Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ron Slaymaker -

Analysts

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

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

Ross Seymore - Deutsche Bank AG, Research Division

Sanjay Devgan - Morgan Stanley, Research Division

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

Ambrish Srivastava - BMO Capital Markets U.S.

John Pitzer - Crédit Suisse AG, Research Division

Glen Yeung - Citigroup Inc, Research Division

Texas Instruments Inc. (TXN) Q1 2012 Mid-Quarter Update Call March 8, 2012 5:00 PM ET

Operator

Good day, and welcome to the Texas Instruments' First Quarter 2012 Mid-Quarter Update Call. At this time, I would like to turn the conference over to Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon, and thank you for joining TI's mid-quarter financial update for the first quarter of 2012. In a moment, I will provide a short summary of TI's current expectations for the quarter, updating the revenue and EPS estimate ranges for the company. In general, I will not provide detailed information on revenue trends by segment or end market, and I will not address details of profit margins. In our earnings release at the end of the quarter, we will provide this information.

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

This call will include forward-looking statements and involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the news release published today, as well as TI's most recent SEC filing for a more complete description.

We have narrowed and lowered our expected ranges for TI's revenue and earnings from our previous ranges. We now expect TI revenue between $2.99 billion and $3.11 billion. We expect earnings per share between $0.15 and $0.19 on a GAAP basis. The revenue and EPS reductions are due to lower demand for wireless products. Our estimates for acquisition-related charges and restructuring charges are unchanged and are expected to total to about $0.10 per share.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll now take our first question from Stacy Rasgon with Sanford Bernstein.

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

For my first question, you took revenue guidance down about $100 million on Wireless weakness, but baseband in the quarter was only supposed to be about $75 million anyway. So this suggests either that baseband essentially went to 0 or that you saw a significant amount of unexpected weakness in Wireless outside of baseband, namely OMAP and connectivity. Can you give me some feeling for how the weakness within Wireless broke out? And what may be driving the weakness, particularly in the areas outside of baseband?

Ron Slaymaker

Okay. Sure, Stacy. As I said, there really is only one area that is weaker than we had expected which is Wireless, and that includes both -- the weakness includes both OMAP applications processors and connectivity products. Outside of our Wireless segment, our revenue is tracking consistent with our initial expectations, which is for that revenue to be about flat with what we saw in the fourth quarter. But back to Wireless, as you will recall from our January release, we had strong growth in OMAP in the fourth quarter, and that was really as we benefited from new product introductions across multiple customers. And as you know, whenever there is a new product introduction by a customer, there's also an associated onetime surge of revenue as those customers fill their channels with product. So although we had anticipated lower sequential revenue associated with that non-recurrence of the fourth quarter channel sales, demand for OMAP is lower than what we had originally expected, as our customers are now rationalizing both their expectations for ongoing demand, as well as the associated inventory. So the result is that we now expect our Wireless revenue to be about $100 million lower than what we had expected back in January. We continue to expect our baseband revenue to decline about $200 million sequentially. So this adjustment is not taking place in baseband. That baseband estimate is the same as what we talked about in January. The adjustment really is across OMAP and connectivity. What's your follow-up, Stacy?

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

Got it. Follow-up just on -- around bookings. And last quarter, you had said that you saw bookings strengthening in December and that strength had continued to move into January. Can you give us some feeling what the trajectory has looked like through February and now into March? And does that still give you confidence? Do you think, I guess, the rest of your broader business is still either at or close to a bottoming?

Ron Slaymaker

Sure. So let me just -- directly on your order question. Order trends are good and in fact, we expect both orders and backlog to grow sequentially. And then to the point of how do we feel about, is the business still bottoming in first quarter as we talked about in January, we do believe that first quarter is the bottom. And again, we look at it from a standpoint of the area responsible for this lower guidance is a single market segment, that being Wireless. And outside of Wireless, again, we're seeing results that are consistent with our expectations and results that are typical at the bottom of the downturn. For example, we've seen our revenues stabilize, again outside of Wireless, revenue flat fourth quarter to first quarter. And we've also seen growth in orders returning. Backlog and visibility are improving. Lead times are short, and we continue to believe that inventory at customers and distributors remains low. So we're planning for sequential growth to resume starting in the second quarter.

Operator

And we'll take our next question from David Wong with Wells Fargo.

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

The weakness in connectivity, is it broad-based, or is it specific to a small number of customers or devices?

Ron Slaymaker

The latter. In fact, what I would say in connectivity is that it's really the same as you've heard us talk about for the last couple of quarters there, which is that business is somewhat self-correcting. It's much more diversified now than it was, say, 1 year, 1.5 years ago. But we do have a couple of customers that make up significant amount of our connectivity business that have seen their business decline. So from an absolute design win standpoint, we're -- our position is secure, I guess I would say, or stable maybe is the better word. But some of those programs where we were designed into, we've seen declining business levels over the last few quarters. So we're seeing more of that continue. I should also point out the decline in connectivity in first quarter is less than what we're seeing in OMAP. So again, the decline is more weighted toward OMAP than connectivity. Okay. Do you have a follow-on, David?

Operator

We'll now go to Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Ron, just a question following up of the OMAP side. Is it specific to just a handful of customers? Is it across-the-board? I guess, is it really just that their products aren't selling through? Any more color you can provide would be helpful.

Ron Slaymaker

Well, I think it's probably on the -- let me not talk about how many customers because I'll let those customers report their own business when they report. So I'll kind of the stay focused more on what we're seeing directly and in combination as opposed to breaking it out customer by customer. But that being said, I think it's probably a combination. It's very typical for coming out of the holiday season that you see inventory adjustments based upon the absolute results during the holiday season compared to those customers' expectations. And it's probably amplified a bit in terms of that adjustment when you have a lot of new products that are being introduced by those customers because they don't have a real clear record or history of what sales will look like. So they build inventory, they hope for the best, and then in the first quarter, they make the adjustment based on actual results. So that's certainly part of it. And then I think part of it also is based upon that small amount of history now, they're making some assessment of what demand for those products will look like on an ongoing basis and how much inventory they need to support that level of demand. So all of that kind of is blending together to result in the adjustment that we're seeing. It's not -- to your question, it's not a specific customer, but let me just kind of leave it at that if I can. Do you have a follow-on, Ross?

Ross Seymore - Deutsche Bank AG, Research Division

Yes, and really quickly, kind of a bigger picture question. You guys historically have done as good a job as any and better than most at forecasting not only cycles but quarter-to-quarter. When I look back over the last I think 3 quarters now, you guys have lowered the bar in mid-quarter update and it turned out you actually beat it when you report your results. But it seems like the difficulty in forecasting is a little bit higher than it has been before. Is there something that's changed in either the environment or at TI that's made the forecasting a little bit more difficult? Or what do you attribute that sort of volatility to?

Ron Slaymaker

I think it's the market. I mean, we've gone through a downturn over the last few quarters. And when you have the market going through a rapid change, it's more difficult to forecast. There's not a change at this end in terms of the process or anything like that we've gone through for forecasting. But I hope what you described is the outcome again this quarter. But we're calling it to the best that we can at this point. And I'll also point out, if you look at -- just go back to second quarter and what -- or in the fourth quarter and what took place there, I think everybody in the industry was describing strength in the back half of December. So I don't think anybody had that well forecast. And the good news is that that's kind of the way upturns will happen, right? You don't necessarily get a lot of notice they're coming, and they happen and then they can happen pretty robustly. So and then they'll also happen somewhat in fits and starts. So we'll see where we land, but we're giving you our best estimate of where it will be. And we'll move to the next caller, please.

Operator

And we can now go to Sanjay Devgan with Morgan Stanley.

Sanjay Devgan - Morgan Stanley, Research Division

You guys have talked about the weakness in Wireless but, if we back out the Wireless business, you talked about the rest of the business being largely in line. But can you talk about kind of the puts and takes across the other end markets? Any end markets that are giving you outside strength relative to what you initially anticipated? And any color there would be really appreciated.

Ron Slaymaker

Okay. Sure, Sanjay. Let me start with some areas that are -- I'll just kind of hit a few that are doing well, and then I'll also maybe touch on the PC market as well, just given its size. So, but in terms of some areas that are noteworthy on the, what I'll call, strengthening side versus say especially what we saw in the fourth quarter. Automotive is one that's doing what I would call exceptionally well. That's probably not news to anybody because the strength in U.S. automotive sales I think has been widely reported. But as those automotive sales increase and the electronics content in these cars continue to go up, we certainly benefit. So if you look at where TI is positioned, we're very well positioned with both our Analog and our Embedded Processing products and products that make cars safer such as rear-view cameras, blind spot detection and also collision avoidance system. But we're also well positioned in the navigational and entertainment system for cars. And both those areas, you're aware, are seeing rapid penetration and semiconductor content increases. Probably another area that deserves mention is Communications Infrastructure. Again, you'll recall from our January call that in fourth quarter, our Comms Infrastructure revenue declined 40% sequentially that quarter, really as a result of reduced capital spending by North American operators. And although that revenue is not back to where it was in the third quarter of last year, we do expect solid sequential growth this quarter in Comms Infrastructure. So clearly, it seems like it declined but it's turned and it's doing better. And then probably a final point that I would mention in terms of areas of strength is our sales of storage products that go into hard disk drive customers will grow this quarter as those customers continue to recover from the floods in Thailand. And I also said I would just mention the PC market. And it kind of ties to what we were saying, what I just said about storage. So with storage up this quarter, obviously that's reflective of the overall PC market. So the other thing I would say though is that encouragingly, we've also seen recent demand increases for some Analog power products that we shipped into manufacturers of PC battery packs. And why that matters is these battery packs had historically been a leading indicator for other products that will ship into PC on a somewhat delayed basis versus the product going in the battery pack. So we find that encouraging as well. Did you have a follow-up, Sanjay?

Operator

And we'll now go to Chris Danely with JPMorgan.

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

Ron, just a clarification. Can you just give us your approximate percentage of revenue from the wireless market? And when you say "Wireless" weakness, is that handsets or tablets too?

Ron Slaymaker

When we talk about Wireless, we really are talking the combination of -- especially in the context of OMAP, smartphones as well as tablets. And the percentage of revenue, if you -- let me do it this way. First quarter, I think we've told you everything else is flat and therefore, the difference between fourth quarter and first quarter is Wireless, which should amount to about $350 million. You'll have to check me on that math, but I'm pretty confident in that number. And so we just gave you guidance of what, something like 3.05 at the midpoint, so a little over 10% of our revenue in first quarter will come from Wireless. Do you have a follow-on, Chris?

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

Yes, does this change the TI belief in terms of the slope or the timing of the recovery at all in semi this year?

Ron Slaymaker

Not at all because again, the adjustment we're seeing is very specific to what I'll describe as a pretty narrow segment of the market, much broader businesses that were deemed -- whether it's industrial, whether it's the catalog product that go across such a diverse array of applications, whether it's other vertical segments. As I've said, revenue is bottoming and profiling as we had expected and even more encouraging is what we're seeing on the order front and growing backlog. So there's really no change to our view of the timing or the profile of the recovery. We look at it as we've got an adjustment taking place in a narrow vertical segment of the market being handsets. All right.

Operator

And we'll now go to Ambrish Srivastava with BMO Financial Group.

Ambrish Srivastava - BMO Capital Markets U.S.

Ron, just a follow-up on your comments, is that just to bounce back from the deep sequential decline, or are you saying that there's a sustained pattern that you're seeing there?

Ron Slaymaker

There was a sustained pattern underway, which is before the decline, which was North American -- especially driven by North American consumers consuming incredible amounts of data. And the various service operators are really just scrambling to try to keep up with consumer demand. And for those of you that have gotten e-mails from service providers talking about throttling data and such, I'm sure you understand exactly what that's about. And so as that demand -- consumer demand has not slowed at all, that's just a very sustained trend going on. Now outside of the U.S., we do expect to see China, to see India start adding data capacity as well, although I will also say that has not yet begun. But what we then saw in fourth quarter was some of those U.S. carriers that has been adding capacity slow down the capital spending, and we're seeing that now start to resume again. So there absolutely was a soft spot in fourth quarter just when the carrier stopped spending. It's picking back up, and there's no reason for us to believe that, that overall trend of consumers consuming more data and service providers trying to keep up with them in terms of just adding 3G and then soon to be LTE capacity will continue as well. So absolutely, we believe it's the same. Do you have a follow-on, Ambrish?

Ambrish Srivastava - BMO Capital Markets U.S.

Yes, I do Ron. At the Mobile World I understood that you had a pretty compelling differentiated view, and this is a longer-term question on how TI is approaching Embedded with OMAP. So my question was how is the mix going to look as we exit this year? Today, it's mostly tablets and handsets. Is that going to matter ending this year, exiting this year or is it more 2 years out from now that we'll see more non- kind of what we call traditional OMAP applications in the mix?

Ron Slaymaker

I think you will see, by the end of this year, we will have a lot of evidence for you in terms of various programs that are using OMAP outside of smartphones and outside of tablets. I think you heard Gregg talked about today we have more than 100 asset customer engagements outside the smartphones, outside of tablets, underway today. Now how fast that revenue ramps relative to smartphones and tablets? I'm going to allow that, that can take some time. But I think you're going to see over the next 12 months a clear evidence of success of our penetration into some of these horizontal segments. And Ambrish, I realized you were at the Mobile World Congress presentation, but just for some of the broader audience, there's a big effort underway to take the OMAP technology that has done so well today in smartphones and tablets and really leverage that into other horizontal markets. That's completely -- and we leverage in multiple ways. We leverage the technology investment that is already in place and then secondly, where in smartphones and tablets, you tend to have a pretty narrow customer base, the horizontal market really leverage the breadth and scale of TI's sales force. With 2,500 sales and field applications people, we can identify a lot of opportunities just as we do in Analog, just as we do in Embedded Processing. And a lot of those customers outside of smartphones, outside of tablets need a lot of the capabilities that are inherent inside of our OMAP technology. And what we especially like about that is, Ambrish, you mentioned it was a differentiated strategy. If you compare what we're doing there and what we're ramping through our traditional application processors competitors, most of those competitors, their history is that they are very narrowly focused on a few customers in a very -- that narrow vertical market of handsets and smartphones. So for them to go pursue kind of the very broad-based horizontal strategy that we're talking about is a huge infrastructure adjustment. So the point being, we have a technology we can leverage. And we have the reach and customer footprint on a global basis in place already to go do it. So it absolutely makes sense for us. We're excited about that opportunity. And we think you're going to see those results very clearly in the years ahead.

Operator

And we'll now go to John Pitzer with Credit Suisse.

John Pitzer - Crédit Suisse AG, Research Division

Ron, so let me ask a question. I guess relative to the $100 million shortfall in the Wireless business, any way to help us kind of gauge what percent is coming from OMAP versus connectivity, or what percent is coming from handsets versus tablets?

Ron Slaymaker

Probably not. I think, and again, other than what I said previously, it's more weighted toward OMAP and connectivity. And it crosses both smartphones and tablets that where, again if you just kind of look at, we've talked about in past quarters kind of the range of new products that were being introduced across both of those spaces. I think kind of the dynamics that I was discussing are common to both of those submarkets. Do you have a follow-on, John?

John Pitzer - Crédit Suisse AG, Research Division

Yes. And I guess, Ron, I guess when you think about the timing of the revenue shortfall miss, is there anything you guys can do on the OpEx line? Or as we think of the reduction in profitability on the EPS line, is it all coming out of gross margin this quarter?

Ron Slaymaker

You're not going to see an OpEx adjustment because of a very short-term type of revenue fall. I don't think that would make sense for us to go flash R&D or sales force or anything like that in response to that kind of market dynamic. So I think -- I guess what I would say, back in January, we gave you pretty detailed guidance for a lot of the lines on the income statement. I don't have a full line by line update for you. But let me maybe make a couple comments that will help you out. So I think if you go back to our January guidance, we talked about -- from the revenue of gross profit numbers we gave you, you would have calculated that gross margin would be about 47% of revenue at the middle of our range. So we still expect gross margin to be about 47% at the middle of our new lower range, although certainly on a lower revenue number. Therefore, the absolute gross profit dollars will be somewhat less. Operating expenses I think, you should assume they haven't significantly changed nor have our assumptions on restructuring or acquisition-related charges as I said before. But I should also make the reminder that inside of cost of revenue, we have that $20 million of acquisition-related charges in there. And again, that's unchanged as well. So think about 47% gross margin at the new revenue level. OpEx, about the same as what we had told you previously. And I think you can probably get hopefully all that stuff aligned with what we just gave you in terms of guidance.

Operator

We'll take our last question from Glen Yeung with Citi.

Glen Yeung - Citigroup Inc, Research Division

Ron, I guess, the first question is any patterns you can tell us about in terms of geographic demand?

Ron Slaymaker

Sure. So again, this is just based on quarter-to-date. But what we've seen so far is U.S. and Europe are growing, while Asia and Japan are declining. And again, that's -- let me emphasize. That really has a lot to do with global consumption and more just where products are manufactured like handsets or tablets or whatever.

Glen Yeung - Citigroup Inc, Research Division

Okay. And then can I ask maybe a slightly longer-term question. You talked about the potential for a recovery. And yet, we're already hearing that the foundries are starting to get sales up. And I recognize you don't make the kind of foundries -- that not all your business is at the foundries. Is there any concern as you look out about the potential for a capacity tightness or shortage as we progress throughout the course of the year from the foundries?

Ron Slaymaker

I think, Glen, one of the considerations is that our overall dependence on the foundry, even though it's for the advanced logic products, we are doing more and more with the foundry. Our mix of advanced logic versus the technology that's required for embedded processors, specifically microcontrollers and Analog products is as much lower as a percent. So more and more of our production becomes in-house because more and more of our revenue comes from Analog, where we're -- we do all that in-house. So that being said, we don't -- so we don't think TI will have a bottleneck with foundry. One thing I will say though is that we do believe that if we get a -- what I'll characterize as a typical rebound off of the bottom and the kind of growth that you might expect over the next couple of quarters, consistent with at least our own views of how far and how far down we are at this point versus, call it, in production rates or production rates by our customers, we do believe we can get to a point where anything that's a revenue hits new highs. And Semiconductor revenue hits new highs, and we can test the limits of the capacity that's out there. So and again, that's a broader industry statement. Of course, you heard us say in fourth quarter, our utilization level was in the low 50s. And so we, given the capacity investments we've made over the last couple of years, we obviously believe we're going to be well positioned in that kind of environment if capacity constraints start to impact the broader industry. So did you have a follow-on, Glen?

Glen Yeung - Citigroup Inc, Research Division

Actually, yes, just a quick one. You talked about the handset -- well this is the $100 million that's a shortfall. And I heard you say that customers are readjusting their demand expectations. So is it fair to say you do not expect that revenue to rebound back and we should just model forward from this lower level?

Ron Slaymaker

No. I don't think -- I think it will come back. I don't know how -- it certainly probably in the very near term not going to bounce back fourth quarter levels because at a minimum, they had channels still in it. But it's probably first quarter also has inventory correction in it impacting it. So it should come back but somewhere probably between where we are at first quarter and where we were in fourth quarter, if you look at upcoming quarters. So one thing -- let me just -- nobody asked this question directly but I'm going to address something. We keep recently especially get asked about margins. And especially because in fourth quarter, we had talked about that, if you take our gross margin, and you adjust it for acquisition-related charges and the baseband inventory charge, that gross margin was about 50%. And you'll recall that in the January call, we discussed that the closest recent utilization comparison is -- would've been second quarter when utilization was about 5 percentage points higher than what we had in the fourth quarter. And so in the second quarter '09, gross margin was 4 to 5 points below the gross margin that we saw in fourth quarter. So summarizing that, last quarter, we were operating at a higher gross margin even though utilization was lower. And I bring this up because a lot of times, people are trying to -- I think a couple of years ago, we talked about 55% gross margin, 30% operating margin as goals. And in a lot of different meetings, people asked about are those still valid goals based upon kind of that example we just gave. So let me just kind of comment that I think going forward, it's clear we're operating at a new level on the margin front. But that being said, our focus internally really is to significantly outgrow our markets, not try to -- we're not focused on the margin line. We're mostly focused on the revenue line. And we're confident that if we grow revenue and Analog and Embedded Processing, we're all going to like the margins that would result. But again the knob we're focused on turning up and turning up aggressively is revenue growth, but revenue growth in some margin-rich areas, those being Analog and Embedded Processing. So again just based on kind of that number of questions that we've been getting in meetings outside of this call, I wanted to go through that. So I guess another thing I would say is that most of you I think are probably receiving invitations for our May 3 investor meeting in New York City. If you haven't already responded, please, and I know a lot of you have, but if you haven't, please do so to secure your place. We really hope to see you there. And before we end the call, let me remind you that the replay is available on our website. Thank you, and good evening.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Texas Instruments' Management Host Q1 2012 Mid-Quarter Update Call (Transcript)
This Transcript
All Transcripts