit Dhanda – Bank of America, Merrill Lynch

First a clarification, you noted the four areas where you saw some improvement, LTD, notebooks, infrastructure and enhancement to some extend but if you look at the magnitude of the $200 million versus your initial projections back in January, it seems like it must have been driven at least in dollar terms by the other segments, so I was hoping you could provide some more clarification on that.

Ron Slaymaker

I think you can, again, we're talking beat here. But your point is the variance to the forecast as opposed to absolute dollars. Clearly handsets were part of it, but we have a lot of analog products that get sold into different pieces of the computer market. Whether those are power management products going into notebooks, whether they're products that go into hard disc drives, I do not want to minimize the importance of that market to TI and what we saw in the quarter.

I would say handsets and notebooks were probably more significant to us than for example the television market. We did see some strength just as you pointed out due to the size of that business relatively, but again, I would say most of the emphasis would be on notebooks as well as handsets in terms of driving the upside to our expectations.

Sumit Dhanda – Bank of America, Merrill Lynch

On the gross margins on the reported quarter Q1, any reason you didn't do a little better? Was it just despite the revenue upside it was offset by a bigger drain in inventory than you were initially targeting?

Ron Slaymaker

It was exactly that. It was a stronger drain in inventory than even our best plans had us at.

Operator

Your next question comes from Cody Acree – Stifel Nicholaus.

Cody Acree – Stifel Nicholaus

You said 60% of revenue into Asia. Of course that's more than a manufacturing discussion where things are ending up, but how much of this stabilization in this one area versus a global improvement has to do with some of the stimulus that's happening in that market, or is it simply that the manufacturing of much of this electronics is happening is Asia, and therefore that business is finding an end consumption match?

Kevin March

It's a really good question and the information that we get from our sales force in the region indicates that in fact the stimulus in China is probably having some impact on that demand, especially on the LCD TV front. We specifically heard on that front that consumers in China are responding to some of the incentives that the Chinese government is trying to offer to stimulate their economy.

And then coincident with that has been the fact that the Chinese initiatives licenses which is for infrastructure build out which is also benefited us. So certainly a portion of that is attributable to that stimulus. I can't actually quantify for you how much but it's safe to say without that stimulus, we probably would have had less of an upside than we did.

Cody Acree – Stifel Nicholaus

The discussion of wireless merchant or base band versus app, can either one of you give any color as to this uptick that you've seen and a little bit of strength. Has it had to do with the applications process or is it more basement related?

Ron Slaymaker

I would describe it instead of product specific or low end handsets or high end handsets, think of it again as more just tied to more customer specific and the timing of when those customers completed their inventory correction and adjustments versus the timing of other wireless customers. So again, less a statement about purging or emerging opportunities or smart phones or whatever and just more of customers getting through the inventory correction faster than some of our other customers there.

Operator

Your next question comes from Tim Luke – Barclays Capital.

Tim Luke – Barclays Capital

I was wondering describing the orders that you closed the quarter, how have things progressed as you've moved to this point in the current period. Have you seen a continuation of that upward trajectory or have you seen, I guess in the last quarter you had a 20 point range in your guidance versus your usual 10 and this time you have a very broad range, but it's also sort of down as well as up. How are you seeing things and where you have visibility too I guess is part of the question.

Kevin March

What we saw in the last few weeks of the first quarter has rolled into the second quarter, but I would also mention that to the extent that customers have placed orders on us, they have not placed orders on us well into the future. In other words, it's still relatively close in requested delivery dates which makes the certainty of the quarter just as opaque to us as it was 90 days ago when we came into 1Q, hence the wider range that we've provided for our guidance out there.

Tim Luke – Barclays Capital

If you could frame, if you move from deterioration to stability in the orders or in your broader business, how are you now framing the puts and takes on the gross margin line and where you think as you adjust to where you perceive to be the L shape of no major uptick but maybe some stabilization. How are you framing the expectation for gross margin as you move to the end of this year and next year and maybe just, you gave some precise R&D guidance? Do you think the SG&A is kind of flat from here?

Kevin March

I think there were a couple of points in there that you had. On the GPM front, we don't give specific forecasts there but I would just remind you that we did mention our utilization is expected to increase in the second quarter which would in turn have a favorable effect on both our GPM percent and our GPM dollars.

In addition, we had mentioned that the restructuring actions that we announced 90 days ago, the $700 million of annualized savings, about 20% of that was going to come through the GPM line as well as those would be manufacturing efficiencies. So those two forces combined over the balance of the year will put upward movement into the gross margin line.

And then on the SG&A front we would expect to see some continued although somewhat more moderate decline in that over the balance of the year similar to what we just saw in the first quarter. Again, that's part of the other 80% of that cost reductions that will pan out by fourth quarter. So expect that to decline more moderately over the balance of the year.

Operator

Your next question comes from James Covello – Goldman Sachs.

James Covello – Goldman Sachs

The connectivity segment was up year over year. Was that just a function of the small base a year ago or is there some share gain working in there as well?

Kevin March

I think it's a combination of increased penetration for features like GPS and wireless LAN and more advanced handsets, and then I think also on top of that is likely some share gain for TI as well. But we're also riding the wave of just higher penetration for those features in the more advanced handsets.

James Covello – Goldman Sachs

The China 3G that has been so strong across a number of companies in the supply chain, how much do you worry that that could kind of fall off as quickly as it's come up in the later part of this year and maybe mitigate some of the improvement that we should see from the rest of the world at that point?

Kevin March

That's a very good question because it's certainly one that's been on our mind as well. We certainly have benefited from the roll out of the first phase of the 3G in China, and as I understand it, there's a second phase to happen later in the year. So while there may be a little bit of a roll down as that first phase completes its roll out, there should be a second phase occurring later in the year and as I understand it, that may roll into early next year as well.

We don't have any precision on that, but that's how we understand that the phasing is going on in China.

Operator

Your next question comes from [Alex Guana – JMP Securities]

[Alex Guana – JMP Securities]

I was wondering if I could ask a follow on to that phasing of the 3G opportunity. In your expectations, is one larger than the other and how do you see your content playing out in that?

Ron Slaymaker

You're saying like would the second phase roll out be bigger than what the initial phase is?

[Alex Guana – JMP Securities]

Exactly, because I don't have any color on it myself what we're actually talking to and the differences between the phases.

Ron Slaymaker

I don't have a lot of color other than what I understand it's the larger cities in phase one and smaller cities in phase two, so one would have to presume there's going to be fewer base stations in smaller cities so it may not be as large as phase one.

[Alex Guana – JMP Securities]

Within the embedded processing space, Intel is making some noise with the atom processing in the SOC, how do you see OMAP playing up against atom? Are there some sockets in question in their roadmap versus your roadmap and how would you see that playing out?

Ron Slaymaker

Our view is if it's a disc type of operating system, it's one that's going to fit very well with what Intel's history is, the architecture that atom process is just where they have historical strength. If it's outside that operating system, we would expect that they're going to be a competitor but we also don't expect that they necessarily will have architectural strength.

In fact, I suspect you're going to find out over the course of time, they'll have architectural deficiencies especially tied around power consumption of that processor relative to the performance of that processor. So again, if you're in a traditional Microsoft Vista type of environment, that overhead is just part of the necessary trade off to be able to support the X86 Legacy that product has.

Outside of that, there's no value to that Legacy and it's only overhead. So that's our view of it.

Operator

Your last question comes from Adam Benjamin – Jefferies & Co.

Adam Benjamin – Jefferies & Co.

On utilization rates, I know you've tagged your factories at about 50% for the rest of this year and I was wondering if you could comment on whether you expect to have any factory shut downs this quarter versus what you had about four weeks in the March quarter, and then how that would play out because given no factory shut downs you should be looking at a utilization rate and a gross margin much higher and back to roughly the Q4 levels assuming pricing is relatively stable which all indications are that it is at this point.

Kevin March

I don't believe we indicated a utilization rate. What we said was we just came off a record low mid 30's utilization first quarter. We expect utilization to increase in second quarter and beyond that it will just adjust according to what the revenue outlook is.

To your specific question about additional shut down, we do not presently additional shut downs of the magnitude that we've done in the last couple of quarters planned. We will continue to do small line adjustments to meet demand, but not of the magnitude that we've had in the last two quarters.

Adam Benjamin – Jefferies & Co.

Just a follow up on some comments on the wireless infrastructure side. You had indicated that you're shipping ahead. I was just curious if you can give some color as to why that's the case and then secondly just the magnitude of the delta for what you expect you're shipping ahead right now.

Ron Slaymaker

We have no idea in terms of the magnitude and the only reason I'm saying we're shipping ahead is any time there is a new program that is ramping volume and increasing that volume, the customers have to get their inventory position in place ahead of that production ramp in order to support the ramp. Nothing beyond that.

With that, I'll thank you for your questions and overall before we end, thank you for joining us. A replay of the call is available on our web site. Good evening.

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