Executives
Ron Slaymaker - Vice President, Manager, Investor Relations
Analysts
Glenn Yu
Chris Danely - J.P. Morgan
Jim Covello - Goldman Sachs
Sumit Dhanda - Banc of America Securities
Srini Pajjuri - Merrill Lynch
John Lau - Jefferies & Company
Joanne Feeney - FTN Midwest
Tristan Gerra - Robert W. Baird & Co.
Uche Orji - UBS
Krishna Shankar - JMP Securities
Cody Acree - Stifel Nicolaus
Daniel Berenbaum - Caris & Company
Tim Luke - Lehman Brothers
Texas Instruments Incorporated (TXN) F4Q07 Mid-Quarter Financial Update Call December 10, 2007 5:00 PM ET
Operator
Good afternoon. My name is Kristy and I will be your conference operator today. At this time, I would like to welcome everyone to TI's fourth quarter 2007 mid-quarter financial update. (Operator Instructions) Mr. Slaymaker, you may begin your conference.
Ron Slaymaker
Good afternoon and thank you for joining TI's fourth quarter mid-quarter financial update. 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, as well as the revenue range expectations for both of the segments, semiconductor and education technology. In general, I will not provide detailed information on revenues trends by products or end markets below these segments and I will not address margins. In our earnings release at the end of the quarter, we will provide these details as usual.
After today’s call, we will not be available for further discussion this evening. Considering the limited information available at this point in the quarter and in consideration of everyone’s time, we will limit this call to 30 minutes.
For any of you who missed the release, you can find it on our website at ti.com/ir. This call is broadcast live over the web and can be accessed through TI's website. A replay will be available through the web.
This call will include forward-looking statements that involve risk factors that could cause TI's results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the news release published today as well as TI's most recent SEC filings for a complete description.
We have narrowed the range of our revenue guidance as follows: company revenue is now expected to be between $3.50 billion and $3.66 billion, or a sequential decline of 4% to flat sequentially. Semiconductor revenue is expected to be between $3.43 billion and $3.57 billion, or a sequential decline of 1% to a sequential growth of 3%, and education technology revenue is expected to be between $70 million and $90 million, unchanged from the prior estimate.
We have narrowed the earnings per share range to between $0.50 and $0.54 compared with the prior range of $0.48 to $0.54 and third quarter EPS of $0.52.
Operator, you can now open the lines for questions. In order to provide as many of you as possible the opportunity to ask a question, please limit yourself to a single question. I will provide you the opportunity to ask a follow-up question. Operator.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Glenn Yu.
Glenn Yu
If I look at your guidance for revenues and then take a look at your guidance for earnings and think about where the consensus is for gross margin, it would seem to me that you are implying there’s a relatively healthy increase in gross margins relative to consensus. I just want to make sure we’re thinking about that the right way.
Ron Slaymaker
Glenn, I’ll be honest; I don’t know what the consensus assumption is on gross margin, but I think if you look at the -- let me point out one thing, though, about gross margin. Recall that in the third quarter, we had $39 million of gain from the sale of our DSL product line, so that would be certainly a pressure on gross margin and of course, that won’t recur in the fourth quarter.
The other thing I would just point out is that if you look at third quarter, you see a decline on the OpEx side, specifically in R&D. I think we attributed that to some of the action that we had taken back in January on basically moving to a more collaborative model on process technology development with our foundries versus developing process technologies on the digital CMOS side independently. And I think what we had indicated even back in January was that action would continue through the course of 2007 and be wrapped up by the end of the year. So I think you are seeing some OpEx benefits continue to accrue from that action as well. Do you have a follow-up?
Glenn Yu
Yeah, Ron, just with respect to the gross margins again; can you give us a sense as to the mix between wireless and analog? And I’m not asking [you to summarize] but just relative to your expectations at the start of the quarter, has that looked different than you thought it might?
Ron Slaymaker
Maybe a little bit. I would describe analog as having a solid quarter, right along the lines of what we had expected though. Wireless is probably doing a little better than we expected and if you’ll recall back in October in our conference call, we explained there really were two factors driving the unseasonably weak fourth quarter outlook for our wireless revenue.
The first was a ramping down of a 3G program at Ericsson. This is happening pretty much right as we had expected. The second factor that we talked about then was that our wireless customers were projecting that their demand for the month do December would decline relative to what they were forecasting for October and November. And that part’s changed and we now see the levels that we experienced in October and November pretty much sustaining through the month of December, so that’s probably the change but analog certainly is having a solid quarter as well.
Okay, Glenn, thank you for your questions. Let’s move to the next caller.
Operator
Your next question comes from Chris Danely.
Chris Danely - J.P. Morgan
Thanks, Ron. Way to make me look bad. Kidding, kidding. Anyway, can you just talk about in terms of end markets, can you give us any color on overall what’s been stronger than expected?
Ron Slaymaker
You know, I don’t know from an end market perspective that I can describe it other than the comments I just made on wireless and again, even if you go back to our statements in October, what we described then was that wireless was really the only area that we expected to be significantly weaker than what would normally be expected in the fourth quarter from a seasonal perspective. I would say that remains the case today.
Wireless is below its seasonal trend but again, most of the weakness that we are seeing is isolated to the Ericsson 3G program that we’ve discussed before.
If I think outside of wireless, I guess I would say that traditional computing and peripheral areas are continuing to run strong. That would be especially on the notebook side. For TI, really that translates into analog product areas such as battery management, as well as products that we sell into peripherals, such as hard disk drives and printers.
But again, that’s not necessarily above what we had expected back in October but are areas that we’re seeing strength continue in as well. Do you have a follow-up, Chris?
Chris Danely - J.P. Morgan
How would you characterize your overall visibility looking into Q1? Would you say it’s normal, better than expected or seasonal or worse than expected or seasonal?
Ron Slaymaker
Yeah, I would say just from a general visibility, probably not much different than what we’ve seen over the last few quarters and that really just reflects short lead times that we’re maintaining and frankly, delivery performance that’s doing pretty well, such that customers have been able to run without a lot of what I would describe as extended backlog. But probably when you compare it to last few quarters, nothing really has changed on that front.
Okay, Chris, thank you for your questions and we’ll move to the next caller, please.
Operator
Your next question comes from Jim Covello.
Jim Covello - Goldman Sachs
Ron, thanks so much. Just to follow-up with Chris’ last question, when you say the visibility is about the same as it’s been, a couple other analog companies have commented recently that they trends look a little softer into the first quarter. Now, maybe they are in a little bit different segments than you are or maybe they are just trying to be a little bit overly cautious but would you generally agree with what they’ve been saying or maybe you haven’t had a chance to listen to what they’ve said?
Ron Slaymaker
I have not done a lot of study of what they said but I will, Jim, that when I say visibility is about the same, that doesn’t -- that’s not trying to imply anything about order levels or levels of revenue that we would expect in first quarter. What I am really trying to say is versus a very preliminary internal estimate that we might have on first quarter outlook, how much of that is covered at this point in the fourth quarter by backlog and how that compares to the same point in the last few quarters.
So it’s really a backlog coverage statement when I’m referring to visibility, as opposed to do we expect revenue to be up or down. Do you have a follow-on, Jim?
Jim Covello - Goldman Sachs
No, that’s good for now. Thanks a lot.
Ron Slaymaker
Thank you. Next caller, please.
Operator
Your next question comes from Srini Pajjuri.
Ron Slaymaker
Srini, are you there? Operator, why don’t we move to the next caller and try to come back to Srini if he comes back in.
Operator
Your next question comes from Sumit Dhanda.
Ron Slaymaker
Sumit, are you there?
Sumit Dhanda - Banc of America Securities
I’m here. Ron, can you hear me?
Ron Slaymaker
Yes, I can.
Sumit Dhanda - Banc of America Securities
Okay, sorry about that. I know it’s tough for you to give details on a specific segment but it seems like application-specific analog is doing quite well. Is it fair to say that the same has held true for your HPA business?
Ron Slaymaker
I would say that HPA is similarly performing quite solidly this quarter and I would say also it’s performing very consistent with our expectations, even back in October, so despite a -- I know there’s been a lot of chatter about what’s going on in the high performance analog market and what our trends might be there but what I’ll say is that our forecast for our high performance analog revenue hasn’t changed from the time when we provided the initial guidance back in October. Do you have a follow-on, Sumit?
Sumit Dhanda - Banc of America Securities
Yeah, a quick one. I don’t know if you can answer this one but anything you could offer up on sell-through versus sell-in in the channel and how your inventories are looking versus the last quarter, where I think sell-in was actually a little higher than sell-through.
Ron Slaymaker
That is correct about last quarter. I guess I would say at this point, we expect that distributor resales will be approximately flat to that of the third quarter and the same for our shipments into distributors. So again, resales are pretty much flattish as well as our shipments in. Do you have a -- I guess that was your follow-up. Let’s move to the next caller, please.
Operator
You have a question from Srini Pajjuri.
Ron Slaymaker
Hi, Srini, are you there now?
Srini Pajjuri - Merrill Lynch
Can you hear me now?
Ron Slaymaker
Yeah, we sure can.
Srini Pajjuri - Merrill Lynch
Okay, great. Just a couple of follow-ups to a previous question; you talk about areas of strength. I’m just wondering if you are seeing any areas of weakness.
Ron Slaymaker
Well, I would describe probably the biggest area of weakness is the one we already discussed, which was wireless. So again, the statement on wireless is it’s still weak compared to what you might seasonally expect in a fourth quarter but at the same time, it’s doing a little better than what we had expected back in October. But outside of that, there aren’t any standout areas of weakness that I would point to at all. A follow-up, Srini?
Srini Pajjuri - Merrill Lynch
Yeah, just on wireless -- the strength, I mean, anymore color that you could give us, Ron, whether it’s units or ASPs or maybe even potentially share gains?
Ron Slaymaker
You know, that level of detail, Srini, I really don’t have, especially when it comes to things like units and pricing. I mean, we’re just not at a point -- in fact, I don’t even think we give a lot of that level of detail in January. Probably what I could say, just if you look at the mix, we expect 3G part of our wireless business, specifically in the handset, to grow sequentially and I would say that’s despite the declines associated with the program transition that’s underway at Ericsson.
Also, just a mix comment would be that entry products are also doing probably a little better than what we had expected back in October but that’s probably about all the insight I have at this point on the wireless.
Okay, Srini, thank you for your questions and we’ll move to the next call.
Operator
Your next question comes from John Lau.
John Lau - Jefferies & Company
Great. Thank you. Ron, a lot of people are continuing to be concerned about inventory but you gave us a very, very interesting data point and I wanted to know if I was reading that correctly. You mentioned that continued pull-through on the wireless side made December a little bit better and I coupled that in with some of the inputs that you had before that. Given your hub arrangement and the pull-through, can we assume that inventory levels must be normal in the channel at this point?
Ron Slaymaker
And this is specific to wireless or is this also a statement about distributor channels?
John Lau - Jefferies & Company
Actually, both, if you can give that to us.
Ron Slaymaker
Okay. Well, first of all, in wireless, I don’t think it’s even possible to make statements about are they at the right level or wrong level on inventory because it really just comes down to what sell-through occurs over the holidays.
So if they have a good holiday season, they could have too little inventory at this point. On the other hand, if it turns out to be weaker than expected, then of course inventory could be described as high.
But I think to our best insight into that channel, we don’t see anything that’s causing us concern but again, we won’t -- I don’t think anybody has real clarity on what the right level of wireless inventory until we get through the holiday season.
Distribution, I would say we’re feeling pretty good. You heard us describe last quarter, that distributors had built some inventory, especially in high performance analog and that was a very targeted and proactive build that we and the distributors accomplished, especially in areas like high performance analog where we felt and the distributors felt that their inventory had gotten too lean back in the first half of the year.
With that build, we think things are pretty good. I would say there’s probably still some targeted areas that distributors would desire to build a little bit more inventory but overall, things are -- you know, I would say things are relatively in good shape.
Did you have a follow-up, John, or was that your follow-up?
John Lau - Jefferies & Company
No, that was it. Thank you very much.
Operator
Your next question comes from Joanne Feeney.
Joanne Feeney - FTN Midwest
A question on the capital spending plans. You say you are continuing to save on 4Q through the end of year. I’m just wondering, of your capital spending, what sort of purchases do you see as continue to be necessary if you are cutting back on capacity? Is it more R&D now? Would you see that as a higher proportion of your capital spending?
Ron Slaymaker
I would say that there’s probably less driven by what I would think of R&D, so for example, when I think of R&D, I think of what used to consumer capital in that area would be process technology development and a lot of that is now moved from TI to our foundry suppliers in terms of the capital spend. So that’s actually an action that we took earlier this year that has relived us, you might say, of some capital spending burden.
I would say probably what will be the most significant area of capital spend would be assembly test and that’s an area where we can on relatively short notice make adjustments up or down as we need. It ties pretty closely with revenue and unit expectations and again, we can adjust that up or down as we need. But what we had described, I guess in October was that our capital spending this year is about $700 million is the plan. If we achieve this revenue guidance, that would probably be somewhere in the level of 5% of our revenue and if you look at depreciation this year, it’s still forecast, as of October, to be $1 billion, which would be about 7% of revenue.
So we like the trends. The fact that CapEx remains below depreciation certainly bodes well for the depreciation trend as we move into 2008 as well. Did you have a follow-up, Joanne?
Joanne Feeney - FTN Midwest
Yeah, a quick follow-up; we’re hearing of shortages in the computing space and some are telling us that this is likely to push the first quarter into a less, a smaller seasonal decline than typical. Are you seeing the same sorts of trends?
Ron Slaymaker
I don’t know that -- I believe most of the products that we’re shipping into that compute space, we’re keeping up with demand and I’m not aware that we’re being impacted by shortages elsewhere. You certainly hear of areas here and there, but I don’t know what impact, what we’re seeing there in fourth quarter would have on first quarter, whether it would be a better than seasonal or normal seasonal trend in the first quarter. So unfortunately, I probably won’t be able to help you on that one.
Okay, Joanne, thank you and we’ll move to the next caller.
Operator
Your next question comes from Tristan Gerra.
Tristan Gerra - Robert W. Baird & Co.
What are the [inaudible] trends versus expectations so far in the quarter?
Ron Slaymaker
I’m sorry, could you repeat the first part of your question -- what type of trends?
Tristan Gerra - Robert W. Baird & Co.
What type of trends are you seeing in infrastructure [inaudible] to expectations so far in the quarter?
Ron Slaymaker
And this is like a wireless infrastructure statement? We’re seeing I would say probably the most notable area -- I don’t know that I have a comment on wireless infrastructure per se but in some of the areas like high density voice, we’ve seen some reasonable strength thus far in the quarter and I believe when we look into our infrastructure business, the -- I’ll call it enthusiasm, as least as it applies to this quarter is probably more focused on areas like high density voice as opposed to a big trend change in base stations. Do you have a follow-on, Tristan?
Tristan Gerra - Robert W. Baird & Co.
Sure. And then in terms of your expectations for low-end mobile phones as a percentage of your wireless revenues at the end of this year, do you have any percentage guidance that you could give us?
Ron Slaymaker
I don’t. You know what I can say is that it has been year-to-date probably in the 25% of our wireless revenue mix. That has been -- I don’t want to say overwhelmed but 3G certainly is a larger part. 3G is more in the 40%, maybe even ticking up from that. But both are important and both are growing. It’s probably areas more in the mid-range that we’ve actually seen some declines, just in terms of a percentage of the mix.
Okay, Tristan, thank you for your questions. Let’s move to the next caller.
Operator
Your next question comes from Uche Orji.
Uche Orji - UBS
Just a couple of questions, first on the 3G. Can you tell us whether the incremental trend you are seeing is coming more from OMAP or from base-band? And if it’s one or the other, does that have any margin implications?
Ron Slaymaker
I think we’re seeing it from both, frankly. In that case, we don’t always -- not all of our customers always pull or always buy both base-band as well as OMAP from us. But probably more and more that is the trend and so what we’re seeing in terms of lift on and growth in 3G I believe would be driven by both this quarter.
Uche Orji - UBS
Let me just ask you this one question; I don’t [inaudible] on operating expenses. Is that any change between the guidance provided in Q4 on OpEx? I’m just trying to work through how the impact [this kind of flows through] to the EPS?
Ron Slaymaker
You mean in terms of the annual guidance of $2.2 billion for R&D? That’s the only guidance that we provided on an OpEx line. We don’t guide on SG&A and don’t consider this a change in that guidance.
Okay, Uche, thank you for your questions. Let’s move to the next caller.
Operator
Your next question comes from Krishna Shankar.
Krishna Shankar - JMP Securities
Are you seeing any kind of -- as you look at your U.S. distributors, are you seeing any indications from them about either weakness in demand or any push-outs or can you comment anything on the U.S. distribution channel at all?
Ron Slaymaker
I don’t have any -- the only comments I have on distribution were worldwide. I don’t have that dissected down, Krishna, by region, so unfortunately I don’t have that level of comment to provide. Do you have a follow-on?
Krishna Shankar - JMP Securities
Thank you. Congratulations on a good, solid update.
Operator
Your next question comes from Cody Acree.
Cody Acree - Stifel Nicolaus
Ron, on your discussions of inventory, it sounds like things are pretty lean right now, sell-in versus sell-through is not changing a lot but if anything, things seem to be tight, whether it be wireless through analog. Do you have a sense whether or not this current situation now compares to prior years and how that may put you in a position as you head into Q1?
Ron Slaymaker
I think it -- prior years or just at any point in time, you’ve had distribution inventory at times tend to move on the high side and when it does, we have to work it down at some point in the future. The way it is currently is the exact opposite. I would say it is lean by any historical measure and even though again we built some inventory in third quarter, by historical metrics, inventories at distributors remain lean. And they want to run it that way. They are managing their assets to be more productive.
Frankly, they are relying more on their semiconductor vendors, TI specifically, you’ve heard us describe that our inventory trends have moved up and frankly, that’s a good thing because it gives us better visibility into exactly how much inventory is out there. And that’s not a moved up this quarter but if you just look at the trends over the last few years, you’ve seen our inventories tick up somewhat.
That’s also a reflection of a product mix that is more focused on areas like high performance analog, where it tends to be more of a catalog product, off-the-shelf type of -- maybe not completely off the shelf delivery but short lead times are expected by the customers and we and they like the what I’ll call cyclical performance behavior better when we can maintain short lead times and stay on top of demand versus what happens when we start slipping behind that demand and customers feel the need to fill their own inventory off stockpile.
So again, I would say again, we think we’re lean on inventories and that feels good that we are at that level, as to how it might play out against future quarters.
Okay, Cody, did you have a follow-on question?
Cody Acree - Stifel Nicolaus
Yeah, just a quick question on lead times and with the leanness and relative strength of demand, have you had any changes in lead times across the different product segments?
Ron Slaymaker
Not any that would be notable. I would just in general characterize that lead times remain relatively short and what I would say are stable on an overall basis.
Okay, Cody, thank you for your questions. We’ll move on to the next caller.
Operator
Your next question comes from Daniel Berenbaum.
Daniel Berenbaum - Caris & Company
Your foundry partners have talked about their CapEx in 2008 being down significantly. Does that in any way affect your relationship? Does that provide you with any capacity constraints? Are there any concerns that you have there, either in terms of capacity or in terms of the technology development that you do with them?
Ron Slaymaker
Daniel, we really from our viewpoint of where that foundry capacity sits and our demand on that, we think we’re going to be in good shape. We think the foundries in general will be in good shape with their capacity situation looking forward, so we have -- you know, it’s an area that we absolutely, as you are aware, stay on top of but we see nothing there that concerns us at this point. Do you have a follow-on, Daniel?
Daniel Berenbaum - Caris & Company
Maybe you could relate that a little bit to the back-end. I mean, you had said that your number one area of spending is in assembly and test, so what are the differences in the situations between your comfort level outsourcing on the front end but maybe pulling a little bit more in-house on the back end?
Ron Slaymaker
It really I would say, Daniel, comes down to just maybe financial performance. On assembly tests, history tells us and we’ve also been able to do a lot of call it just cost comparisons when we’ve done various acquisitions that our costs of doing assembly test in-house are significantly advantaged versus what we can get on the outside.
On the other hand, when we look at what’s actually a much more capital intensive front-end type of situation, generally what we’ve found is that our financial performance, as well as our -- frankly our delivery performance to our customers is enhanced by having more of what we’ve described as a hybrid model where we have certainly levels of capacity internally that we maintain very high levels of utilization on and then complement that with some pretty significant amounts of external capacity through the foundry.
Okay, Daniel, thank you for your questions and Operator, I think we have time for one additional caller.
Operator
The last question comes from Tim Luke.
Tim Luke - Lehman Brothers
Thanks, Ron, for fitting me in. I was wondering -- it sounds as if you are saying the sales out of the channel are fairly similar to the sales into the channel that your bookings, book to bill will be broadly around one, or are there seasonal elements in wireless DSP, for example, which take it lower because the first quarter is seasonally somewhat lower?
Ron Slaymaker
You’re right that there are seasonal elements that tend to impact book-to-bill and order trends in fourth quarter but let me just describe it as this -- overall, orders remain solid. We won’t be providing information on book-to-bill at mid-quarter updates because what we’ve found is that more and more so, it has been a poor indicator at this point in the quarter of where we’ll end the quarter on book-to-bill.
For example, in each of the last two quarters, despite the book-to-bill being well above one at the mid-quarter update, due to stronger shipments in the last month of the quarter, the book-to-bill fell back by the end of the quarter then. So rather than trying to provide a number or a comment on book-to-bill, at this point in the quarter that we would expect to change, we’ve decided we just will stop providing it now.
But that’s just -- that comment just applies to book-to-bill. Overall, I would just describe the order trends as remaining solid thus far in the quarter.
Do you have a follow-on, Tim?
Tim Luke - Lehman Brothers
If I may, just a reminder of the framework for seasonal historical expectations in the beginning of the year. And I was wondering, in the wireless area particularly, it would seem that some of your rivals have seen some slippage in products going into the largest handset vendor and whether that’s impacting your framework of expectations for ’08 now?
Ron Slaymaker
Okay, I think you asked initially what the normal seasonal trend would be and what I can say is that in first quarter, typically wireless has been -- or I should say on average, this is an eight-year average -- has been down about 6%. The range on that was minus 30% to plus 9%, so once again, be cautious when you use those averages.
Semiconductor overall for TI in first quarter has been flat to down slightly would be the seasonal average. Beyond that, as to whether anything we’re seeing at Nokia or any other customer would be coming into play, I really don’t have any specific comments for you on that.
Did you have a follow-on, Tim? Okay, I believe that was your follow-up question, Tim, so we appreciate your questions and with that, we’ll wrap up. Let me before we end the call remind you that the replay is available on our website. Thank you and good evening.
Operator
Thank you. This concludes today’s conference call. You may now disconnect.
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