Texas Instruments Inc. Presents at UBS Global Technology and Services Conference 2011, Nov-17-2011 08:00 AM

| About: Texas Instruments (TXN)

Texas Instruments Inc. (NYSE:TXN)

November 17, 2011 8:00 am ET

Executives

Richard K. Templeton - Chairman, Chief Executive Officer, President and Member of Special Committee

Analysts

Unknown Analyst

Uche X. Orji - UBS Investment Bank, Research Division

Uche X. Orji - UBS Investment Bank, Research Division

All right, good morning. Thank you very much for joining us today. We have with us today, Rich Templeton, Chairman and Chief Executive Officer of Texas Instruments and we've also have Dave Pahl, Director of Investor Relations for TI. Today's formats will be a fireside chat with Rich and I will hope to go for 30 minutes and leave the last 20 minutes for questions from the audience. But before we start, I would like to make an announcement. NVIDIA's presentation today at 12 will be held in Salon 2. It will not be a lunch keynote, we moved the lunch meeting to 1:00. So NVIDIA will be at Salon 2 and lunch will be served at 12:45 or 1:00.

All right and with that, I'm going to go sit down and Rich and I can start out chat without a fire. All right? Thank you.

So Rich, thank you very much, thanks for joining us. Do you want to make any opening remarks before we get started?

Richard K. Templeton

No. Uche, it's really an opportunity to give everybody here a chance to ask questions. I know you have an informal list of your own, I would assume, that has been put together. As you know, we're really very excited about what's happening out in the marketplace and at TI these days. We've set forth on a path to really make Analog and Embedded Processing the heart of what we do. You saw a significant announcement earlier this year with the acquisition of National Semiconductor. We closed that in September. And today, we have literally 70% of the company centered up in these key areas of Analog, Embedded Processing and the application processor and conductivity business. 90% of our R&D goes in there. We think they are a great growth opportunities and they are very well proven margin and cash generators as well. And so we continue to move forward and focus on execution.

Question-and-Answer Session

Uche X. Orji - UBS Investment Bank, Research Division

Sure. So why don't we start up by going through the little comments submitted in the last earnings calls about starting to see the beginning of the upcoming process, and incidentally, our analysis actually shows that the semiconductor companies have been on the shipping and demand since Q3, but at the same time, there's a de-stocking process going among the key industrial customers. So any comments you can make as to the parameters around which you made that statement.

Richard K. Templeton

Yes. Uche, it really is a very simple set of statements. You go back to the discussion that Kevin and Ron had during the call. What we pointed to -- and I've been in the business, now, 30 years and our team has been in there a long time. We were seeing, as the quarter ended, a slowing down of the decline or the slope of the orders coming in was starting to dampen. You combine that with the fact that lead times are very short today. You then put on top of that, that inventories are actually quite lean and that's usually a pretty good sign that things are getting to "the bottom or near the bottom." Obviously, we guided Q4 to be down from Q3. So you really have to take those words into context of the shaping of the bottom as opposed to a single declarative point of here it is. But the Semi industry has been very predictable. And that's when things are strong, people are anxious to have as much inventory as possible, because they're afraid of not making shipments. And when things go on the other side and lead times come in, they go back to old habits again and that usually is a pretty good indicator of what's going to start again. So that's what we're seeing.

Uche X. Orji - UBS Investment Bank, Research Division

Great. Let me just move quickly to National Semi, because this has been a very fundamental deal that's been done this year in the Analog world, probably the biggest we've seen in Semis in this current cycle. Two questions there, when you cast your mind to when you did the Burr-Brown deal, a while ago and then this one, what are the lessons between those 2 and, I know there's been a long time span between the 2 deals, but they are quality and very fundamental in the history of TI. So first question, what are the lessons? And the second question is obviously what are your parameters to get into synergies that were outlined in terms of growth and cost and capacity rationalizations?

Richard K. Templeton

Okay, well let me go through them if I forget something -- Shawn probably prompt me on that. You know the first thing that I think is important is that the context of the acquisitions was different. And what I mean by that was in the case of National, you had what is proved -- what we theorized and now that we've gotten inside and looked closer is a high-quality portfolio with some really high-quality people, but it just did not have the commercial direction and the commercial leadership that was allowing it, as we had talked, the consistency of commercial leadership to allow it to be successful. So it was significantly underperforming. And so, it was a very simple theory of we could take our sales force, our reputation of consistency of direction and combine it with some really great Analog talent and some really great Analog products. And as we talked to a group that Ron and Gregg Lowe and the guys had in the Valley 2 days ago, I think they got a bit of a sampling in the first -- we closed 45-odd days ago, Gregg has taken that set of business unit managers around the world for this infamous world tour. And in that first 45 days, that's our definition of integration. Let's go visit customers. And I think they visited, as they went around the world, over 400, approaching 500, customers; got introductions done with 1,000 TI sales people, I think it was several thousand distributor sales people. When I talked to Gregg Lowe what he got done and, I think he commented that I think he's been -- slept in his own bed 5 nights in the past 45, he doesn't know of a meeting that they held where they didn't have a design in interest, meaning a specific chip on a specific board at the end of that meeting. And that's a pretty good indication that, that theory has been true and we ought to be able to do pretty well on that. Now, I contrast that, if you think back to Burr-Brown in 2000, it wasn't an underperforming asset, it was pretty well run at that time, had good skills. So what we had to do there were some different things and TI was in a different state in terms of our maturity as an Analog company. And so, in that case, if you go back and look at even some of the early analyst meetings, we talked about defining some new process technology together because they had some very keen insight, what high performance meant. And the things that had to be done for data converters. And so the things that we were after from a synergy point of view and strategically we're very different then what we're taking advantage on the national deal.

The last one, and boy, it's almost answered in the introduction I gave on National; remember that Gregg Lowe was in the heart of the Burr-Brown and the Unitrode activity. So he was sitting there watching all the things that we did, John Szczsponik that runs all of our worldwide sales today was inside the Analog sales team at that time. So one of the great benefits we had, and we felt this would really help us was we had a lot of lessons of should've, could've as a great way to look back in life, and now let's apply those. So very simple things like, we were fully prepared integration-wise day 1, websites were linked, everybody knew what their jobs would be for the long-term. We went out and spent 45 days out selling with National, not spending the time discussing roadmaps internally. Organizationally, Gregg Lowe is literally out running that fourth business, the Silicon Valley Analog or the National business because we learned that the best way to meet the people, know the people and know the products is go live with them. Don't try to sit back in Dallas and judge what's happening, but go out in the middle of that. So you're seeing a number of things that will really benefit us because we have the continuity of people that were involved in some pretty big acquisitions and integrations 10 years ago and right at the front of this one.

Uche X. Orji - UBS Investment Bank, Research Division

And in terms of the growth synergies, obviously, one of the comments that was made at the time when the deal was announced was how this would help you grow faster than the industry. So with all that been done and granted it's a little bit early to start measuring some of these parameters, are you still confident at still being able to grow at a rate much faster than the Analog industry?

Richard K. Templeton

Yes. I would tell you that the -- it's one thing to study, meaning go through the products and study from the outside, confidence in the products, judging that the people look like they're high-quality, and it's a second thing to now be inside and see it in real life and visit customers with the -- and just see the knowledge, the level of respect, the hunger by our customers. I mean, if I've had 1, I've had 30 visits myself where people are literally saying we love the National product, we just couldn't deal with their commercial behavior. It's now okay to design it in and we're changing what we're doing. I couldn't ask for a more encouraging setup on that. So the guidelines that we had said, where we believe we can get this deal to pay back within 3 years and we had kind of laid out some growth plans of when we would have the National team performing at the level we expect of the TI team, we have no reason to believe that we can't be on that and I will assure all investors that they can probably guess the internal expectations that we have on ourselves and we have on the team out there are even higher than what we modeled or what we've talked about. And now we've got to go to take the great energy and the great early start and we're pretty simple. It's time to convert it into results.

Uche X. Orji - UBS Investment Bank, Research Division

Just one last question on this subject before I move on, one of their concerns obviously was about the product overlap, you're both fairly successful in the high-performance Analog space, and to what extent are you seeing overlap that needs to be eliminated? I mean, right now the top line is interesting to see because we believe that you can, in many ways, deliver some of the benefits, that is we'll get them done on the cost side is kind of where all feel not very clear as to how much cost can be taken out of product overlap areas.

Richard K. Templeton

Yes. So be very clear because it's a topic -- I think they covered even Wednesday or Tuesday this week, when everyone was out there. If you look at the overlap, we had kind of ballparked it as 5% to 10% and that was by studying products and studying overlays and everything that we see, say, that it is a pretty good estimate, maybe even at the 5% side of that as opposed to the 10%. The biggest point that I have made, and I've made it to the National team, I've made it to the TI folks internally and all investors is we're really pretty simple about product overlap and that is, if I find out we have 2 groups calling on a customer, my only question is who won? And people are like, what do you mean? But that really is the culture we want because what you'll find is the group whose product wins will end up being the leader in that area. And the group was product whose product didn't win, will take those resource and direct them to a better opportunity internally. And that adjustment actually happens really quickly in our business and in the cycle on that front. So what Gregg had theorized and we had guessed then it's going to turn out to be very accurate, we're not going to have to do a bunch of refereeing of this is overhead, this is duplicate or this is not. He's made a couple of minor adjustments that were obvious to start out and he's often running. On the cost synergy, we talked very clearly that we should be able to get $100 million of cost synergy out of the National deal. But that would be primarily and significantly on the SG&A side, that's where you just have duplication and corporate structures and corporate functions. And we said that $100 million would be realized on a run rate basis a year after close. And I just, I cannot compliment our team enough. They had all those decisions and all that communication and all that done on Thursday before the close on Friday, back September 23 or whatever that was. And it's the speed and decisiveness, it's also the right human thing, meaning people know what they're future is and that helps teams work together well. So that looks very good, we really have no plans to have a bunch of R&D synergy, in fact, if we have areas, as I commented before, where one group is working on a chip that's close to another one, I just want them shifting a little bit to the left or right and go pick a more unique area. These are talented people, let's turn them lose to design great parts for us.

Uche X. Orji - UBS Investment Bank, Research Division

That's fantastic. Can I just switch to OMAP? In the vision you articulated of Analog and Embedded Processing, OMAP has been one area that obviously fits within the Embedded Processing story. Of late, there's been a lot of success with the new OMAP products, you've been designing to a lot of the new Ice Cream Sandwich Android products, Samsung, Kindle. Can you talk about 2 things here? The first is, when I look at the competitive dynamics within OMAP, of the top 3 players, you are the one without an architectural license. QUALCOMM does, NVIDIA does. And to what extent is that an advantage or a disadvantage for you not to have an architectural license? Obviously, you're usually the first -- one of the first licensees on the next new ARM core, but I just want to see how that sits within the competitive dynamics, that's the first question. And then two, what do you attribute to the recent success you've had have coming back and searching into some of these new Ice Cream Sandwich products and how sustainable can that be?

Richard K. Templeton

Uche, there'll always be debate on subjects like this, is it good or bad to have an architectural license? So I realized you can have other people and they'll tell you why it's critical. I'll tell you I think it's dangerous to have it. And I've had customers tell me the same thing. Because when you take something from ARM and then change it, it's going to take more time to get to market. And the only thing I'd guarantee at the end of people changing it, is that it's different. Now the designer that changed it is probably going to tell you that it's better, but it's later and it's different. And so, in a world where you want to have consistency on the ARM-based code, okay? And I have to be very careful the way I say that, when you want to have consistency on the ARM-based code, I don't think it's a great strategy. In fact if you look at things that we do, we typically will be first to market with the newest generation of core from ARM, because we don't change it. So we get it done sooner. And so, I think you're going to find that, that tends to prevail, you'll see us do it again with OMAP 5 with the latest Eagle Core that comes out of ARM accordingly. So we'll be first to market, I think, first still really matters in this business. So it will go a long way. The second side of that and in that question of kind of why have we had success and how sustainable is it or some people want to know how sticky is the Android success that you have? The fact is, I think, the most important thing that Greg Delagi and Remi and his team have done and you've seen them do it consistently throughout the generations of OMAP, is I think they've got a great team that knows how to look out ahead and deliver performance and power and balance. This is a mobile world. This is not about cores and it's not about megahertz. It's about the user experience per unit of milliwatt of power per cost. And that team has done a great job of looking out ahead, knowing what multimedia trends, what browser requirements, what audio decode, all the things that are going to be required on that phone platform and then designing a very special platform. What to accelerate, not on the ARM core, so that it gets done faster on lower power. And I think what they've achieved is because of that capability, they have been able to get selected as the lead platform by the Android guys several times. And you've also watched us get accepted by Microsoft as the lead platform on Windows 8. And while a lot of people may dismiss it, I think there still -- we'll have to see, we have the lead in primary platform with the QNX folks inside of RIM. And it's important to have the world's best operating systems on your platform. It just lets you go more places. So I think it's great to be there. I think it's great to have a team that can look ahead. I think they've got a great software compatible roadmap through devices inside of the OMAP 4 family and the coming OMAP 5 family. And what I'll tell you relative stickiness is, it helps to be there first today, but it's not a guarantee. And I think what that it'll come down to is that we've got to execute well, we've got to be working closely with the Google team and with our OEMs and make sure that we're continuing to bring them the most competitive platform. And I think if we do that well, we'll enjoy the benefits of that.

Uche X. Orji - UBS Investment Bank, Research Division

I'm going to come to the Windows platform a little bit later, but can I just point to something that has been raised as an issue? One is, you are working there around the baseband business, having decided to shut that business down a couple of years ago and NVIDIA, which is one of the platforms selected by Microsoft, just bought Icera and QUALCOMM, obviously, started up live as a baseband company. You are the only one of the 3 that doesn't really have a baseband strategy, if I had to put it that way. As we now migrate to more low-cost smartphones, where integration seems to be a key parameter, is that a market that you think you could still play, not having an integrated product, obviously? And how do you see the dynamics playing at, even within the higher end smartphone market where there has been an argument from QUALCOMM that you're going to need more integration into those markets. Any comments you can make there?

Richard K. Templeton

Yes, Uche, as you know, the debates about integrated and not integrated have been going on for 4 or 5 years. And we had a lot of people 5 years ago that said there's no market for discrete app processor and look at what's taking place today. And so I think we will continue to see that as a very healthy marketplace for discrete and that's inside the smartphones, obviously, you get into tablets it's with a very different architectural decision. And so I think you'll find discrete is the dominant platform for a very long time on the tablet front. So inside smartphones, I think you'll see a lot of headroom and a lot of runway in terms of the discrete. The second thing that I go to, haven't been around a long time, baseband is simply a destroyer of capital. Integrating a destroyer of capital into your business model doesn't make it better. And it isn't easy taking a business like baseband and you know how big it was and how successful we were at it and saying we're going to go without it. But it's also a heck of a lot better than trying to embrace a business where there's, at last count, 10 different competitors in the baseband business. And as I've just learned too often in this business don't let that be a reason to go do something. Go work on the products that are truly going to differentiate the device. And that's going to be the application processor and that's going to be the connectivity, and so we feel pretty good about where we are.

Uche X. Orji - UBS Investment Bank, Research Division

That's very interesting that you raised that point, let me just switch to Microsoft, and I'm going to come back to the subject of baseband again later on in the conversation. Within the Microsoft base Windows 8 program, that has -- ARM has now been selected and you, NVIDIA and QUALCOMM are the top 3 that was selected to play in that market. That market is supposed to span both handsets, tablets and PCs. How do you prioritize the 3 of them? Have you chosen where not to play? There has been suggestions that you will not be playing in the PC market, or even in the server markets, which is kind of where some of the ARM guys think they can extrapolate the ARM core into. So any commentary as to where you want to play within the whole continuum of Windows 8.

Richard K. Templeton

Yes, I'll go even beyond it's been suggested, I'll reinforce it's a very clear decision. You take your products where they're designed to be great and so, where Gregg and Remi and that team are doing is Windows 8 into the mobile side. So think of tablets or different formats or form factors around that, could be smartphone variants, that's where we will focus our energies when it comes to Windows 8. And there are companies that will go attack back up into the traditional notebook or traditional desktop or, even as you said, some taking a look at the server space. And I think those are certainly logical opportunities, I think ARM has a great advantage going into some of those markets, but we will clearly prioritize our R&D in that direction. And we'll do it because when we look at this overall application processor space, yes, smartphones are important, yes, tablets are huge, but we also, as you've seen us do for 15 years in the wireless space, we want to look through to the longer-term trends. And the longer-term trends that I think are very obvious is the next thing that people will spend time talking about is the impact of cloud-based services. And when you think about a world, 5 years from now, with extensive cloud-based services, it's going to lead to a wide variety of devices and some of those are smartphones and some of those are tablets or specialty tablets, but there's 85 million automobiles in the world. There's home automation in the world. There's set-top box and media players. People are going to want to watch and view their information and stream that information not to one part but to actually, it could be a dozen different devices. So we want to make sure with that world emerging is that we have got the most important operating systems that could be players out in that time frame, certainly Android is going to likely be one, we think Microsoft with Windows 8, they take that kernel and move it further out into the embedded space. So when you hear Greg Delagi even week talk about building a horizontal or broader market for OMAP and for connectivity, it's with that vision and that view in mind. So this is not about aiming backward to the last decade's product but really looking out to where we think the world's going on that front.

Uche X. Orji - UBS Investment Bank, Research Division

So let me be sure it is clear, that PC is not a priority within it.

Richard K. Templeton

That is correct.

Uche X. Orji - UBS Investment Bank, Research Division

On the subject of baseband closure and I know you talked about destroying capital within that business, and of watched TI walk away from business that are huge -- the DRAM business, you walked away at the right time for the DRAM business before the whole thing imploded...

Richard K. Templeton

And here, you could debate 10 years earlier would've been even better, but ...

Uche X. Orji - UBS Investment Bank, Research Division

But at least the timing was still great because subsequent to that, the industry just literally shrunk for basebands, the timing also and it's time to walk away from what at a time had proven to be a profitable business for you was a very interesting decision, but the problem though still, that business still continues to grow for you in the 3G area. Why is it being difficult for the partners having named by Nokia to take a bow from you, because last quarter it actually still grew. So I just want to understand as you decide to close that business, why did it take you so long for you to walk away and should we still be look at 2013 as when you should walk away from that business?

Richard K. Templeton

Yes. Uche to me it's very simple. We -- I forget when we had talked about the 2013 time. I'll bet we probably got specifics somewhere in 2009 and the multisource announcements were sometime in 2008. And we said essentially assume that by '13 it's 0. That's still a good assumption today. And people ask what's the shape of the curve and we said draw a straight line and all we promise you is it's wrong. And that will be a function of Nokia's success in the market, the mix of what they're shipping and the rate at which they get other people in place. And so, I don't, and I don't encourage people, don't over interpret. Yes, baseband was down in 2Q and backup in 3Q, I think that far more has to do with what Nokia was manufacturing and building at that time as opposed to any big strategic implication. So we are well on our way to -- you could assume that number is going to be very close to 0 by '13.

Uche X. Orji - UBS Investment Bank, Research Division

Is there still any IP left in that business you can monetize going forward, and I say that because when I look at DRAM you still generate a reasonable royalty stream in the DRAM market. If you look at handsets, is that kind of similar on the baseband side?

Richard K. Templeton

Well if you look -- and be careful, because we don't necessarily couple that IP with where it was created. But we are a very significant holder of a lot of fundamental wireless pads including in the 4G or LTE world. So at the company level, the TI pad portfolio, which 20 years ago its crown jewels were DRAM patents, you've watched that diversify and the reason we have such a strong portfolio is our very creative engineers over time who filed patents as we have innovated in a lot of these spaces. So that IP will be well protected and used to make sure that we have A, the freedom to operate but it will also generate a very nice ongoing stream of royalty for us.

Uche X. Orji - UBS Investment Bank, Research Division

Let me switch to Embedded Processing and I'm probably going to take it by subsegments. So, in the com infrastructure business, that's been an area where you've been very, very strong, but last quarter, that business declined double digits and for many reasons. It obviously -- we've seen what's going on in Europe and even within the U.S. there were certain delays. What is your sense as to how that business plays out and I'm not trying to get you to give us a guidance for next year, but if you look through the conversations you have with your customers, how do you see that business playing out short-term, medium-term, longer-term and out, if you would? Other question I want to ask is to the interplay between you and the PLD companies?

Richard K. Templeton

If you -- and I'll give kind of a mid and a little longer-term, so think 3 and 5 years maybe. I made the comment before when we were talking about the handset and our view on application processors and look out for world of cloud computing and what the implications are in terms of devices, and that's an exciting area for us. I will tell you equally excited with a cloud computing vision of the world is the plumbing that has to go into making it work. And that plumbing ranges from servers, to wireline, backhaul and, yes, a very extensive communications interface or a com infrastructure world that will take place from a wireless perspective. We're a big participant in the infrastructure of the base station business, as it gets called, and so when we look out to that world, we see it as if still a very exciting and expanding market. In the near-term you will see and it's done this for 15 years as tenders come out and go away, it will tend to have waves of up and down, but you kind of look at the line that's the secular growth that goes through that, and that's still very strong. The next thing that you're going to see and we're very well-positioned to benefit from it, is you're going to find as the world of LTE evolves, is you're going to find a whole small cell or femto, a lot of different names you could put around it. But basically, where the cell sizes get smaller so you can get the traffic density and it could be either for an enterprise or even private but more citywide metro deployment on that. And so, when you start thinking about what the base station count would do in a small cell environment, we get very excited about. It's got a great content from a multicore DSP system point of view. It also has great Analog content, so think data converter, off-vamp [ph], RF Front Ends, these are very sophisticated pieces of equipment and they're full of a lot of the things that we tend to do very well. So we are excited in terms of both the intermediate and the longer-term. That business, like most of them, never goes just steady up quarter after quarter. It'll roll up and down depending on the tenders by the service providers at that time. But we love the direction.

Uche X. Orji - UBS Investment Bank, Research Division

And do you see femto as complementary or as kind of alive in micro cells?

Richard K. Templeton

No, I think it's going to be very complementary. When you look at how it will happen and if you spend time with the leaders in the industry, you will see how you really have to have a macro down through femto strategy to handle different demographics, different densities, different deployments on into enterprise, so it is going to be something where -- what our customers love about our approach is we can provide a scalable and software-compatible solution. So the extensive investment that they have to make is in software. And they want to be able to take that investment and be able to scale it from the largest systems down to the smallest systems. And so a company like TI, they can handle the processing demands of that and still scale them to give them options, we tend to be a perfect partner for that.

Uche X. Orji - UBS Investment Bank, Research Division

Fantastic. Hard disk drives, you've been a very good player in the hard drive business for some time but let me just start sort of asking you your thoughts on the whole Thailand flood issue. We've seen a better resilient supply-chain with Japan, bounce back fairly quickly, but Thailand seems to be a slightly different situation. Any commentary as to what you're seeing in Thailand, what is TI's exposure both direct or indirect and in terms of the conversations of late as to how the supply chain is trying to deal with this, maybe that's just helpful?

Richard K. Templeton

Yes, obviously I can be more definitive about impact on TI and than you have to speculate as you get out into the broader supply-chain. We don't have direct operations in Thailand. We do have some subcontractors. They represent less than 1% of revenue, very small percent of the units. But that matters because if you're one of our customers, or on one of those units, that's a really important unit. And we look in pretty good shape, I saw one of the guys just on Wednesday before I took off, because we've been working this pretty closely, we have alternatives and plans put in place where we think we can get most of our customers through all of those issues just because we have the flexibility because that percent of our units is pretty low. We can get it moved somewhere else or work with that subcontractor to have it done in a different place. So from a TI point of view, it looks like it's pretty navigable relative to where we are. Some people as you pointed out starting it, we are a big supplier to the disk drive industry on both the preamp, which is not as closely impacted, but on the -- well the preamp is closely impacted, servo not as much. And we see the speculation of what the unit shortages will be in Q4. That's also a pretty agile channel. And you're watching them adjust inventories and volumes. So I don't know what the exact impact will be on the drive industry and therefore, upstream into the PC industry. But my guess is people usually find ways to get through it. Our best guess is what really matters is when does Thailand start operating again. And best input we're starting to have is the water has been coming down, they are getting the dykes fixed and more pumping taking place in some of the parks. If you kind of work the north of the city, further north, it gets wetter as you go further north. Those are starting to get dried out and our guess is you'll see operations back in February and we should be okay on that front. But we'll have to watch. Just like we saw in Japan, and we were clearly impacted very directly in Japan where the wafer fabs. The world makes a lot about people saying I'm going to take market share from somebody or somebody's going to gain it or lose it and there's more noise made around the event and less positions really changed during it, and we've got a pretty agile set of supply chains and customers and I think they're all pretty busy trying to navigate. So let's get out into January and we'll get a better sense.

Uche X. Orji - UBS Investment Bank, Research Division

Automotive has been one of the areas obviously was directly impacted by Japan and we've seen a little bit of a good resurgence following the whole Japan issue being resolved now. Hardly some of the growth is a catch up from the disruption in Q2. When do you think we will regress to the main in terms of trending back to a more in-trend growth? And if we allude to automotive, how are you seeing the demand trends, medium-term, on the line beyond the inventory stock and post Japan?

Richard K. Templeton

Yes. Uche, we've got a great automotive business but it's not across every end OEM and every chassis and every device. My guess, just knowing time constants of supply chains, you ought to be getting pretty close to that when you get 9 months past the event, I think we're probably just intuitively, you're probably near that. The thing I'll tell you that has me excited about automotive, and I think it gets lost in 2011 because the story tends to be more the earthquake or recovery, is when I look out over a 5- and 6-year period, and I look at the impact of infotainment coming into cabins of cars, this is a big trend because consumers are being exposed to products that we work on like smartphones or tablets. And people are simple, I want to be able to take that experience into the car. I should be able to watch my movie, listen to my music and should all just connect up and work and that ought to get done. And that ends up, I think, being a great kind of 5-year medium-term growth opportunity. You look at some areas that we're working, it falls under this whole driver-assistance world of lane changing, of forward collision, of parking assist, these types of things use DSP and processing capability. That is going to be a large growth opportunity over a 5- and 6-year period. The other piece that, I think, is missing here in the U.S. is China is going to be the automotive unit grower. It's probably sitting at 18 million units annually, total global volume of 85 million. But China talks about potentially that number doubling in not too many years and these are not de-contented cars, these are full up, braking systems, suspension systems, infotainment, driver assist. These are going to be great opportunities for companies that have the right products and we tend to be well-positioned because we have the kind of mobile consumer perspective that OMAP brings us and then you combine that with our Analog and microcontroller expertise and our DSP expertise and then put it together with the fact that we're a long-term supplier of the automotive industry, and we think those add up to a good opportunity. So we've got a lot of hope on that.

Uche X. Orji - UBS Investment Bank, Research Division

That's fantastic. Can I just -- one more question on Embedded Processing before we get into the balance sheet and the use of cash, as the next line of questioning. 16-bits and 32-bits micro products for you, since some competitors start to come into that market of late Microchip has become a player in the 32-bit market. Finally, there has been some surveys that's put them at the top of the design -- engineer-designer preference. Question for you here, you have not been in the 8-bit market, you've entered the 16- and 32-bit market. Are there any opportunities for you in terms of growth between the tablets? Well, how do you differentiate between where your 16-bit goes and where 32-bit goes because the 2 tend to overlap each other once in a while? And then 2, how do you view the competitive elements in this market as we start to see the resurgence of, say, Microchip in that market? It hasn't really been a player?

Richard K. Templeton

Yes, a couple of things, the highest level comment is, if we had -- and I've had some meetings this week and even today's discussion, it's usually Analog, Analog, OMAP, OMAP, OMAP and then if time remains, Embedded, and I'm okay. My encouragement or reminder I provide to investors is I think they're going to find Embedded continues to just grow, make a lot of money and generate a lot of cash. And my guess is, one of these days, it might actually make it to the second slot, the question is on that front. And when we look at the interest that we see from customers and our sales force, on where we're going with the Embedded Processing strategy, it feels very good today. And we've obviously been a long-term leader in DSP, so some people say that's not a surprise, well it's also good that the teams are doing the right things to grow that. The part where I am so encouraged is that Brian Crutcher and his team have really put together a winning strategy in microcontrollers. So some people say it's a 16- and 32-bit discussion, if you look at our 430 family, it addresses the 8-bit and 16-bit market. And so when people ask how is it differentiated, it is ultralow power, it is very cost effective and you get down to where you can literally get into toothbrushes, razors, automotive applications, the spectrum of places you can take that 8- or 16-bit product are very wide. It's a multibillion-dollar tale. we have the opportunity to build a billion-dollar a year business on that front. And the guys are well on their way to doing it. And if you look at what sets us apart from anybody else -- because there's been people in the 8-, 16-bit market for 30 years, is we have got the world's most modern and lowest power processor with the best peripherals and the best memory. And that's what really ends up winning in the microcontroller market. In the 32-bit world, we had made an acquisition now, I forgot, 3-odd years ago to accelerate our entry into the 32-bit and the team continues to gain momentum and, again, it comes down to very simple thing in microcontroller world and that is great cores, great peripherals, great memory options and put good customer support around it and Brian and his team are well along the way on that front. We've got another member of that family that doesn't get talked about much, it's a very high-speed embedded controller, it's the C2000 family, and it's been one of the wonderfully quiet stars inside that portfolio as it goes into applications like motor control. The world has a lot of motors; many of the industrial motors have historically had no electronics in them for 80 years. And they run at a single speed. Well this whole advent of variable speed control, the motor turning only at the rate needed for the work being done, our C2000 family does that work very, very well. And we've been fortunate to be growing with some of the top air conditioning companies, top solar inverter companies, people like that have been focused in that area. So we are really pleased with that kind of 3.8 -- 8-bit, 16-bit, 32-bit and the high-end 32-bit, so that strategy lets us take an offering that actually none of the microcontroller players have. Microchip doesn't cover that front as good as they are, the other incumbents, to free scales around -- nobody touches the breadth that we have on that. So we've got to just stay focused and execute.

Uche X. Orji - UBS Investment Bank, Research Division

Actually, I'm glad you observed it. Analog is above growth. So we decided to spend some time to remind you people there's more to TI and just so on the high-volume, high-performance Analog business. So quickly let me switch to use of cash, so post acquisition, what are your priorities now for use of cash within TI? Between what acquisitions, dividends, share buyback and CapEx?

Richard K. Templeton

Yes. Uche, it's really unchanged. Where if you would've asked that even prior to the National acquisition, we're very simple when we sit with the board and that is, number one is growth. And growth could be CapEx for manufacture equipment, growth could be acquisition, growth could be R&D, growth could be SG&A, the things that you want to invest to drive it, to drive the company. When you look at where we are, I feel very good and what I mean by good, the R&D levels, where the R&D is going. I look at the acquisition we certainly talk about National, I think it's going to be a wonderful move. We're going to love it in the near-term and love it in the long-term. But we've got work to go do on that. And then third, I think one of -- and I think the investor community has seen it, and I hope they just remember and keep it in mind, the move we made in 2009 and '10 to go secure what turns out to be about $5 billion of assets for $500 million. These 3 wafer fabs they're inside the P&L they're operating, they're obviously not fully loaded, given where the industry is right now. But that is going to position us to generate tremendous growth with very little CapEx incrementally. And that's -- my world says that's a pretty good thing to have. Most of our competitors, in fact, a very few of them have got that ability to grow upwards and the cash flow implications when we grow this place it's going to be pretty good accordingly. Once you get past those, and I think we've got those well covered, it then comes down to a balance of dividend and share buyback. We said following the National acquisition that we would moderate share buyback but not eliminate and you've watched us over the past couple of quarters that we've done pretty much that. And so, we were absolutely fortunate in terms of the timing of the National acquisition to be able to secure the financing at the rates we did. And that was a great thing. So there was no rush to pay any debt off in terms of the rates we have it. So our focus will be to generate the cash and then take a good look at the balance of dividends and balance of buyback, you've seen us on the dividend front grow it for I think 7 years now. We continue to step that up and we are a believer that dividends are an important element of return to investors. And I think a great, well-run tech company can actually deliver growth, can deliver equity opportunity, but also could have a dividend component to it.

Uche X. Orji - UBS Investment Bank, Research Division

I promised to allow a few questions from the audience. We have some microphones in the room, if anybody has any question, please raise your hand, get the microphones over to you. Right at the back, over there.

Unknown Analyst

For the final few years, in the National independent company there's some chatter that the margin structure was too high and that was one of the reasons that they were losing share. But it seems that your team has actually discovered that, that's more because of their commercial execution. So having gone inside National, at this point, what do you think would be the best thing to do at National's margins in order for you to maximize the profit?

Richard K. Templeton

So the first comment I would make is, I would never use the statement "too high" when it comes to margins. Okay? I think if you look at what occurred and I think the National folks will tell you this pretty directly, you can go back and listen to historical conference calls, even in 2007 and 2008 timeframe. Is not that they had high gross margins but they kept trying to optimize or maximize gross margin percent as opposed to maximize earnings growth. And therein, I believe, lied the core problem that they had, they've got great parts, great parts could earn high margin, but they had some initiatives as we've looked even further inside where because they got very enthusiastic about their margin improvement back in 2006 and '07 they did some things that they probably wish they hadn't done and a lot of it has to do with their commercial posture to customers. So we're not going up and down the hallways of Nationals saying, "Lower margins" I can assure you. What we're doing is going through the halls of National as witnessed by the world tour; get out and sell, grow with the customer and be aggressive. And those will lead you to probably being able to still have very good margins but a growing revenue base that you can put alongside of that. And the good news was we had that thesis as we studied it from outside and everything that we have discovered as we've gone through so far is very consistent with that, which gives us comfort that the speed that we can move to that, to a different way to operate, will actually happen very quickly. The biggest thing that I remind people of and in some ways this world is simple, National has great Analog design engineers. We've got great Analog design engineers. The number one thing that great designers want to do is see their parts successful. They want to see their parts in customer's applications and growing. And so the enthusiasm that we've seen from the National community about "TI coming in," has been very high. Because what they see is an opportunity to do what they haven't been able to do for the past 2 or 3 years. And that's where I continue to feel pretty encouraged by what we've found.

Unknown Analyst

Two real quick questions. On National, just curious as far as the company itself, is there much overlap or have they gotten you into any product areas that you haven't been in before? And as far as there are 150-millimeter, 200-millimeter fabs assuming you operate them as a stand alone for the time being, whether it is the endgame of to eventually fold them into that the 300-millimeter that you're building. And secondarily, kind of a separate subject, I was just curious as far as DLP and kind of its future within TI, where you see that heading?

Richard K. Templeton

Let's see if I could keep those on the top of my head. First off, and Dave you need to tell me, are the slides that the guy showed at the Wednesday session up on the web or not, they were only at the session? Out at the meeting that we held on Wednesday, we walked through those business units and gave some very good examples where there was capability that complements TI that we did not have. I think there was some low noise, data converters, lower. I forget the exact devices on that front. But you'll find a very complementary set, especially in the signal chain that can match up to some of the processors. They had and we talked about it at announcement, you look at the power area, they tend to have higher voltage ranges so it tends to be better optimized for industrial. One of the great things that we wanted out of the National deal was to take us closer and deeper into the industrial market. And everything that we see is saying that they're going to be able to do that for us. So we feel pretty good along those lines. On the wafer fab commentary, and I'll go ahead toss the assembly test site, they've got 2 wafer fabs: one in Portland, one in Scotland. Portland is all 8-inch, Scotland is almost fully converted to 8-inch, we have a very simple plan and it's back to that prior question, and that is to go sell and get them loaded up. We do think, there are some things that we can do working with the teams at those 2 sites to get their cost per wafer better but the sites look competitive and we think we've got good line of sight on how to run them well, same with the assembly test site. Lastly on DLP, it's one of those interesting ones were I think to many in the investment community, is the DLP TV era wound down 3 or 4 years ago. It wasn't going to be -- everybody tended to commiserate that no growth would occur. And that business is actually back to prior record highs in terms of revenue and that is combination of the front projector space, the digital cinema space, but there's also some very exciting new growth areas. You read about these Pico projectors. These miniaturized devices a company just announced just kind of a sled product that would attach to a cell phone. You could find them now embedded on camcorders, so that if you shoot video you could play back and show people. Back to one of Uche's questions, we see applications in the automotive space for heads up displays and other areas as well. So even though DLP is in the other segment, we actually -- it is an area that is getting R&D. It's an area where we've got quite a bit of excitement in terms of potential revenue growth.

Unknown Analyst

How many parts do you guys produce now on an annual basis? And if you lowered all of the factors that you have bought over the last couple of years how many parts would you be producing? And what percent of the industry would that be?

Richard K. Templeton

And you're after units? Okay. Oh, in round numbers we're probably 20 billion units annually right now, maybe 22 billion. It's a 5 billion to 5.5 billion unit a quarter, but we've got the ability to probably do 7 billion with where we are today. And in terms of the percent of the market, you'll actually find it's pretty proportional on a revenue basis because TI's average selling price is about what the overall industry is. When you go look at the deeper math on that particular front. So we're not exceptional, we're not out of line, either lower ASP or higher ASP, when you blend everything together and that's where you've got to be very careful. You've got to add it all up accordingly.

Uche X. Orji - UBS Investment Bank, Research Division

Just one last question because we're almost out of time. That's fine. Rich, why don't I just conclude by just asking you a couple of real quick comments on the business model, how you see it shaping up eventually, if you were to quickly remind people where you see this business from a business model perspective, top line growth related to the industry, margins and how confident you are from what you've seen so far of getting there in mix in it?

Richard K. Templeton

Uche, as you know, we have talked in general, and I think if you look at the pieces we've shown that we have the ability to do what we have called this 2x the market, which we have defined because we have a lot of engineers. We, in general, believe that the semiconductor market probably has an 8% average growth rate over the long-term. And there's a reasonable history that can prove that, and I think if you, depending on your assumptions for long-term global GDP, I think because of more electronics in our lives, semiconductor industry probably grows at about 8%. So we believe that we can take our Analog and Embedded businesses, including the OMAP and connectivity and really grow those at an 8-percentage point faster than the market. It's an audacious statement in some ways, and it's a statement that, depending on the investor, gets met cynically. And I accept that. But it's also something that we've got very firmly in front of us in terms of what we intend to go do. And we've got a significant portion of our business that is capable of doing it and has proven can do that over time and the ones that aren't, guess what? We're off working on those. If you look at that, the best way to understand it is back in 2006, 52% of TI's revenue were in those core categories of Analog and Embedded and OMAP and connectivity. Today it's over 70%. And so during that timeframe we've actually been very close to pushing those types of levels that we have described. So we intend to keep pushing on that. If you look at the fall through for the margin, and this is another one that gets somewhat touchy depending on the investor, is we provided a business model guideline, well, I think it was like the 2007 or the 2008 analyst meeting. And at that time, we said a well-run portfolio of Analog and Embedded Processing should be able to achieve 55 points of gross margin and 30% pretax. And as we started getting near that a year ago or so, we started getting into the okay, let's raise the bid and the cheering from the audience, and we haven't. And the reason we haven't is, and it's almost back to the National question, I don't think good things come out of putting single point models up on the wall, what we intend to do is grow the earnings faster than the revenue and hopefully grow the revenue faster than the market. And what will that exact gross margin be? What will that operating margin be? We're not sitting there saying, here's a single point to be able to drive that. You can go look at well-run Analog models and well-run Embedded Processing or microcontroller businesses and get a sense of what that could be and we certainly know those numbers and we certainly hold people to types of benchmarks. We're not running around trying to lower the GPM or the operating margin, but we are careful about getting a single point up on that wall. So I will, yet again, be evasive on the gross and the operating model.

Uche X. Orji - UBS Investment Bank, Research Division

Yes, I hear you. This has been terrific. Thank you very much, Rich. In behalf of UBS, thanks for coming. I appreciate it.

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