Texas Instruments Incorporated Q2 2010 Earnings Call Transcript

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Texas Instruments Incorporated (NYSE:TXN)

Q2 2010 Earnings Call

July 19, 2010 05:30 pm ET

Executives

Kevin March - Senior Vice President and Chief Financial Officer

Ron Slaymaker - Vice President and Head of Investor Relations

Analysts

Chris Caso - Susquehanna Group

Uche Orji - UBS

Tristan Gerra - Robert Baird

Srini Pajjuri - CLSA

Jim Covello - Goldman Sachs

Ross Seymore - Deutsche Bank

Craig Ellis - Caris & Company

Sumit Dhanda - Bank of America Merrill Lynch

Glen Yeung - Citi

Kyle [ph] - FBR Capital Markets

Shawn Webster - Macquarie Research Equities

Christopher Danely - JP Morgan

Doug Freedman - Gleacher & Company

Steven J. Smigie - Raymond James

Tim Luke - Barclays Capital

Ramesh Misra - Brigantine Advisors

Operator

Good day and welcome to the Texas Instruments, second quarter 2010 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Ron Slaymaker. Please go ahead sir.

Ron Slaymaker

Good afternoon. Thank you for joining our second quarter 2010 earnings 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. 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 earnings release published today as well as TI’s most recent SEC filings for a more complete description. Our mid-quarter update to our outlook is scheduled this quarter for September 9th. We expect to narrow or adjust the revenue and earnings guidance ranges as appropriate with this update.

In today’s call, we’ll provide an update on our strategic progress, discussing how the quarter’s results align with our longer term objectives. Our core businesses are the Analog, Embedded Processing and the smartphone focused applications processors and connectivity products and our wireless segment collectively made up 67% of our revenue in the second quarter. They grew 11% over the first quarter and 53% from a year ago. They are also the areas where we’re focused our R&D investments with 88% of our total second quarter R&D spend focused in these areas. These are the growth engines for the future.

Part of the attraction of our Analog and Embedded Processing businesses is the breadth of their position across the electronics industry. With these products, we have the potential to sell into literally every electronic product that is produced. This includes computing applications such as fast growing tablet computers and at the other end of the market spectrum, includes industrial applications such as smart meters.

As we’ve seen over the past year, these end markets often move at different speeds. The recovery that began in the first half of last year initially began with the high volume computing and communications market with the industrial markets not beginning their recovery until late in the year.

Although some of the high volume markets are now normalizing into their more typical seasonal growth patterns, the industrial market has continued its recovery. For TI this is evidenced in the strength of our various catalog product lines such as catalog micro-controllers and digital signal processors in our Embedded Processing segment as well as high performance Analog and power management products in our analog segment.

These catalog products are typically sold through distribution often in low volumes to a large number of customers across the world. Our revenue in the US and Europe regions are both weighted toward industrial applications and both areas performed well in the quarter.

These catalog product lines will particularly benefit over time from the size of TI’s field sales and applications force and the breadth of our product portfolio as we have a stronger capability to call on more customers and sell more products to those customers.

The notable area of weakness in the second quarter was in wireless where we experienced an unexpected slowdown late in the quarter. We believe this weakness was a customer specific issue and not a broader reflection on the market. I’ll discuss that more in a few minutes.

Overall, TI revenue in the quarter was up 9% sequentially and up 42% compared with a year ago. Analog revenue grew 11% sequentially and was up 56% from the year ago quarter. All three of our major Analog product areas were solid contributors to this growth in both comparisons although sequential growth was most significant in high performance Analog due to its strong position in the industrial market.

Over the past five quarters, HVAL revenue has continued to pace well with our other Analog areas and was up more than 50% from the year ago quarter. This provides additional confirmation that HVAL has turned the corner and should be a strong contributor to our growth in the years ahead.

Embedded Processing revenue grew 17% sequentially and was up 47% from a year ago. Catalog micro-controllers and digital signal processors were the areas of strongest growth in both comparisons. The relatively large size of the micro-controller market, combined with the potential for TI to gain significant share represents our most significant Embedded Processing opportunity. Micro-controllers led our embedded processing growth in both the sequential and year on year comparison as our investments in this area are producing results.

Wireless revenue was up 1% sequentially and up 18% compared with a year ago. Revenue of $311 million from applications processors and connectivity products for smartphones was up 6% sequentially and 52% from a year ago. These products are redefining our wireless segment and are delivering strong growth. Baseband revenue, which as expected, continued to decline, was $416 million, down 2% sequentially and about even with a year ago. Basebands are now 12% of total TI revenue compared with 17% in the year ago quarter.

As you know, we made a strategic decision to exit the Baseband market and as we do, we’re maximizing profits during our multi-year wind down of this product line and using these profits to fund growth in other areas. Revenue in our other segment comes from a mix of product lines, mostly DLP products and calculators as well as royalties. Although there will be significant variance in growth across these product lines, collectively they will have relatively lower growth. Nonetheless, they had strong profitability.

In the second quarter, revenue in our other segment grew 9% sequentially. Calculated revenue increased seasonally and more than offset a decline in royalties. From a year ago, revenue in the other segment grew 42% mostly due to strength in DLP products. From a geographical perspective, Asia Pacific, Europe and the US regions grew sequentially while Japan declined. All regions were up from a year ago.

Turning to distribution, re-sales or sales out of our distribution channel were up almost 15% sequentially. Once again, we believe this represents share gains for TI across multiple distributors. Even with a strong resale growth, we were able to help distributors build some inventories to support future growth. Distributors’ inventory remained low by historical standards at about five weeks of inventory, similar to the past few quarters.

Now Kevin will review profitability and our outlook.

Kevin March

Thanks Ron, and good afternoon everyone. As we’ve shifted TI’s focus to Analog and better processing, we are addressing better opportunities and our financial results are reflecting this through higher levels of profitability, better earnings per share, lower capital requirements and higher returns. Our gross profit expanded by 12% sequentially this quarter as revenue grew and grew in the right areas.

Gross margin also increased by 150 basis points to 54.2% of revenue. Operating expenses increased $41 million in the first quarter. Almost all of this increase was focused on our core businesses.

Operating expenses declined to 22% of revenue in the quarter. Restructuring charges in the second quarter were $17 million. This was for US pension plan settlement accounting associated with actions that occurred in 2008 and 2009. The distribution of these charges across our segments is included in our earnings release.

Operating profit for the quarter was $1.11 billion. This is the best operating profit TI has ever produced. Operating profit was 17% higher than the prior quarter. From the year ago quarter, operating profit was up $764 million. In both comparisons, the higher operating profit reflects higher revenue and the associated gross profit.

Operating margin in the second quarter was 31.7% of revenue. Not only did our core businesses drive most of our revenue growth this quarter, they’re also grown 75% of the incremental profit. That increment in the second quarter was $759 million or $0.62 per share, an interesting comparison to the third quarter of 2007.

Prior to this past quarter, 3Q ‘07 was our high level mark for operating profit. This quarter’s operating profit exceeded that quarter’s by 9%, even though revenue in that earlier quarter was 5% higher. Earnings per share is an even better story, up $0.10 or 19% compared with 3Q ‘07 as our operating profit gains have been further amplified by our stock repurchases. These results clearly represent the power of the portfolio changes we’ve implemented and the benefit they have provided to our financial results.

I’ll leave most of the cash flow and balance sheet items for you to review in the release. Well, however, let me make just a few comments. Cash flow from operations was $552 million. This was down from last quarter due to income taxes that we paid in the quarter.
Cash flow from operations was about the same as a year ago.

Capital expenditures increased to $283 million dollars in the quarter. Expenditures include the purchase of Analog wafer fab equipment as well as assembling test equipment.

Recall that we announced earlier in the quarter that we have begun the buildup of phase two of our analog capacity expansion at RFAB with the purchase of additional 300 millimeter equipment from commodities’ bankruptcy proceedings. We will continue to make opportune capacity investments to support our analog growth as these opportunities arise.

Just last week we announced that we will be buying additional 300 millimeter equipment to help complete the RFAB phase two buildup as well as an operational 200 millimeter fab and an additional fab facility that can be equipped with 200 millimeter or 300 millimeter equipment as needed in the future.

These facilities are located in Japan and were purchased as part of Spansion Japan’s bankruptcy proceedings. The purchase price on this manufacturing capacity is attractive and these purchases will help give us the capability to significantly grow our analog business while providing strong returns on these investments. I should note that in the second quarter, our return on investor capital moved up to 31%. Our strategy is to continue to improve the efficiency of our manufacturing operations while making sure we have capacity in place before we need it.

We used $750 million in the quarter to repurchase 29.7 million shares of TI common stock and paid dividends of $147 million in the quarter. We were able to increase our inventory by $73 million in the quarter while inventory day held steady at 76. We have continued to improve our delivery performance and our lead times have continued to decline as we bring additional manufacturing capacity online and get better positions with inventory.

Even as we have continued in an orderly process of reducing lead times, demand from our customers has remained strong. Orders in the quarter increased to $3.7 billion. TI’s book-to-bill ratio was 1.07 in the quarter. Turning to our outlook, we expect TI revenue in the range of $3.55 billion to $.3.85 billion dollars in the third quarter or 2% to 10% sequential growth. We expect earnings per share to be in the range of $0.64 to $0.74.

Our estimates for 2010 R&D and depreciation are unchanged from last quarter. Our estimate for 2010 capital expenditures have increased to 1.2 billion from our prior estimate of 900 million, reflecting the additional manufacturing equipment acquisitions.

In summary, we continue to execute a strategy that will allow us to grow our analog and a better processing business significantly faster than the respective markets. Results in the second quarter confirmed the attractiveness of the strategy both in terms of the top line growth that can be produced as well as the earnings potential of these businesses and we’ve continued to pave our path for long term growth with low cost acquisitions and manufacturing capacity that will provide us competitive advantage on (inaudible) the company with unmanageable fixed costs.

With that, let me turn it back to Ron.

Ron Slaymaker

Thanks Kevin. Operator you can now open the lines up for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourselves to a single question. After our response, we’ll provide you an opportunity for an additional follow up. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from Chris Caso of Susquehanna Group

Chris Caso - Susquehanna Group

Hi, thank you. First I guess if you could comment on the bookings in the quarter and you talked about in the press release up 2% sequentially. That looks like it’s slower than the growth we’ve seen in the past couple of quarters. But it sounds like the book-to-bill was actually a bit stronger than that, what you just said. If you can give some color about what you’ve seen there?

Kevin March

Sure Chris. What we saw was bookings actually broadly crossed all of our products and markets and across all the regions. We actually think the orders are coming in probably more consistently with underlying demand. You may recall that last quarter our book-to-bill was 1.14 and this quarter at 1.07. We believe what we’re seeing here is the effect of us in orderly fashion beginning to pull our lead times in, we’ve given our customers more confidence that don’t have to place orders on those (inaudible) as far out in the future as they have for the last three quarters and in addition the underlying demand is going on -- is increasing orders as well as the market share gains.

So combined, we think the order pattern is beginning to align up a consistent way with the changing lead times and just underlying growth through market growth as well as market share gains.

Chris Caso - Susquehanna Group

Yes thank you, and I wish if you could talk a little bit about inventory. You talked about -- you said you built some inventory at distributors during the quarter, what’s the plan going forward? Obviously you’ve got plans to add a bunch of capacity and in addition to that I guess you are also moving to a consignment model with some of those distributors. Can you talk about as you build that inventory, is that showing up in the revenue number or is that mainly going to consignment at this point?

Kevin March

Chris, I believe we talked about re-sales of distribution were up about 15% last quarter and in addition we were able to build some inventory in the distribution channel. I would point out that the turns in that channel continue to be at a certain low levels of about five turns overall.

On the point of consignment, that inventory cost when it was previously carried on the distribution books, is now moving on to our books and will constitute some growth that you’ll begin to see in our held inventory. But at 76 days, I’d categorize that has continued to be very lean inventory balances overall.

As we go forward, we will continue to convert more distributor inventory to a consignment arrangement and so that we’ll shift from their books onto our books, but that will be over the next year, year and a half or so before we complete that process.

Ron Slaymaker

Jeff, as a correction, distributor weeks of inventory are about five, not turn.

Kevin March

Okay Chris, thank you and let’s move to the next caller please.

Operator

And our next question comes from Uche Orji of UBS.

Uche Orji -- UBS

Thank you very much. Can I just focus a little bit on the embedded business where you’ve seen some really strong growth; you mentioned micro-controllers being the key driver. Any color you can give us as to specific end markets strength that’s driving that strength in embedded and just as a matter of explaining whether that share gains or whether the overall industry has seen some strength in embedded, that would be helpful. Thank you.

Ron Slaymaker

Uche, I can try to give you some, however you also have to keep in mind that the area that we said was growing more significantly in embedded processing were the catalog products, so just by definition those catalog products go into lots of different end markets and it’s not any particular end market that’s driving it. What I would say is that just in addition, catalog grew strongest but we also saw growth in coms [ph] infrastructure and automotive as well but it was catalog products that were growing more significantly and when you think about that, think about applications mirroring with one that I think I mentioned previously, motor control, you get equipment like safety equipment, medical equipment, those type of applications that come in.

Do we believe we are gaining share? I believe so and we haven’t seen the competitor’s report but with 17% sequential growth in that business, I would venture to say that probably represents pretty clearly market share gains from TI in that area, pretty some of what you’ve seen for the last five years from TI in that area where we have been growing well above market growth rates in embedded processing and the reality is we are kind of feeling the investments in that area as well. So if anything over the course of time, we would expect to maintain that relative out performance versus market overall if not even accelerate that.

Do you have a follow on that, Uche?

Uche Urji - UBS

Yes I do actually. Can I just ask you about wireless? Okay so probably we say just say we’re seeing early signs of the Nokia share ship to other supplies into Nokia. The baseband chops into the revenues, I’d like to get a sense as to how much this contributes to your profits for the quarter and also as we grow through the rest of the year, any sense as to how much of the baseband revenue is 3G verses 2G and should we see the modeling this going down to zero say by 2013? And that’s my last question, thanks.

Ron Slaymaker

Okay Uche, I’ll take the latter part then I’ll let Kevin make any comments he would choose about profitability there. The composition of baseband these days is 80% of that revenue is 3G and then that would leave 20% basically representing the older technologies. By comparison in the year ago quarter, 50% of that baseband revenue was 3G. So we’ve seen a very significant market shift over the course of the past year away from the older technologies and towards 3G and I believe you commented that I would agree that in terms of competitor pressure at Nokia where again they’ve acknowledged and they have a strategy to multi-source products, this year basically the competitors that they have on board will be addressing those older non-3G technologies which represent 20% of our baseband technology and then the 80% that is 3G to the best of our knowledge it will be 2011 before they have any other alternative suppliers on board with 3G basebands there. Kevin, the question regarding the contribution of baseband profitability to TI.

Kevin March

Yeah, Uche on that question there, we’ve talked in the past about the baseband products operating about a 40% kind of gross profit margin level and we’ve described in the last couple of quarters how we’ve removed pretty much all of our R&D spending on that product line. Request for that -- support for that; customer service support low entry and things of that nature, factory planning still goes with that.

However given the nature that basebands are largely going to a single customer, we don’t really think it’s appropriate for us to give any further commentaries to profitability that would be happening inside of that particular product family.

Ron Slaymaker

Okay, Uche thanks for you questions and we’ll move to the next caller.

Operator

Our next question comes from Tristan Gerra of Robert Baird

Tristan Gerra -- Robert Baird

Hi, good afternoon. Regarding the Richardson fab, could you give us a sense of what percentage of that fab output potential could be in production by year end assuming that can end demand trends remain stable and when you would expect follow up.

Ron Slaymaker

Tristan, Which fab are you referencing?

Tristan Gerra -- Robert Baird

Your new a 300 millimeter fab.

Ron Slaymaker

RFAB, okay. You want to give an update on that Kevin?

Kevin March

Sure. RFAB is still on schedule to harvest our first production products exiting that factory by the end of this year. We announced of course phase one of the equipment claim to that fab late last year that would give us an incremental $1 billion of revenue capacity when fully up and running.

In the last quarter we announced that phase two, which will give us a second incremental $1 billion total, about $2 billion of delta revenue capability when fully up and running. Of course phase two will be fully up after phase one so expect that next year or beyond. But the quick answer is that by the end of this year we expect to have qualified products shipping from that factory able to begin to generate revenue.

Ron Slaymaker

Okay, Tristan do you have a follow up?

Tristan Gerra -- Robert Baird

Also on the wireless revenue growth for Q3, would you expect seasonal or below seasonal output and or trans-quarter of a quarter and do you think that the 3G mix will continue to increase?

Kevin March

Tristan, that’s probably -- I think over time, it makes sense that that 3G mix will continue stay on the trend that it has been. But whether that holds for any particular quarter is probably more precise than I would want to get and then similar just in terms of our outlook, we try to keep it at the company level as supposed to individuals segments or products lines. I really don’t have a forecast for you on what we’ll expect from wireless there. But again, in general we would expect to track overall, the general performance of our customer in that market.

Ron Slaymaker

Okay Tristan, thank you for your questions and let’s move to the next caller.

Tristan Gerra -- Robert Baird

Thank you.

Operator.

Our next question comes from Srini Pajjuri of CLSA

Srini Pajjuri -- CLSA

Thank you. A couple of questions; Kevin, given that the lead times are now coming in, what are you expecting for the turns business this quarter versus another -- past few quarters?

Kevin March

Srini, I don’t have a specific forecast for you on that. I would just note the terms have been pretty quick at five weeks for an extended period of time right now and so those things tend to change at a fairly slow pace but beyond that I don’t have a specific forecast for you.

Ron Slaymaker

Is there a follow up, Srini?

Srini Pajjuri -- CLSA

Yeah, just on the wireless Ron, you said that one of the customers were a week late in the quarter. I am just wondering, was it specific to the baseband business or was it more broadbased across all the products lines and also if you can address whether you expect that business to come back this quarter, thank you.

Kevin March

Okay Srini, I think in that customer’s own pre-announcement, they described general weakness in their high end business. So as you might expect that goes across more than just basebands. It would be across apps, processors and connectivity products in terms of where we saw some unexpected weakness.

Now, that being the case, if you look at the sequential trends, one you’ll note is that basebands were down where the other areas collectively still went up. So again that was -- but from what we were expecting with let’s say early June when we gave mid quarters guidance, all those really softened up somewhat because of that particular customer.

Ron Slaymaker

Okay Srini, thanks for your question and we’ll move to the next call

Operator

Our next question comes from Ramesh Misra with Brigantine Advisors.

Ramesh Misra - Brigantine Advisors

Good afternoon, Ron and Kevin. In terms of putting your growth numbers into historical prospective, can you give us an idea of where historically Q2 growth has been and where Q3 growth has been?

Kevin March

Okay Ramesh, what I would say is, Q2, if you look at just the last five years, the average has been at 10%, but also you kind of have to allow, at least consider last year's Q2 was exceptionally robust with 18% sequential growth. If you just move to the -- take that out and move -- look at the five years prior to that, it would have been 2 percentage points less, so 8%. So again, what we just reported, I would say generally right now that range of seasonal Q2. With respect to Q3, again the five-year average is 8%. Last year's Q3 was similarly robust with 17% sequential growth. So if you look at the five years prior to that and basically exclude the third quarter '09 you would get to a 5% growth number for sequentially Q3.

Ramesh Misra - Brigantine Advisors

Just a quick one, Ron. In terms of gross margins, obviously, very strong last quarter. I presume that was mostly mix related. But where should we be thinking of gross margins kind of through the rest of the year or any visibility there that you can provide beyond Q3? Thanks.

Kevin March

We've talked in the past about the portfolio that should produce gross margins over time averaging around 55% and this is going to be just really a change in our mix as we move over time. I think we just did 54.2% this most recent quarter. Our focus as we move out in time now is really on top line. We believe the portfolio is able to deliver the kind of margins we talked in the past and the focus now is shifting really to accelerating our top line growth and being more aggressive with our market share gains.

Ron Slaymaker

Okay, thank you very much, and let’s move to the next caller please.

Operator

Our next question comes from Jim Covello of Goldman Sachs.

Jim Covello - Goldman Sachs

Great guys, thanks so much for taking the question. I'm sorry if I missed it, but I didn't hear, I don't think, where were lead times at the start of the quarter, kind of where are they today, where do you think they'll be at the end of the quarter?

Kevin March

Jim, lead times, we didn't actually characterize the number on it, that's why you didn't hear it. They came down a little bit again in second quarter as you saw in the first quarter. So we continue to make progress as we bring more capacity online and you could actually see the way we're supporting that is through de-stocking our fresh goods inventory.

And if you actually look at our balance sheet, you'll see that's where most of our inventory build was at. As we continue to bring capacity online, notwithstanding variability and demand going forward, we’d expect that lead time to continue to come down. And it's coming down pretty much across the board, so that is -- those items that were greater than 16 weeks, we saw some of those coming down to less than 16. Those that were greater than 14, we saw some of those come down to less than 14 and so on in each of those tranches as you take a look at them. We would expect continued progress on that front.

Ron Slaymaker

Okay, Jim, do have a follow on?

Jim Covello - Goldman Sachs

Yeah, my follow-up will be about maybe competitor lead times. What are you hearing about what competitor lead times are doing as yours come in a little bit?

Kevin March

The sort of anecdotal evidence that we're hearing, Jim, is that at least some of our competitors are actually experiencing extended lead times. We, of course, don’t order from them, so we don't know exactly what that means but we are hearing those kinds of things and we're having customers coming to us and asking us, we can't help out with some of those issues. Their customers are also recognizing that unlike our competitors, we in fact had been pretty aggressive in putting in capacity not only opening a simple test site to the bottom of the downturn last year, but starting RFAB late last year and more recently the announcement we just did last week of the acquisition of the Spansion Japan factories. That seems to be resonating well with our customers and in fact, we believe this is helping us win additional orders that should accelerate our growth going forward and accelerate our gains against those competitors from a future standpoint, let alone current lead time issues that some of them are starting to experience.

Ron Slaymaker

Jim, I just want to kind of reiterate some data I think that we shared at the Analyst Meeting. If you look at capital spending between the year 2007 and 2009, TI's capital spending was basically up 10% over that time period, where when we look at, general, the math of our competitors collectively, they were down -- and I believe this is an analog-specific comparison -- they were down on average 57%, and that doesn't even comprehend the fact that many of these analog competitors took a lot of capacity offline.

So, in addition not to spending on new capacity, they were taking capacity offline. Customers see that data. They see the spending we're doing -- that we did through 2009 plus what we've done in addition to that and frankly, they know how that's going, they know how to extrapolate into the future, know what that situation is going to result in, in terms of availability of product and that's why I think the situation Kevin's describing is there. They're already seeing some of these various competitors start to extend lead times while at the same time they are seeing TI pulling lead times, plus as Kevin said, really lay the path for our future in terms of these capacity investments.

So frankly, we think that's big; we think it's going to be a big differentiator for TI over the course of the next few years.

Kevin March

Okay Jim, thank you for your question and we’ll move to the next call.

Operator

Our next question comes from the line of Ross Seymore of Deutsche Bank

Ross Seymore - Deutsche Bank

Hi guys. Ron, pretty much on that topic you were just talking about, between the Spansion addition and then the Qimonda equipment, you talked about adding $3.5 billion of revenue capacity. I guess, two questions on that. First, can you tell us how much you paid for those Spansion assets? And then secondly, the $3.5 billion is about 2.5 to 3 times how much dollar growth you've seen over the last four years in your Analog business. Are you just getting more optimistic about how fast you can grow revenues or is this kind of a pull forward of CapEx? How should we think about that kind of big investments you’re making?

Kevin March

Ross, I'll go ahead and answer that. I think -- we started talking last year that as we were coming into the downturn and watching what was going on there that we would remain poised to be opportunistic to go ahead and take advantage of acquisition of capacity as well as companies, if it made sense for the smaller companies we can buy in, because the prices are so attractive.

This is just a continuation of what we talked about back then. We have been able to acquire these manufacturing assets at extremely attractive prices. In the case of Qimonda, we were able to discuss what that pricing was. In the case of Spansion, we have not disclosed that. But I can say to you that our estimate is that the original acquisition cost of that capacity we bought is close to $2 billion and we spent -- got it for a very attractive price, one that we are not at all concerned about will cause us to have an undue level of fixed cost to have to incur should the demand take a long time to play out.

But to go back to what Ron said a few moments ago, with the underinvestment that we’ve seen from a competitor standpoint, we expect our growth rate in fact should be poised to accelerate versus our competitors, and we may look back on this a couple years from now and find this very inexpensive type capacity acquisition to be a very opportune move for us to make the company much larger.

Ross Seymore - Deutsche Bank

So it's safe to say versus that $2 billion original acquisition price or cost what we paid was a small fraction of that, is that correct, Kevin?

Kevin March

Very small fraction of that.

Ron Slaymaker

And Ross, the other thing I would point out is, when you're looking at $3.5 billion of incremental capacity or revenue generation, I mean look at our Analog business alone, second quarter '10 over $1.5 billion, so annualize that and call it a $6 billion business. I think, last year, we were at $4.2 billion, and it's still growing. So, as we said, the strategy is to have that capacity in place before we need it. We're not trying to forecast exactly over what time period we will fill it up, but just keep in mind we're at a $6 billion run rate in terms of that revenue level today.

Kevin March

Do you have a follow on, Ross?

Ross Seymore - Deutsche Bank

Yeah, it will be a quicker one, I promise. Just -- what did the calculator business do in the quarter? I thought you guided it to be up about -- well even more than that entire other segment grew.

Kevin March

Ross, I think that we had suggested that Calculator was typically up around $65 million 1Q to 2Q, and it came in a bit stronger than that, but it was within its normal pattern that we've see in year's past.

Ron Slaymaker

And I think we also described in the release that there were some offset with lower royalties to that higher revenue as well. So Calculators was completely consistent with our expectations, and maybe even a little bit more.

Kevin March

Okay Ross, thanks for your questions, and we’ll move to the next caller.

Operator

Our next question comes from Craig Ellis of Caris & Company.

Craig Ellis - Caris & Company

Thanks guys. Just a quick follow-up on the CapEx. What percent equipped will Richardson be after the Spansion assets are added?

Kevin March

Craig, we think that it will be close to half the clean room will have equipment in it, so we'll have still half the clean room available for future expansion.

Craig Ellis - Caris & Company

Any thoughts on when the company would be looking to build that out then Kevin?

Kevin March

That's going to be a function of when we continue to find the kind of opportunistic equipment acquisition that we've got in these last couple of quarters. We really -- our interest there is to build that in a very cost effective fashion and not to build it at any cost. And so you'll probably continue to see us do what we have done, and that is when we see the right price for the right equipment, we will go ahead and pursue it and that will likely be in advance of when we actually need it.

Ron Slaymaker

Okay, Craig, thank you and we’ll move to the next caller please.

Operator

Next question comes from Sumit Dhanda of Bank of America Merrill Lynch.

Sumit Dhanda - Bank of America Merrill Lynch

Yes, hi. First question, Kevin or Ron, in terms of the outlook for the third quarter, the sales increase you're talking about outstripping the order growth which hasn't necessarily been how you've guided revenues in recent quarters. So just wanted to get some more detail on the thought process around that and is the backlog build stronger, either the anticipation of that later into Q3 and also further out into Q4, any color you could shed on that?

Ron Slaymaker

Sumit, let me ask you just a clarification. When you're saying our revenue outlook outstrips our orders, again our book-to-bill in second quarter was 1.07. Can you explain what you mean when you say outstrip our orders?

Sumit Dhanda - Bank of America Merrill Lynch

I meant growth rate; the growth rate in revenues versus the growth in orders witnessed in recent quarters?

Ron Slaymaker

Okay. I would just say again I think what Kevin explained previously, part of the reason that book-to-bill was coming down probably would be levels that would be more consistent with true end demand is, what a lot of you guys have described for some time, although it's probably happening in a more orderly fashion than what some of you would have projected. And that -- as lead times have -- as we progressed in reducing lead times, customers no longer need to provide us the very extended visibility that they had done let's say, six months ago when lead times were kind of out at their peak level.

So, with that lower visibility, the new orders are basically coming in to replenish at a level that is consistent with the true demand as opposed to the rate of orders basically reflecting a backlog that was extending out over time. So, probably that's about the best I can do in terms of trying to explain that. Do you have a follow on, Sumit?

Sumit Dhanda - Bank of America Merrill Lynch

Just along those same lines, anything that you could offer up in terms of the momentum or the trajectory of orders that you saw through the second quarter and then initially here into July and then what's the inventory outlook on your balance sheet into the third quarter?

Ron Slaymaker

Okay, I don’t know that I can sit there and describe a trajectory as we move through second quarter. I would say that orders quarter to date have remained strong and fully consistent with the outlook that we just provided in terms of revenue.

In terms of our inventory expectations, we do not at this point try to project any kind of inventory plans because our inventory plans for the third quarter really have more to do with our outlook for the fourth quarter so we may give you more visibility as we move to the quarter but at this point, we typically don’t.

Kevin March

Okay Sumit, thanks for your questions. And we’ll move to the next caller.

Operator

Our next question comes from Glen Yeung of Citi.

Glen Yeung - Citi

Thanks. Maybe -- just wanted to open that last question. When you think about third quarter, your guidance is slightly above what would be considered normal seasonal. Can you give us a sense as to what part of your business you think may be tracking ahead of plan or ahead of normal?

Kevin March

Glen, I’d say it’s broad based. We do need to keep in mind that our third quarter is typically the quarter when customers will order material in anticipation of fourth quarter holiday sales, and even some orders in anticipation of the first quarter Chinese New Year holiday sales so this seems to be shaping up consistent with that.

In other words, we’ve got a global economy that’s still growing, albeit at a pace that may be just a little bit down -- summarily the second half versus the first half. It’s still growing nonetheless and the order pattern that we have seen reflects that, it’s broad based, it’s probably been very strong and as we indicated earlier in the industrial and automotive segments that Ron talked about it and it’s probably gotten more to a normal seasonal kind of demand pattern in some of the other areas such as computers and handsets.

Glen Yeung - Citi

Okay, thanks. And as a second question, you guided 2010 depreciation to I think the same guidance you had before, but I’m thinking about -- you’ve now added some incremental capacity, obviously through both Qimonda and Spansion acquisitions, and I’m wondering if you were to conclude phase one of RFAB and then basically do nothing else with the assets that you’ve bought, what would be the increment to depreciation we would expect to see in 2011 or 2012?

Kevin March

Glen, I don’t have a forecast for you out quite that far but I would just kind of point you back to some of our spending over the last few years. Our depreciation over the last 12 months has been a little bit less than 7% for the last 12 months revenue.

Our CapEx, if you include the most recent acquisitions, have been under about 9%. We’ve been talking about a CapEx target of between 5-8% so I’d say the spending is pretty consistent with that sort of -- kind of goal, that is that you’ll probably see depreciation in the 5-8% kind of range over time, and looking forward with the CapEx that we’re doing right now, it’s probably going to be still inside that range just fine.

Of course that’s a function of what you wind up with revenue up to 2011 and 12, but anticipation of the growth there, which of course is what we’re expecting with the capital acquisitions that we’re making.

I would expect to see that depreciation kind of stay inside that range without actually getting into a dollar amount right now.

Glen Yeung - Citi

Kevin, what we have, I guess, disclosed up to now is for RFAB, the phase one purchase of that commodity equipment worth a little over 170 million, is that correct?

Kevin March

Correct, 173 million.

Ron Slaymaker

And then we bought additional commodity equipment that was roughly 75 million if I remember right, plus some incremental equipment that we didn’t disclose the amount of from Spansion, and Glen then you take those numbers, make an estimate -- maybe for some incremental equipment from Spansion and our depreciation schedule for 5 years will get you roughly into our ball park, and that’s not -- that would be pretty much before phase one or phase two of RFAB. So, at least that will help.

And then Kevin, just clarification on Spansion, the 200mm fab is an operating fab currently and when we first purchased it so that in the additional depreciation associated with that fab is already in our depreciation guidance which was unchanged that we just provided. Is that correct?

Kevin March

Correct.

Ron Slaymaker

Okay, so obviously the incremental depreciation associated with that 200-milimeter Spansion fab is not very significant. Okay Glen, thank you for your questions and we will move to the next caller.

Operator

Our next question comes from Craig Berger of FBR Capital Markets.

Kyle - FBR Capital Markets & Co.

Hi this is actually Kyle asking a question on behalf Craig. For your gross margin, you were talking about over time you were looking to get to 55%. However, you qualify that qualify that saying your shorter term focus is going to be top line revenue. When do you envision getting to the 55% level?

Kevin March

Actually our shorter term and longer term focus is on revenue growth. We believe the model is well on its way there, and at this point in time rather than really focusing on that kind of model and discussion of that, our focus going forward is on the top line because we believe with the portfolio we have, it will deliver the results that we've talked about. This is how we'll maximize our earnings growth in the future by growing our top line.

Ron Slaymaker

And Kyle, I'll just remind you. I mean, we just reported 54.2% gross margin. We're almost to a point where we'll be rounding 55%, so hold your breath.

Kyle - FBR Capital Markets & Co.

Just a quick one, your WiLink 7 product on the multimode radio product, how is that doing? Can you add some color to that, please?

Ron Slaymaker

Kevin, I believe that one would be for you.

Kevin March

Well, I'm going to have to confess I don't have very much knowledge on that front, Kyle, I'm sorry.

Ron Slaymaker

Kyle, unfortunately I don't think either of us probably have a lot of specific insight into where we're with that product line, unfortunately. Although if it's a product for handsets, which is where most of our Wi-Fi focus is, we have a very strong position. I think, I mentioned before that connectivity for TI is really focused on both discrete GPS chips as well as Wireless LAN, and I'll just note that industry analysts would estimate that last year, we had about 55% share of handsets are really smartphone Wi-Fi market share. So again that doesn't gets to the specific product that you're describing or asking about, but we have a very strong position and you can rest assured we're doing what we need to do in terms of new product development to extend if not expand that share. So, the other thing I would just point out on that is all of the connectivity options in a handset Wi-Fi is the least penetrated, but it's also the most rapidly expanding. So, we like that combination for our connectivity products, and that we have share in the connectivity technology that is growing fastest in handsets. So, we think great growth in terms of revenue in terms of that product line and we expect more going forward.

Operator

Our next question comes from Shawn Webster of Macquarie Research.

Shawn Webster - Macquarie Research:

Just to clarify real quick, the new CapEx guidance, that includes Spansion acquisition?

Kevin March

Yes, it does, Shawn.

Shawn Webster - Macquarie Research

Then on the gross margins, can you walk us through what changed sequentially from Q1 to Q2, and comment on utilization rate trends, and do you think utilization rates will be up flat or down for Q3?

Kevin March

Shawn, I guess probably about three or four quarters ago, we stopped discussion on utilization specifically, we were discussing it when it was illustrative of what was going on, it was dropping so fast and coming back up so sharply. Our utilization levels have fared back to a much more normal level, are somewhat elevated right now given the strong demand which is why we're adding capacity. Our utilization levels really didn't change that much last quarter to this quarter, and I wouldn't expect them to change too much going to next quarter partly as a function of we're bringing on additional capacity, and so we're kind of staying ahead of it now.

Shawn Webster - Macquarie Research

Just what else changed in driving gross margins?

Kevin March

On gross margins, yeah, really what we wind up with is mix as I had in my opening comments, not only was the majority of our revenue delta in our core product areas, but the majority of our profit dollars came through that, and that mix contributed along the GPM line as well as the operating profit line.

Ron Slaymaker

So again, just to reinforce, Analog grew 11% sequentially last quarter, Embedded Processing grew 17%. So as those areas continue to pace faster than our revenue overall, we'll continue to benefit.

Operator

Our next question comes from Christopher Danely of JP Morgan.

Christopher Danely – JP Morgan:

So you talked about continuing to make progress on the lead times. Do you think that those will go back to normal levels by the end of the year?

Kevin March

Chris, I can't give a precise answer on that, I sure would like to be able to say yes, but that's going to be not only a function of the order mix that comes in, but also a function of just how fast the top line continues to grow. I mean, I’d get – it’d be fairly safe in saying that we are growing at the upper end of our guidance, it’s going to be harder than it is if grow at the midpoint or at the lower end of our guidance, but beyond that I couldn't give you a specific forecast.

Christopher Danely – JP Morgan

And then as my follow-up, can you just give us a sense of how much your capacity is going to increase say over the next six months and then also in the first six months of next year with the new fab coming on?

Kevin March

Yeah, I think the biggest capacity increase really are on two fronts over the next six months, that's we've already discussed with the RFAB and that is 300-millimeter RFAB coming up and actually getting production material on that by the end of the year. That will be at relatively low volumes at first as you can expect, but it will ramp up all through next year. And then as to the Spansion fabs, we will get started pretty quickly here on getting process adjusted in there, so we can start wafers in those fabs by the end of the year, but I don't expect to see them qualify for production until sometime in middle of next year when we could start to actually generating revenue on product coming out of that.

Ron Slaymaker

So near term over the next six months the capacity expansion is a combination of 200-millimeter equipment that we've redeployed and spanned out through various fabs as well as the assembly test equipment. And then as we move through 2011, first half will be primarily affected by RFAB increasing and then second half would be a combination of further increases at RFAB as well as the 200-millimeter Spansion fab that would be in production by call it mid-2011.

Kevin March

Correct.

Operator

Our next question comes from Doug Freedman of Gleacher and Company.

Doug Freedman - Gleacher & Company

Kevin, you guys have had a very successful acquisition strategy that's worked along the way and helped drive some of the market share gains you're seeing. Is it possible for you to quantify for us what impact your acquisitions have had on market share gains and how you are looking at acquisitions going forward?

Kevin March

Doug, actually I can't comment on that because I don't know the specific answer to that question. I'm sorry. It's clearly important to us in that most of these acquisitions that we've done are quite small and when we expose to the extent that becomes product mix [ph] exposure to our sales force, we find those very attractive because often times we can sell the product as fast enough to recover our purchase price and furnish our order, but beyond that to say how much it’s actually increased our market share gains, I’d be a bit hard to press, really articulate a number right now because I just don't know the answer to that.

Doug Freedman - Gleacher & Company

Sure, if I could focus a little bit on what's happening with all the cash? You guys did a nice job of buying back some stock this quarter. Can you let us know is there is any change in thinking between buybacks and dividends and then also what your thoughts are on your hiring plan and if you could, what is your outlook for your own internal IT budgets?

Kevin March

I heard three questions in there, but I'll give…

Doug Freedman - Gleacher & Company

That's right.

Kevin March

Yes, the multiple choice; you can pick your favorite.

Doug Freedman - Gleacher & Company

You didn't answer the first one.

Kevin March

Doug, on the cash, as you observed, we didn't pick up our buyback since last year. We bought back $500 million of shares in the first quarter and $750 million in the second quarter. As we've been doing – by the way, we have about $1.3 billion of unexpended authorization remaining. As we've done over the past few years to the extent that stock buybacks remain accretive that will be one way that we use cash, but really it’s important to note that the first priority for our cash is to just towards [ph] growth and that will be as you've been seeing us do either through acquisitions of companies, as we acquired in about a few moments ago, or opportunistic acquisition of capacity. And of course, the third way that we use the cash is in the form of when the Board approves to deliver back to shareholders in dividends. On the hiring front, I don't have any specific comments on that other than to say that as we bring on these factories, we've already talked about in the Richardson fab that several hundred people will hired to staff that fab as the equipment comes online, and we did mention in the acquisition announcement last week of the Spansion factories that we would hire almost all of the people that are there, that's 450 plus people that we'd hired there. And as to the IT budget, that's something my CIO would like to know and I'll talk to him about when we do annual plan times for next year.

Ron Slaymaker

So, we'll get back to you on that one, Doug. Kevin, let me ask you a question just on Spansion. So we have roughly 500 people that we may be have employees – that employed and we don't have output until sometime mid 2011 in terms of TI Analog product, how do we – I mean are those costs going to be a drag on TI profitability over the next year I guess is the question?

Kevin March

We expect to be providing continuing transition services. Spansion is already supplying to a customer out of that factory and we expect to continue to do that while we're bringing our own manufacturing processes in there and to a large extent, we would anticipate those transition services would largely offset our carrying costs of that operation while we're bringing up our Analog processes.

Operator

Our next question comes from Steve Smigie of Raymond James.

Steven Smigie - Raymond James

I was hoping you could talk about the Analog a little bit here. In terms of the high volume Analog and logic, would you say that that is back to levels that you were at, at the peak, I’m just trying to understand what's driving the 50-ish percent type growth there, and how we should be thinking about that growth going forward?

Ron Slaymaker

Steve, I don’t -- off the top of my head, I don’t have the data on HVAL back to say second half, ’07 so I don’t know whether we’re -- how the comparison is as to how we moved back to peak levels.

We certainly know we’ve moved very aggressively off of the -- off of, I would say the last five quarters. I think first quarter ’09 was when we saw that revenue bottom and it’s grown very nicely since then and we would say that represents really a turnaround of business. It’s not just -- I’ll call the cyclical bounce back in that revenue but in fact a lot of the things that we had been talking about really since I believe it was the May ’08 analyst meeting that we had done to restructure and create efficiencies in that business are in fact coming to fruition.

So again, that’s where we would declare it truly as a turnaround as opposed to a cyclical recovery and we do expect HVAL to continue really what you’ve seen over the last year, which is to grow consistent with the other two Analog businesses and contribute consistent with those -- with the overall analog revenue as opposed to the drag that it had been previously.

Do you have a follow on, Steve?

Steven J. Smigie - Raymond James

Yeah, if you could just -- how meaningful is the logic within that high-volume analog sales growth going back? Is it really the analog or is logical participating actually there and just -- I know you don’t give too much detail on the breakout, but is it meaningful, what’s in that HVA?

Ron Slaymaker

Yeah, I would describe it this way, it’s a relatively small part of that business overall. There is commodity, product and more in that area so we have -- I don’t want to say it’s not meaningful; certainly it’s meaningful although it’s a pretty small part of that HVAL business and even inside of that space, you would have to say there is a trend away from commoditization as they try to address more higher valued opportunities within there so it’s relatively small and getting smaller as a percent of the total from a logic perspective.

Okay Steve, thank you for your question and I think operator, we are going to have time for one additional caller and we’ll stop there.

Operator

And our next question comes from Tim Luke of Barclays Capital.

Tim Luke - Barclays Capital

Thanks. Kevin, I was wondering if you guide up two to ten and bearing in mind that you saw some weakness at the end of the quarter in the wireless area. Are you expecting that to be broadly seasonal now, having seen the softness at the end of last quarter or how should we think about that?

Kevin March

Well, I think that Ron characterized earlier that if you take out last year seasonally, you might see 3Q grow to something like 5% in our forecast right now. The middle of our forecast is something like 6% right now so we’re probably in a round, seasonal kind of growth and honestly, it’s pretty broad based, it’s across all of our product lines, there’s no one area that we’re looking as being different from what we’d normally expect versus any other area right now.

Tim Luke - Barclays Capital

Thanks Ron. Just with respect to the regions, I was wondering if either of you had any color on how you had seen the order patterns from Europe develop as you’d gone through the quarter and if we begin to look at the third quarter -- obviously one recognizes that your capacity constraints have too much impact but can you give some color on what you’ve seen out of that region?

Ron Slaymaker

Tim, I don’t have data on the order patterns by regions but I do on revenue and what I would say specific to Europe is Europe grew pretty much the same pace as our revenue did overall so if there’s weakness to come, it’s still ahead of us. We did not see it at all in the second quarter. So again, Europe, revenue grew at the same pace as TI revenue did overall last quarter.

Okay Tim, thanks for your question and overall, thank you. We’re going to wrap up. Thank you for joining us.

A replay of this call is available on our website. Good evening.

Operator

And this does conclude today’s conference call. We thank you for your participation. Have a wonderful day.

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