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Texas Instruments (NASDAQ:TXN)

Q4 2005 Earnings Conference Call

January 23rd 2006, 4:30 PM.

Executives:

Ron Slaymaker, Vice President and Manager of Investor Relations

Kevin March, Chief Financial Officer

Analyst:

Michael Masdea, Credit Suisse

Adam Parker, Sanford Bernstein

Glen Yeung, Citigroup

Cody Acree, Stifel Nicolaus

Chris Danely, JP Morgan

Tom Thornhill, UBS

Jim Covello, Goldman Sachs

David Wu, Global Crown Capital

John Barton, Wachovia Securities

Ambrish Srivastava, Harris Nesbitt

Mark Edelstone, Morgan Stanley

Chris Caso, Friedman Billing

Tim Luke, Lehman Brothers

Michael McConnell, Pacific Crest

Joseph Osha, Merrill Lynch

Tristan Gerra, Robert W. Baird

Ron Slaymaker, Vice President and Manager of Investor Relations

Good afternoon and thank you for joining our Fourth Quarter and 2005 Earnings Conference Call. Kevin March TI’s Chief Financial Officer is with me today. To review investor release, you can find it on our website at ti.com/ir. This call is being broadcasted live over the web and can be accessed through TI’s website. A replay will be available to the web. This call will include forward-looking statements that involve risk factors that could cause TI’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in the earnings release published today, as well as TI’s most recent SEC filings for a complete description. Our mid-quarter update towards outlook is scheduled this quarter for March 6, we expect narrow or adjust revenue in earnings guidance ranges as appropriate with this update. We will observe a quite period beginning on March 1 until the update. In today’s call, I’ll review our highlights of revenue performance and then Kevin will discuss profit performance in the first quarter outlook. After this review, we will open the line for your questions.

Fourth quarter TI revenue of $3.59 billion was even with the third quarter level and grew 14% from a year ago. This was at the lower end of the updated guidance range that we provided in December, primarily due to assembly and test capacity constraint in semiconductor. Even so, semiconductor revenue grew 3% sequentially and was up 15% from a year ago. This was the second consecutive quarter of accelerating year-on-year growth for semiconductor, a trend which we expect to continue into the first quarter. Sensors and Controls revenue grew 8% sequentially and 9% from a year ago. The E&PS revenue declined seasonally by 62% from the third quarter and was down 16% from a year ago.

Semiconductor revenue set a new quarterly record and was accomplished while simultaneously setting a new quarterly record operating margin of 28.1%, especially noteworthy, was another strong quarterly performance by our high performance analog group, which grew revenue 8% sequentially. High performance analog revenue was up 41% from a year ago, reflecting the combination of four consecutive quarters with solid growth and the inventory correction that was underway at TI’s distributors in the year ago quarter. Overall, analog revenue grew 2% sequentially and increased 20% from a year ago. The year-on-year comparison was negatively impacted by about 7 percentage points due to the divestiture of the commodity LCD driver product line in the first quarter of 2005. This revenue was $53 million in the year ago quarter.

In addition to the previously mentioned high performance analog growth, demand for wireless analog product was also strong in both comparisons. TI’s overall wireless revenue grew 4% sequentially and was up 12% from a year ago. 3G revenue was the biggest factor driving our year-on-year growth. Sequentially, in addition to 3G, we had strong growth in a range of 2.5D products, including chipsets sold to ODM customers for low priced handsets to address emerging market opportunities and OMAP application processors for Smart Phone. In addition, our Bluetooth units tripled sequentially as we ramp new programs since production. Overall, DSP revenue increased 2% sequentially and 12% from a year ago, driven in both comparison by wireless.

Let me make a few quick points about our performance overall in 2005. First, our execution in high performance analog was very strong in 2005, with revenue growing 13% from 2004. This growth rate was 50% higher than our closest major competitor. And we exited 2005 with distribution inventory levels of our high performance analog product, lower than they were at the end of 2004, despite resale that were significantly higher. Growth in 2005 would have been several points higher had distribution inventory grown at the same pace as the resale through the year. Nonetheless, we are encouraged at the lean channel inventories will service well in 2006.

Next, I believe we performed well on wireless in 2005 with revenue growth of 14% we entered the year with many predicting that TI would loose market share in the fasting growing 3G WCDMA market. We’re exiting the year having done the opposite. We believe industry shipment that WCDMA handset doubled in 2005. TI doubled our shipments of OMAP application processors and almost tripled our shipments of WCDMA modems in 2005. In both areas, TI holds strong market leadership.

We solidly accomplished our goal to exceed $1 billion of semiconductor revenue in WCDMA in the year. As we enter 2006 a year in which, most expect that WCDMA handsets will double again in terms of shipments. We are confident that we will maintain our market share, if not expand it further. At the same time, we’ve cornered an undisputed leadership position, supplying chips to the rapidly growing emerging market for low priced handsets. In 2006, we expect to extend this lead even further as we ramp volume production of our Single-Chip cell phone product. As in 3G, we are engaged with market leaders for gaining share themselves.

TI shipped more than 400 million units of Digital Baseband devices in total in 2005 and more than half of the world’s cell phones continued to be based on DSP technology from TI. TI has shipped more than 150 million chips in total in 90-nanometer technology, and 65-nanometer process is now qualified in a ramping end of production. This deployment of advanced technology as well ahead of any of our major wireless competitors and it’s a significant differentiator for TI. Our customers are advantaged by our technology allowing them to introduce phones that perform better consume less power, fit into smaller, thinner form factors and cost less.

2005 was a more challenging year for TI’s DLP product line as we entered the year with significant excess inventories at both our form projectors and HDTV customers and their channels. Overall, DLP revenue declined 8% in 2005, however we left the year in a much better position with revenue in the fourth quarter up 10% from the year ago quarter. More importantly our products continue to be enthusiastically received by our OEM customers and consumers alike. We continue to leverage the flexibility and then earn performance advantages of DLP technology as well as continue to build our brand image with consumers.

Recent technology introduction examples include DLP, HDTV chipset that’s the fourth LED illumination and brilliant color technology which extends DLP color processing from 3 colors up to 6 colors. Significantly increasing the number of producible color shades and providing up to a 50% brightness increase. These innovations provide real advantages to consumers and demonstrate a level of technology headroom that is available to TI and our customers with DLP technology. At this point, I have Kevin to review profitability and our outlook.

Kevin March, Chief Financial Officer

Thanks Ron, and good afternoon everyone. As Ron indicated, we are pleased with the progress that we made profitability in the quarter. Excluding stock-based compensation expense, we held our 25% operating margin that we first achieved in the third quarter. Total stock-based compensation expense in the fourth quarter was $86 million or 2.4% revenue. For the year, it was 178 million or 1.3% of revenue. In comparison with the prior periods, please remember the stock option expense is not included in the periods prior to the third quarter of 2005.

TI’s fourth quarter gross profit was $1.73 billion or 48.3% of revenue. The sequential decline in gross profit and gross margin was due to the seasonal decline in graphing calculators with their associated strong margins. Semiconductor gross profit increased due to the high revenue as its gross margins were about the same as last quarter. Operating expenses decline by 32 million or 1% revenue compared with the third quarter. The seasonal decline in paying benefits resulted from holidays and vacation time taken by employees during the quarter was the primary reason for the decline. As you would expect, these trends should reverse the gain in the first quarter.

TI’s operating profit for the quarter was 810 million or 22.6% of revenue. Again, this includes stock-based compensation expenses that were 2.4% of revenue in the quarter. Semiconductor operating margin reached a new record high 28.1% of revenue in the fourth quarter. This was a second sequential increase of 1.5 percentage points and an increase of 11 percentage points from a year ago. For the year, TI’s operating profit of $2.79 billion and operating margin of 20.8% of revenue both set new annual records and reflect profitability gains in semiconductor.

Semiconductor’s operating margin for the year is 23.9% an increase of 5.2 percentage points from 2004. TI’s overall tax rate in the fourth quarter including discrete items was 24%. Net income was 655 million or $0.40 per share in the fourth quarter. Although, we were at the lower end of our guidance range for revenue, we were pleased to be able deliver earnings that were at the top end of our range. For my account, if I summarize the fourth quarter’s earnings per share transitions from $0.38 that we reported in the third quarter. On the plus side, about $0.02 of higher EPS resulted from semiconductor revenue growth about a penny came from lower operating expenses and about $0.02 came from lower tax rate. We called that the third quarter tax rate included cumulative catch up adjustment. On the minus side, earnings per share were reduced by about $0.03 due to the seasonally lower EPS revenue.

For the year, net income increased 25% to $2.32 billion. Only most of the cash flow and balance sheet items for you to review it in the earnings release. Let me make just a few comments. Cash flow from operations was $908 million in the quarter and 3.77 billion for the year. We entered the year with $5.34 billion in total cash. TI used $870 million of cash during the quarter to repurchase 28 million shares of TI common stock. For the year, we used 4.15 billion to repurchase 153 million shares of stock. Average diluted share outstanding were 1.64 billion in the fourth quarter, down 20 million shares in the third quarter. For the year, average diluted shares outstanding were 1.67 billion down almost 100 million shares from 1.77 billion in 2004. Inventory of 1.27 billion at the end of the fourth quarter increased 115 million from the less-than-desired level of the third quarter. Note that almost all of 108 million of the inventory increase remains work-in-process at the end of the fourth quarter. Inventory levels while improved remains below our desired levels, especially in high performance analog die banks and overall finished goods. Days of inventory at the end of the fourth quarter were up 62, up 5 days sequentially and the same as the year ago.

TI orders in the fourth quarter were 3.77 billion about even sequentially. Semiconductor orders were 3.39 billion, up 2% sequentially. Semiconductor’s book-to-bill ratio was 1.05, down slightly from 1.06 in the third quarter. Before I turn to our outlook for the first quarter in 2006, let me remind you that the previously divestiture of TI’s Sensors and Controls operations, to Bain capital is expected to close in the first half of 2006. The financial results for this business will be accounted for at a discontinued operation beginning in the first quarter. This means that its results, excluding a small RFID operation that will remain with TI as part of the semiconductor segment will be consolidated to a single line item on the income statement labeled income from discontinued operations. Its results will not be reported in the company’s revenue, cost of revenue or operating expense lines.

For the first quarter, we currently expect total TI revenues from continued operations to be in the range of $3.11 billion to $3.38 billion. Semiconductor revenue should be in the range of 3.05 billion to 3.30 billion and E&PS should be in the range of $60 million to $80 million. Earnings per share from continuing operations are expected to be in the range of $0.29 to $0.33 in the first quarter. This estimate includes about $0.04 for stock-based compensation expense or about $90 million, a little higher than the third and fourth quarter levels. EPS from discontinued operations is expected to be about $0.03. In 2006, our tax rate will be affected if the US government reinstates the Federal Research Tax Credit which expired at the end of 2005. Our annual effective tax rate was expected to be about 30% and does not assume the reinstatement of this tax credit. For reference, the higher tax rate will negatively impact first quarter EPS by about $0.03 when compared with the 24% rate of the fourth quarter.

For 2006, for continuing operations, we expect R&D to be about 2.2 billion, capital expenditures to be about 1.3 billion and depreciation to be about 1.03 billion. This depreciation estimate reflects the company’s change from an accelerated to a straight line method of depreciation for existing and future property planting equipment beginning in the first quarter of 2006. This change is the result of our studying the pattern of usage of TI’s long led depreciable assets. The study indicated the trend toward more consistent utilization of assets as TI has focused its product portfolio on differentiate products and supplemented its internal semiconductor manufacturing, the supply from foundries. The effect of this change will be reflected on a prospective basis and prior period results will not be restated.

2006 depreciation is expected to decline about $350 million compared with 2005. About half of this decline is the result of the change to the straight line method with a remainder mostly due to TI’s lower capital spending of the last few years. The small amount of the decline will be due to the discontinued operations. In the first quarter, we expect depreciation to decline about $80 million in total, which is about 35 million lower under the new straight line method than it would have been under the prior method. However please note that since depreciation is in inventorial cost, we will see less than 10 million of benefit to pre-tax income from this change in the first quarter. Considering that we entered the quarter with 62days of inventory, where depreciation was calculated under the prior accelerated method.

So in summary, 2005 overall was a milestone year for TI, we set new records for annual revenue, operation margin, operating profit and cash flow for operations in the year. We are very encouraged with the financial health and strategic direction of the company. We believe the actions such as the divestiture of our Sensors and Control segment and the recently announced acquisition of Chipcon, but both serves a high performance analog capabilities will continues to evolve TI into a company that will produce superior revenue and earnings growth on a sustained basis. I should also note that our Board’s recent authorization to reinvest an additional $5 billion in repurchases of the TI common stock that was announced today. This is a statement of confidence in the opportunities ahead for TI and our ability to translate these opportunities into solid financial results. With that, let me turn it back to Ron.

Ron Slaymaker, Vice President and Manager of Investor Relations

Thanks Kevin, and this time, I ask operator to open the lines up for your questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we will provide you an opportunity for additional follow up. Operator?

Question-and-Answer Session

Operator

Thank you, the floor is now open for questions. If you do have a question at this time please press “*” then the number “1” on your touchtone telephone, once again, to ask a question, it’s “*” key followed by the number “1” on your telephone keypad.

Our first question is coming from Michael Masdea, of Credit Suisse.

Q - Michael Masdea

Yeah, thanks to Ron and then Kevin, real quick, on the comment you said about the depreciation, a lot of us assume kind of a straight line impact per quarter for the year in terms of the benefit from changing depreciation accounting, it sounds like its going to be is it going to ramp throughout the year and less than a penny in the first quarter in terms of the positive impact, is that the right ballpark?

A - Ron Slaymaker

Yeah, Micheal that’s what we think about it. The recent ramps through the years, because as we spend capital later through the year rather than a standard depreciation under the accelerated basis, if depreciation is under straight line, so that impact for the year actually grows throughout the year. In the first quarter, the delta due to this change in method of 35 million only about 10 million will make its way to the P&L in the first quarter, well, it just takes about 2 months for the depreciation of traversal inventory.

Q - Michael Masdea

Great, that’s helps to compare with what was out there. I guess a follow up, Ron, you’ve spoken about lot of semiconductor companies talked about, lead time stretch now, a little about expedited orders and it sounds like that it, the good times are back. But help us understand that the impact that’s having on your business. Are you seeing expedited orders, are you handling that, and try to avoid inventory builds and how sustainable is that?

A - Ron Slaymaker

All right, certainly with described things maybe is a bit more hectic in terms of the operations Michael, probably there are some areas where the lead times have moved out, for example, isolated products and high performance analog that are high demand where they fully depleted the die bank inventory, they have to move lead times out. But even in high performance analog, I would say, overall, we’ve tried to keep lead times pretty stable, and in some areas for example standard logic where you recall last quarter we said we have to move lead time out of couple of weeks. We’ve been able to get back on top of that in bringing lead times back in by a couple of weeks. Now at the same time, Michael, I’d say our delinquencies are up. So we are not buy a few days, I would say, we are not fully meeting the lead times that we have committed to customers and in terms of those deliveries and in fact those delinquencies, will carryover into, in the first quarter and that what we trying to what we are focused on, trying to get on top of today. But in terms of overall, lead time extensions we have not made those moves at this point.

Q - Michael Masdea

Hey Ron, just to make sure we’re clear, is this driven by demand surprising upside or the lean supply chain or some combination?

A - Ron Slaymaker

I would say a combination demand remained solid and even through, first quarter up to this point, I would describe that it’s remaining strong. Now you only have to look at the order increases but maybe even more telling would be the, the book-to-bill of 1.05 that we ramp for semiconductor in the fourth quarter. So that’s why demand is remaining solid. If you look at what change probably say versus our mid quarter update early December, at that point we were planning on certain capacity expansions in assembly tests that frankly we just weren’t able to get equipment in on time and per our plan. So that created probably for more supply-related constraints than we had expected at that point in the quarter.

Q - Michael Masdea

Thanks a lot.

A - Ron Slaymaker

Thank you, Michael. Next caller please.

Operator

Thank you, our next question is coming from Adam Parker of Sanford Bernstein.

Q - Adam Parker

Yeah, hi just want to understand that last point you made, what was the impact of that back end tightness you referenced in Q4, in terms of revenue and when will this be resolved, given that, book-to-bill, is it, its still impacting here in Q1, or how can you explain your guidance of that more clearly please?

A - Ron Slaymaker

Yeah I would say, I don’t know that we can completely quantify it other than to say, where we landed in the quarter relative to our midpoint we were below and we can fully explained that gap and probably more due to some of the slippage and expansion of that assembly test capacity from our plan. Does it carryover in the first quarter, yes we are trying to bring on early in the quarter. Additional assembly test capacity and we are trying to get our output back to realign with the customer demand in the first quarter; yet at the same time our ability to do that, certainly the demand trends will be a factor. If we get some seasonal flowing in demand, we will make progress if demand continues to building on us, and, that will mean we might carry higher levels of delinquencies than certainly than we preferred. So does that, does that help the estimation Adam?

Q - Adam Parker

Yeah generally okay. And the second question is just related to your operating expenses and the couple of pieces here with first of all can you provide ’06 SG&A guidance, at all I also missed your R&D and then CapEx but now SG&A?

A - Ron Slaymaker

Yeah Adam, we don’t typically do that, we will just give you CapEx depreciation and R&D and we don’t typically offer SG&A guidance for you.

Q - Adam Parker

Is it reasonable to assume your revenue growth will exceed your SG&A growth or, maybe just answer that over the long-term?

A - Ron Slaymaker

I think over the long-term, maybe you are exactly on the same kind thinking that we are on, because that’s the best way for us to expand our overall earnings.

Q - Adam Parker

Okay and then the one last thing is your R&D shortfall versus your earlier guidance, or the lower R&D versus with you earlier guide, you mentioned some of vacations of holidays, that the number of vacations and holidays surprise you or what cost that lower R&D versus your plan or your own?

A - Ron Slaymaker

Well actually it was we have little more vacation but quite tangibly we also have number of R&D LIFO such that we are statically released. It didn’t quite make it in the quarter and another reply in the first quarter.

Q - Adam Parker

Okay.

A - Ron Slaymaker

So you put those together and took as a bit under that averages down little bit, that’s what we expected.

Q - Adam Parker

So we should take up our first quarter number by that shortfall?

A - Ron Slaymaker

Yeah we’ve expect our spending to go back up, because these rate were just miss the quarter and out come of the first quarter.

A - Kevin March

In fact both of those factors Adam, certainly the seasonal element of holidays and vacations will comeback in the first quarter and then the radicals just slip from fourth into first.

Q - Adam Parker

Okay thanks guys.

A - Ron Slaymaker

Thank you Adam, next call please.

Operator

Thank you, our next question is coming from Glen Yeung of Citigroup.

Q - Glen Yeung

Thanks just a point of clarification when I look at your semiconductor guidance for the first quarter on a revenue basis down just a little bit, you can calculated that in a bunch of different ways, just how you feel that your guidance relative to normal seasonal for the first quarter?

A - Ron Slaymaker

I think actually we are performing quite well relative to seasonality and the other thing we have to be, you have to watch carefully as, what do you mean by seasonality and when we look at, for example just the last, the last I think its ten years semiconductor seasonal pattern, its ranged anywhere from excuse me, I got numbers from a, its ranged anywhere from for the sequential forward to first transition are down at 19% to at last to 12%.

Q - Glen Yeung

Right.

A - Ron Slaymaker

So, when you talk about what’s the, that normal or average sequential decline or seasonal decline, I’m not sure to very tailoring in terms been able to here as a forecasting guideline. But, the other comparison is just, you have to consider a couple of things one over the course of time, Wireless has become a bigger part of our revenue, as well as areas like DLP. So in general, the more we become aligned with consumer region purchases you probably going to see more of that fourth to first stand and even third to fourth seasonality, in our revenue trends and then the other consideration would just be if you look at last years there is a, as a most recent example, we were down 7% sequentially in the first quarter. So, we feel pretty good with the numbers that, that we’re put down you for first quarter.

Q - Glen Yeung

And Ron, in 2005, you made the point that DLP was down about 8% for the year on the back of inventory constraints to start the year. As you look in the 2006, we don’t seem to have with any inventory issues. Do you expect DLP to be positive grower this year and so we look at that as a positive for gross margin?

A - Ron Slaymaker

Yeah I don’t have any specific numbers but certainly it would be our expectation to be able to grow that DLP revenue and frankly on both fronts, I mean form projector market is a fast growing market and its one where, we have about 50% share in that market. So it would be probably becomes increasingly difficult to gain share yet at the same time we got a market that, generally we believe and the analyst believe is growing on the rate probably about 30% per year in terms of unit. So that’s a, and if you keep in mind that 70% of our DLP revenue in the TV space, we are still very, very early in that trend for digital television and to point of HDTV in general we’ve got a great technology, great position in the market, highly competitive but one that we believe will succeed in and that will be a nice contributor to growth in 2006 as well.

Q - Glen Yeung

That’s great. Can you, on a follow-up on the first question, I forgot to talk one of the part which is, you got a good book-to-bill to start the quarter, what’s your sense about any double order in that while on the quarter or that you are experiencing now giving that you had tightness in the backend and order book is pretty strong?

A - Ron Slaymaker

Yeah that’s always an unknown, so, might there be some book to some double ordering in there could be, but, Glen in general we think, customers are they have given us more coverage, so they extended their backlog in visibility out through first quarter not really so much out beyond 90 days compared to what we have seen over the course of the last year. But we are certainly, we believe entering into first quarter with more visibility than what we have seen and we think in general the customers are using that as they are means of securing deliveries as suppose to playing that double booking game but, there is certainly could be some of that as well and we don’t have a great way to distinguish between, what double booking versus true win demand.

Q - Glen Yeung

Okay thanks Ron.

A - Ron Slaymaker

Thank you. Next caller please.

Operator

Thank you, our next question is coming from Cody Acree, of Stifel Nicolaus.

Q - Cody Acree

Thanks Ron, can you maybe go back to last year on that question about DLPs, when was that you started to run into the problems that you noticed that you have some inventory issues in DLP and are we at that point in this quarter?

A - Ron Slaymaker

I think it was, when we really became aware of it, was probably once we got into first quarter, and, again therefore we understand sale-through and all that. When we look back, and I’m saying that’s when we realized it not when we built the excess inventory. If you look back at fourth quarter, we saw, of coverage revenues down but I would say most of that some of that could have been associated with inventory, some of that probably was normal seasonality. I would say its really first quarter became, before we were fully aware what we are looking at in terms of inventory correction.

Q - Cody Acree

How do you believe that on what you are seeing in DLP now especially in the television side of things that you’ve got better visibility this year than you did last?

A - Ron Slaymaker

Certainly and Cody when I say first quarter I don’t mean, the third month of the quarter. At this point, in first quarter last year, we knew and we were discussing with you guys that we were facing an inventory correction in DLP. So certainly, we don’t believe that there is excess DLP inventory out there, to any significant level on the form projector side or the television side at this point. So, from a visibility standpoint, what we saw last year that was from, we don’t think we are facing this year relatively consistent with, in demand and normal customer inventory trends for this part of the television selling season.

Q - Cody Acree

And then on the delinquencies, do you say that you are still running with some delinquencies now are those starting to clean themselves up or you, how do you feel about your those capacity constraints and are they going to linger into this first quarter?

A - Kevin March

Cody, I’ll go ahead and try to take that one, delinquencies are still lingering they have come down a bit, but they have not come down anyway near enough to meet the customers service requirements that we have in mind. Our objective is to get enough backend capacity in place, that’s the assembly and test capacity in place to clue those math to begin building some finished goods inventory and get little bit ahead of this demand. So we can meet these sort of, cycle times that we’ve got with some of our customers.

A - Ron Slaymaker

And Cody, again there is a two variables on that. One is our own capacity expansion, which is coming online as we are hope as far in the current quarter and then the second variable is customer demand and, that one is remaining strong. So we are not getting help from the customer demand side, but, frankly that’s not a bad issue to be facing right now.

Q - Cody Acree

So would you double little inventory than this quarter?

A - Kevin March

I think that we would tell you what we would like to, but again as Ron pointed out as a function of the demand, if demand keeps running as strong as it is, we’re going to have to keep working hard just to keep up.

Q - Cody Acree

All right thanks guys.

A - Ron Slaymaker

Thank you Cody. Next caller please.

Operator

Thank you, the next question is coming from Chris Danely of JP Morgan.

Q - Chris Danely

Hi, thanks guys. Capacity constraints always a good problem to have, I guess given the capacity constraints, I’m just curious is to why the CapEx wouldn’t be little higher this year and a little more front end loaded?

A - Ron Slaymaker

Chris, actually you’ve hit the nail on the head. There will be higher in equipment terms and they will be front end loaded. If you take a look at last year, we spent middle of 1.3 billion and we’ve got it for about 1.3 billion this year. But keep in mind last year, we spent nearly $300 million on your new fab and enriched spend. And that had drops off significantly in 2006. So that money is diverted instead into equipment expenditures. We’ve ordered a lot of assembly test equipment in fourth quarter, and of course it takes a little while, it has to arrive before in terms of capital expenditures and you will see that CapEx numbers bump up in first quarter as a result.

Q - Cody Acree

Okay and I guess little bit more a longer term question now you guys have done the fab I think for a couple of years and its worth well in certain times very well, in certain times and you got caught a little bit in Q4, do you have different view on that, I mean, do you think that you will rely maybe a little bit less on foundries in the future or more how do you look at that, how you think that will be going forward?

A - Ron Slaymaker

Yeah, Chris I wouldn’t, the foundry strategies have no impact on us in fourth quarter, this is an assembly test problem. There’s really a question of, starting the wafers in a uniform pattern to meet our assembly test backend capacity and the fact, the matter is we have to expand the backend much faster than we expected. Because we call again, we drain finished goods in third quarter. We didn’t build any finished goods in fourth quarter, we did bill work in process, a fair amount but we still have not been able to get it to the backend to begin to build up finished goods. So it’s not a, not a wafer problem, at this stage, it is an assembly test bottleneck.

A - Kevin March

Yeah, lot of that with that you saw build in fourth quarter is, you can assume as probably sitting in front of assembly test equipment, trying to work its way through that final stage at manufacturing flow, which again is the bottleneck we are facing, it is not by any means either our own wafer fab capacity or availability from foundries.

Q - Cody Acree

Thanks that’s helpful. As my follow-up, would you guys care to update here long-term growth in operating margin targets given the sales of the S&C group?

A - Ron Slaymaker

Well I think what we’ll see with there is sale in Sensors & Controls business. Our gross profit margin should actually increase a little bit. Given that S&C was below, pivotal TI, the operating margin of the 3% or 4% would be, call it flat and maybe slightly up if you looked in the first half of 2005, Sensors & Controls operating margin was better than Semiconductor. If you look the second half, when you see this Semiconductor was better than Sensors & Controls, we would expect it to continue that kind of performance in the future. If we look out further in time we just achieve some long term goals to get in ourselves to a 50% growth and 25% operating and that of course that excludes the impact of stock options expenses and shut that. I think it would be fair for us to say that we would like to learn how get to those same kind of operating margins as we work with time by absorbing the stock option expense over time.

Q - Cody Acree

Okay, thanks a lot guys.

A - Ron Slaymaker

Thank you next caller please.

Operator

Thank you our next question is coming Tom Thornhill of UBS.

Q - Tom Thornhill

Just got to ask, was looking for more exclusive guidance here on gross margin because the changes but, can you elaborate a little bit on that, on what we should be looking for in the March quarter, given that the percentage is coming down, near-term fee is coming out, and both of the operating business as you have are, were running above 50% gross margin in the quarter, you just finished?

A - Ron Slaymaker

Yeah Tom, we don’t actually guide between license fees and give revenue and give EPS and we don’t want to breakout that between but I could suggest, you might model of I take, look at Sensors & Controls in the fourth quarter, we can subtract out $30 million for RFID from that revenue line. I think that was in the low to mid single digits on operating profit. So back that out and recomputed it and see what comes out of TI is trying to get to that if you want the model on those kind of, numbers.

Q - Tom Thornhill

All right. You mentioned, book-to-bill, it sounds like business stayed strong right through the end of the fourth quarter, and has continued at a rate through the first part of Q1, is that accurate, is there are read it all on the early part of Q1 in terms of trend?

A - Ron Slaymaker

Now, I think you’ve got it right Tom, certainly we were also curious to see the transition once we got over into the new year and, you recall even a mid quarter update. We indicated at that point that we really needed to get into January, to get feedback from our customers on sell-through and see any kind adjustments size they might make to their bill plans and backlog, associated with either excess inventory or, if there was such a thing, and what I would say is we really haven’t seen any downward revisions as of likely any maybe item-wise but in case of the, overall, our customers have not gone through and made downward adjustments that would indicate to us they see, any kind of inventory issue either in their running operations or inside of their channel, so to strength that we saw coming out fourth quarter you are exactly right carried right over into the first three weeks of January, here.

Q - Tom Thornhill

By this point of time, it would have be normal that your customers would be making those adjustments if they had inventory at yearend its carried over that they want?

A - Ron Slaymaker

Certainly, most deadline making a, they can make those adjustments anytime, they want but I think, as it relates to the Christmas holiday sell-through, I think we’ve and our customers have pretty good indications that didn’t present an issue, of course you have Asian holidays coming up here shortly that will be another checkpoint but at least as it applies to the other holidays end of year holidays in 2005. I think we have pretty good indication at this point.

Q - Tom Thornhill

Thank you.

A - Ron Slaymaker

Thank you Tom, next caller please.

Operator

Our next question is coming from Jim Covello of Goldman Sachs.

Q - Jim Covello

Good evening, thanks so much. First question on DLP, Ron I’m not sure if you said it was up 10%, Q4 over Q4 or year-over-year, for full year ’05?

A - Ron Slaymaker

Q4 compare to Q4, full year growth was 8% in DLP.

Q - Jim Covello

Okay, should, do I have that right end of that and I could very well be doing my numbers Ron, but does that mean it was flat quarter-over-quarter?

A - Ron Slaymaker

Yeah that’s correct. And Jim let me correct, 2005 compared to 2004 was down 8% not up 8% as I said, and you are exactly right, third quarter to fourth quarter was flat and frankly that’s a little better than we had expected in October, and the reason is, front projectors, televisions were down sequentially as we expected which would be the, when I say as expected really as expected, just from a seasonal pattern because again you have to keep in mind there is a pretty long channel between TI and the end-consumer purchase there. But front projectors, grew and grew little better than what we had expected.

Q - Jim Covello

Terrific, thanks for that clarification. And then couple other quick questions for longer term for modeling purposes, when do we think about a depreciation in fraction probably when we think about depreciation kind of bottoming out then, then picking back up a little bit.

A - Ron Slaymaker

Jim what you begin to see is that, 2007 we were probably expect depreciation to see a little bit more of a decline again and that’s because we, large capital expenditure that we had in 2001 rolls off. And then after that you start to see CapEx depreciation begin to be pretty easy to model and start began to pick up the number of straight line would be easier just take and divide by 5 and get you the numbers when you start seeing, flattening of that or a near in whatever our capital expenditures are at that point of time, but we are starting the depreciation in the much easier to model basis.

Q - Jim Covello

Okay and then a final question from me, well to the margin leverage in the model you all done a terrific job of, of doing different things to create much higher, normalized margins if you will, anything you can do at the currents levels to drive incremental leverage from the current levels which is kind of way to your peak.

A - Ron Slaymaker

Like…

A - Kevin March

What you first about, when you describe peak you’re saying…

Multiple speaker

Q - Jim Covello

Historical levels

A - Kevin March

Yeah, comparing TI to wherever it was back then…

Q - Jim Covello

That’s I guess another way to say would be the relative to current levels. What do you think you could do the drive incremental margin leverage in the model, may that’s a better way to ask him?

A - Ron Slaymaker

A couple of things out for a while and let Kevin add to it is, you certainly see benefit as revenue grows any and how that translates first of all for leverage on OpEx, second, I think Kevin already said we would expect to grow under normal expectations revenue growth, SG&A below, below the rate of revenue growth. Another consideration would be product mix, somebody asked this question already, I don’t know that I addressed it but certainly DLP, for example runs about corporate average margins, HPA tends to run above corporate average margin, so to the extent that we see good growth in those areas and frankly we didn’t see that kind of growth in 2005, hopefully that, that comes back in 2006 which with respect to DLP and certainly HPA the trend we’ve seen there, we fully intend to keep marching forward in the 2006 with being, above market revenue growth and then, and so utilization is a factor, product mix is a factor, and just revenue growth and leverage on, on OpEx. So frankly, so lot of things you’re seen from TI over the last couple of years and then in addition, the, the Sensors & Controls sale certainly will help at least on the, on the gross margin line. Kevin anything else you can think of?

A - Kevin March

No. You’ve covered it all.

Q - Jim Covello

And I guess, it’s my final, final question with then, we had, obviously the revenues were kind of flattish sequential in Q4. But we had a lot of those things present in Q4 of ’05 and the margins were, flat to down a little bit. So, what would change relative to, all those kind of seasonality in the business?

A - Ron Slaymaker

I think, Jim when you look at first of all which you are saying margins were flat sequentially…

Q - Jim Covello

Yeah, yeah I mean obviously gross margins out there, operating income was, that operating margins were flattish kind of quarter-over-quarter.

A - Ron Slaymaker

No for the company we keep in mind that, that reflect the seasonality in our calculated growth. I mean you are taking a lot of, lot of highly profitable revenue, if you look at semiconductors operating margin went up a 1.5 sequentially. Gross margin held up the same but, I would really, the only thing on gross margins when you look at sequential comparisons you can get, noise five factors for example, third quarter depreciation was down a little bit, fourth quarter depreciation was up a little bit, for, if you want to look at it from an incremental margin standpoint, I really encouraged kind of year-on-year type of comparison so, I think you get some of those kind of noise factors entering into the sequential comparison.

Q - Jim Covello

Great thank you so much.

A - Ron Slaymaker

Thank you John, next caller please.

Operator

Thank you. Our next question is coming from David Wu of Global Crown Capital.

Q - David Wu

Hi and great quarter folks, two quick questions, number one is, Ron, can you tell me when does the DLP business actually grow on a seasonal basis and second question I have is, these wonderful things that are sitting in front of your test and assembly equipment, won’t be a delinquency if you make them up in Q1, so just had a couple, some of these revenues that you miss in Q4 will show up in Q1 revenues. Do you make that kind of assumption in your guidance?

A - Ron Slaymaker

Well, I think certainly as we are preparing our guidance we’re, we’re well aware of the delinquencies we are carrying over into the quarter and to the extent that we are able to reduce those delinquencies going out the first quarter then that says yes those, that benefit is in the first quarter and is in, in the guidance but, to what extent we still, will still have to be determined. I am sorry David could you, the other question.

Q - David Wu

The DLP business?

A - Ron Slaymaker

A reasonable growth, when we may expect it. I think…

Q - David Wu

When, how does the seasonality growth of four quarters of the year, because we, we have last year distortion from Texas inventory in a channel and this years it’s kind of probably unwinding of that problem.

A - Ron Slaymaker

Agreed and any that you look year before that we just kind of been on a secular bill trend that works on blew through whatever, whatever underlying seasonality…

Q - David Wu

Seasonality applied to ’05.

A - Ron Slaymaker

Yeah I don’t, the answer is I don’t, we don’t have the history to be able to layout and say this is what you can typically expect from DLP through the of course of the year so, unfortunately we trying to have that little more history behind that’s able to talk about how that works for the appointed business there.

Q - David Wu

Okay, can you expect, I want to just clarify one thing which is that, you said in the liquid updated you are going to get into third quarter to get customers feedback on sell-through, what you specifically thinking about the very large OEMs and cell phones and the DLP kind of business or do, can you get a read on the broad base customers as well.

A - Ron Slaymaker

Certainly the big customers we have, their production planning system tied into our production build systems and we have really good visibility there, as we move out in the smaller customer certainly we would have, we would have a lot visibility and we say we have generally good visibility at demand and distribution and certainly inventories and distribution and, when it is common inventories and distribution declined again in the fourth quarter, so we know those, those channel inventories are low and all of those, generally point to good things. I mean, frankly, in distribution, we and the distributors probably would, would have preferred to have the inventories at a little higher level than where they are coming out of fourth quarter but, they caught up in this whole issue, as we are putting product out are we feeling if the customers that re, that are ready to put that in system or we put that, sending it to distributors kind of put it in the inventory so. It’s taking us a little more time to get that inventory build back to desired level in distribution but certainly the demand is there, if you go into 2006, I think we believe we are going to be well served by having lean, lean inventories in that, in that channel.

Q - David Wu

Thanks Ron, still about those 7 turns, turns rate like, like we said before.

A - Ron Slaymaker

That, that correct turns are 7 or maybe slightly above that lead. Okay lets move on to the next caller and our backlog of our callers is growing in factor than our, our constraint in assembly test, I really will ask each of you limit yourself to 2 questions please.

Operator

Our next question is coming from John Barton of Wachovia Securities.

Q - John Barton

Thanks, Ron if you could comment on OMAP, I mean you talked about the strength in year-over-year et cetera, just give us a picture what you’re seeing from the competitive landscape perspective and tax rate, pricing trends et cetera, to give us to feel of business delinquency.

A - Ron Slaymaker

OMAP is doing very well, and if you look at our Wireless revenue and our 3G revenue in 2005, it was roughly 55% OMAP, 45% Baseband, I think I said earlier that we doubled our OMAP immense shipment in 2005 compared to ’04 for that 3G space. So it’s doing very well. The encouraging thing is if you go back probably to 2004 almost all of our OMAP revenue was tied to the Japanese market and into DelCmos programs specifically that has moved out to a broader base of customers and service providers in 2005, so its diversified nicely and, and its grown nicely. We’ve certainly, in terms of ASPs I would say, whole many other coming down but holdings, holding up a well with respect to our expectation, still in the $15 to $20 range that, that we described overall for 2005. But more in the lower part of this range, coming out of the year then, then what would have been at, at beginning of the year. Could you have a quick follow up john?

Q - John Barton

Just real quick, with utilization expectations for Q1?

A - Ron Slaymaker

We don’t have specific numbers to share, what I can say is utilization in fourth quarter all are of back of our fab, so wafer capacity was about even with where it was third quarter but I don’t have a specific outlook number to provide you in first quarter.

Q - John Barton

Thank you.

A - Ron Slaymaker

Thank you, John. Next caller please.

Operator

Thank you. Our next question is coming from Ambrish Srivastava of Harris Nesbitt.

Q - Ambrish Srivastava

Hi Ron, I didn’t hear the answer to this question, maybe you didn’t answer even Michael asked earlier on, on lead times. You said high performance lead times have stretched up. Could you please qualify that?

A - Ron Slaymaker

No I said overall high performance analogs have been stable all I would characterize is that it’s, four to six weeks or isolated, isolated cases where the die bank inventory was depleted and we have to move lead times out of those really are isolated cases versus what we are doing overall in high performance analog.

Q - Ambrish Srivastava

Okay thanks, thanks for your clarification. Second question, very good free cash generation, you are buying back why not increase your dividend?

A - Kevin March

Ambrish we have, came to lose over the last year and a half or so and what we’ve one who done on dividends and buybacks we have actually increased the dividends several times and I think the first, size of a buyback that we announced back in September of 2004 and at that we increased our dividend by 17%. We have a second buyback that we announced a year ago, the third buyback that we announced in July of this past year and at that time another 20% increase in dividend in our most recent buybacks. So we have impact in increasing dividends and the Board does review our dividend policy on an on-going basis to the extent that, that large with appropriate, will make changes in the future based on their evaluation.

Q - Ambrish Srivastava

So, when I should re-look into that Kevin, is we should expect an increase sometimes also?

A - Ron Slaymaker

You know Ambrish, I knew that I was saying that you are going to go there. I don’t want to pass the recall out of future, but I just did wanted to out the fact that we had been increasing it and we continue to look at that until we expect that makes sense will make adjustments. Was that your follow up question Ambrish?

Q - Ambrish Srivastava

No, my follow up Ron was a little bit on the Wireless business. You talked about the, and you’ve talked about, in the past about the growth in the low end as well as the high end. What do you think is the percentage of the two businesses relative to what it was in ’05, what would you expect in ’06. Thanks.

A - Ron Slaymaker

I will say, these are not percentage talking about market growth.

Q - Ambrish Srivastava

No, not market growth because I guess that’s, I guess both of them are dependent on where the market goes. But both when you look at your business and you look at ’06 versus ’05, where would you expect the low end phones to come in as a percentage of you total Wireless business?

A - Ron Slaymaker

Yeah I don’t, I don’t have a specific number there in and part of this is, trying to come of with an exact definition of low end. We know, the lower priced product that are going into those lower priced handset generally but there is not real kind of corporate line definition of, of where the low end ends and mid range began. What I can say is the trend is exactly as we described where, if you look at, I think we gave from the numbers in case of 3G, 3G represents quarter of our Wireless revenue in 2005, that likely will increase in 2006 at the same time, this trend that we’re seeing on the low end we would expect will continue as well. I don’t have a market growth number for you ’05 or ’06 on the low price segment but I can say our market share is really strong and we’re engaged with those familiar players that are quite vocal about their own successes in that segment of the market. So, I think it’s suffice to say we expect that to continue to be a growth driver in ’06 as well.

Q - Ambrish Srivastava

Okay thanks guys.

A - Ron Slaymaker

Thank you. Next caller please.

Operator

Thank you. Our next question is coming from Mark Edelstone of Morgan Stanley.

Q - Mark Edelstone

Good afternoon. I guess you guys on that point, now we just going to walk to the high end and the low end, and if you net it out and look at 2006 are you expecting that units and revenues and Wireless growth roughly the same pace, or you think that there is more content increase overall when you net it out.

A - Ron Slaymaker

That, that’s a good question Mark and I don’t have any answer for you, because that really depends on the mix. This in fact, the growth from, from 3G absolutely is, if you call blended ASP, blended ASP, the ASP on 3G is higher that our average ASP. The ASP on low priced where there is lot of unit growth happening is below, so, what nets out is going to be dependent upon the relative growth of, those 2 segments of the market, if you look at ’05, we had good, good solid Wireless growth of 14% compared to ’04. But that was probably a little bit below what in side units grew in ’05. So where it goes in ’06, really is going to depend upon, which, which segment of the market grows faster.

Q - Mark Edelstone

And then this is follow up, if I am reading between the lines correctly Kevin it sounds like you are going to a five year straight line depreciation, can you confirm that and then just you talk about where you expect royalties to trend in ’06 versus what you saw in ’05?

A - Ron Slaymaker

Mark you read between the lines correctly we do, we’re keeping the less, as they had been 5 years so that would be just a simple 5 years straight line depreciation going forward. On the question of the royalties; we are in a process in 2006, those getting new royalty contracts with various parties. 2006 is very, is a period in which we began to see some of those 10-year licenses that we had back in the mid 90’s beginning to come up from the middle. And so some will be expiring, some are already be replaced, renewed some new people are already signing-on, so we are expect to see, royalties continuing to be a reliable incomes during first in 2006 and beyond, it probably wouldn’t be appropriate for me to comment as to, what amounts that we might see on that, because as we go into 2006 we’ve had a negotiations with various people who may see certain catch up adjustments and so on for some of them may expire last for a quarter or two before they get renewed. But that’s the pattern, which I look in at 2006, again you keep in mind that royalties, the total TI has dropped down roughly 5% on the over now, such its really not quite as big as component is about to last for us.

Q - Mark Edelstone

Is there risk in Kevin, at least as you go through some of the quarters this year, that the royalty income in April quarter is lower than what it was in 2005?

A - Kevin March

This considerable something, a kind of particular quarter, we could see a shift like that, if we anticipate some like that Mark, we’ll make it clear to, at our guidance what’s happening, right now I have nothing like that, that I would offer to you work into your models or anything.

Q - Mark Edelstone

Okay, thank you.

A - Ron Slaymaker

And I would just add the reasons maybe different but frankly Mark, as you are well aware, if you go through the history of our royalties they’ve always, I mean, there are lot of factors there including, licenses revenues, any catch ups, things like that. Those numbers have tended to move around pretty much quarter-to-quarter anyway, I know for example, I think it was a second to third quarter last year we had something like a $50 million transition, so all I am saying is historically those numbers have moved around a lot. Okay, let’s move to the next caller please.

Operator

Our next question is coming from Chris Caso of Friedman Billing.

Q - Chris Caso

Yes, hi, thanks. Guys with your high performance analog segment, typically with some of the other guidance in the high performance segment, they show a pretty strong first quarter, as the industrial market tends to kick in, naturally the profile of your businesses is that something that you guys are expecting as well as far as the HPA group in the first quarter?

A - Ron Slaymaker

I think what without the specific our expectations, I think you can expect that in general PICs new pattern on high performance analog will be very closely aligned with what you see from up three primary competitors in that space.

Q - Chris Caso

Okay fair enough. And as far as some delinquencies, you guys have been talking about, could you give some clarity as, with respect to what segments the delinquencies around and they kind of pretty much broad along the product line or they concentrated in the catalog business and then more specifically are, are the delinquencies in Wireless business as well.

A - Kevin March

Chris, I would say that they are pretty broad based; they included the catalog area, the include some of the big verticals and including Wireless, and so it was quite a bit across the Board, this assembly test bottom lines that we’ve been experiencing, was not favoring any one particular product family as we did expand it in inside TI would tell you they are suffering from the same line of constraint.

A - Ron Slaymaker

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

Operator

Thank you. Our next question is coming from Tim Luke of Lehman Brothers.

Tim, your line is currently barred.

Our next question is coming from Michael McConnell of Pacific Crest.

Q - Michael McConnell

Thank you, question on the bottleneck in assembly and test, I was curious if this caused some revisions in the supply chain, and with respect to some of your partners.

A - Ron Slaymaker

I am not sure Michael what you mean the revisions with our partners.

Q - Michael McConnell

Well you have a bottleneck; I was looking at from the wafer standpoint, just with respect to Q1 from your forecast, is going to be your partners, if this, with this bottleneck, if you had to make some revisions to some of your suppliers.

A - Kevin March

No, if you talk about our, our wafer suppliers, the answer is no, if you are talking about some of our assembly and test equipment suppliers. We certainly are trying to prioritize some of them to help us to leave those and in part of that’s just a logistic challenge, we’re trying to bring the various parts together for example, of tester, with the right handlers. So that we can actually brings those to the line at the same time, and run product through that. If those kinds of logistical challenges that we have in the balance are really only a few days off but, if not costs us only before that was delinquencies miss revenue opportunities.

Q - Michael McConnell

Okay and then would just, maybe this is for Ron, just Ron if you kind of characterize Q1 time what you are seeing, in the Wireless and handset customers in general, seasonality if it just seems to be normal seasonal and make some characterizations between demand both at the high-end relative to low end please?

A - Ron Slaymaker

Michael we’ve really don’t break down our outlook into all the various sub business below the semiconductor segment level. So let me leave my statements I made them as they applied to the semiconductor business overall suppose to breaking it down into wireless or various settlements below that.

Q - Michael McConnell

Okay thank you.

A - Ron Slaymaker

Thank you Michael, next caller please.

Operator

Thank you, our next question is coming from Joseph Osha, Merrill Lynch.

Q - Joseph Osha

Well, I made it. My question on Wireless was already asked in terms of the profit sharing toward 2006, Kevin can you give me a census that how that’s going to work.

A - Kevin March

Yeah Joe, it’s going to work same like in 2005. We’re called to re modify the formula coming in at 2005 so that is purely a function of operating margin, where as previously function of both operating margin and revenue growth rates. So we saw that the reduce done significantly on a year-over-year basis into ’05 and really its moving to self out and kick it out that it was middle of the pricing relates like it was in the past. So we would expect that going into 2006, I don’t have a dollar value or present value for the work in there but, well on the same sort of trend that you seen out operating margins running on.

Q - Joseph Osha

As the further rate change the dollar and how, how the rate calculated taking the option expensing into the account?

A - Ron Slaymaker

The option expensing run through, the operating margins so those depress, if you go over our profit sharing complication.

Q - Joseph Osha

All right thus the implication and we might see perhaps smaller impact here this year than we have in past is result of that?

A - Kevin March

Are you assuming our operating margins decline as result of the stock-based compensation meaning ‘06 in total compare to ’05 in total?

Q - Joseph Osha

Well, I do know yet but I have been certainly they tend to have to a depression and you factorize two points revenue?

A - Kevin March

Sure, so to that extent it was, but to the extent that operating margin is higher including stock base compensation of expensive in ‘06 than operating as we reported in ’05 with half year stock base compensation expenses profit sharing will go up a little bit.

A - Ron Slaymaker

Joe let me just reminded you on that. So it’s not to forget look with the depreciation drop as much as it is and year-to-year basis that will also list as a positive impact on operating margin.

Q - Joseph Osha

As the year progresses, yeah.

A - Ron Slaymaker

Right.

Q - Joseph Osha

Okay, and then just very quickly Ron, to return to the, wireless did you say earlier on that you are thinking 3G revenue could double in dollar terms this year as you said?

A - Ron Slaymaker

You know its actually I think what I said was we believe and I think both analysts are forecasting that segment in the marketplace that double the WCDMA handset will double again ’06. So roughly going from about 50 million units ‘05 to about 100 million units in ’06 and I’ll say our expectation in terms of our own market share is that we hold it, we don’t, we hold it if we don’t need to expand it in ’06. So, of course we have the pricing that offsets some like unit growth, but we think it’ll be a nice growth engine for us again in ’06.

Q - Joseph Osha

Okay one just a follow on that then I’ll go away. Are you able to give me a senses to have the ads process reverse fees baseband that, it my progress that I remember you are showing this turnaround I think showing your that mix might a been quickly go upward?

A - Ron Slaymaker

Sure, if you look at OMAP revenue last year was about 55% of 3G revenue 45% been modems…

Q - Joseph Osha

And that’s ’05 you are referring to?

A - Ron Slaymaker

In ‘05 and what I said was the modem units tripled, the OMAP units doubled so, that will always give you some data points data about make your own assumption and they extrapolate into in ’06. The modem shipments have been increasing faster than the OMAP shipments in ‘05

Q - Joseph Osha

Understood. Thank you very much.

A - Ron Slaymaker

Thank you, Joe. Next caller please.

Operator

Thank you, our next question is coming from Tim Luke of Lehman Brothers.

Q - Tim Luke

Ron can you hear me.

A - Ron Slaymaker

Yes we can go ahead Tim.

Q - Tim Luke

Apologies, earlier. With respect to the mix in wireless, is it fair to say that these are yield perception going into the quarter that the WCDMA market may have strengthened. Or that largely as you thought it would be and maybe how do you see it, in the first quarter. And I would also wondering, with respect to the challenges in assembly and test, what they most felt by wireless relative to HPA such that the sequential growth rate would have been similar to HPA, was that not really a factor, I had a brief follow-up?

A - Ron Slaymaker

Okay on the later I’ll see not really a factor, wireless got hit little bit actually HPA has it done, probably there it’s more related to die bank inventory as opposed to assembly test but, both were of course somewhat constrained in the quarter, probably the only area that really came out of the quarter, clean without such constraints for all would be DLP. The mix of Wireless Tim, I have to tell you, if I just go through the, the quarter of, Wireless overall a bit probably little better than what we expected in October, it was little under what we expect to that the mid quarter update, first week of December and the reason it will wonder was because of the assembly test constraints that Kevin described. As to the mix turn out you know…

Q - Tim Luke

How did this finished, how did this finished that you came how was in the mid quarter?

A - Ron Slaymaker

I didn’t understand what you just asked Tim, could you repeat it?

Q - Tim Luke

How, you mentioned how the, you was at the mid quarter updated with the little softer than expectation to the assembly and test?

A - Ron Slaymaker

No, no. What I was trying to indicate was how it’s finished was a little softer then what we expected in the mid quarter, we took mid quarter Wireless expectation was up from October and then we landed somewhere in between the 2 and the reason is softened up just as we described already we didn’t bring assembly test capacity on, at the pace that we expected, during the month of December. But I don’t have any color for you on the mix of 3G versus low end versus what we would expect to come in into, end of the quarter.

Q - Tim Luke

And lastly just as a follow up, as you have, could you give any commentary on the progress with respect to the development of your merchant solutions for the WCDMA market and any assessment of opportunity maybe opening up to you as some other struggle to move rapidly to 1965 and what, OEM opportunity is that might open up with, opportunity is very high pride of our customers?

A - Ron Slaymaker

Okay certainly I, you’re asking a really good question and on probably not going to be able to provide you as much clarity as you would like but I will say our progress is very god and for the rest of the, on the phone we’re talking about the, the WCDMA product that TI developing conjunction with the MTV DoCoMo we’ve got, base band product we’ve got a and then the graded OMAP II processor with the, with the UMTS baseband and those are merchant market solutions that we install to other handset vendors and service providers throughout the world. So what I say is our progress is very good but at the same time I don’t have a specific customer engagements to be able to discuss and, frankly I wouldn’t, I wouldn’t suggest you hold your breath waiting for that, because generally we don’t block of such engagements into the customers are ready to deploy their products, so there nay be a better time before you here specifics on who are engaged with. Kevin, I think you had a comment to make.

A - Kevin March

Yeah, Tim on your earlier question about that the delinquencies and how it mixed to across the business and had impact of the business, obviously we didn’t come in and we didn’t deliver the revenue that we had expected at the mid quarter update and it makes it almost internally attributable to the fact that we have these delinquencies that we’ve seen with the bottlenecks that we’ve been describing. I think it’s fair to need a, to be with the, our wireless revenue been kind of the bottom filled with our total summer revenues that there are biggest vertical that in fact that was pretty close to the kind of delinquencies that we had, missed opportunities that we have in Wireless if you will, because of the bottleneck problems so in fact we would assume more revenue in Wireless as well as HPA and some of the others that Ron talked about a little bit, a few months ago, but you could, you could pretty much telling about that would be a similar ratio to what our total Wireless revenues are for semiconductor.

A - Ron Slaymaker

Okay and I, and I realize we have a long queue of a caller still waiting at questions, but operator let’s take one last caller and then we will wrap up the call.

Operator

Thank you our final question coming from Tristan Gerra of Robert W. Baird.

Q - Tristan Gerra

Can you help us quantify the expected impact of your single chip solution for low end sounds all those six revenues what percentage of revenues can get this generate by yearend?

A - Kevin March

Chris, now have a specific number for you but certainly we expect that single chip solution to go a long way towards expending our leadership in that, that low price segment of the market, we already have better market position in low price segment then we have in the market overall and, frankly a lot of, even our current position is based on, is not just the fact that we have really good products and price points already that we’re introducing but the roadmap that we are providing those customers with that platforms evolution over to single chip and so, let me those, make quick note that, that single chip technology will also be extended out, not to just drop the low price segment of the market, we will think that, that technology, all up and down our product line to a growth rate ramp even, even UMTS. The concept of lower price solution and the benefit that come along with integrating, a digital radio with a baseband and some of the other analog technology in full CMOS implementation, its not just going to be felt by the low price segment of the market. So you will see initially in ‘06 in handsets we would expect for low price segment for year also, we just stay tuned for products announcement were you are see that moving into other technology’s for the handset vendors as well. Do you have quick follow up Christine?

Q - Tristan Gerra

In terms of the DLP pricing any unusual trends lately and what’s your expectation on the DLP pricing in ‘06 as the TV price points continue to decline any, any variation from the, the normal decline that you’ve seen or you expect to see similar trends in ’05.

A - Ron Slaymaker

I would say generally some of our trans Christine, its, in our interest to continue bring DLP the light engine, the chipset that we provide as well as to work with our sister suppliers to bring the cost of that light engine down so that television pricing can continue down, so that we continue to benefit from the price elasticity of that market, that being said, its no secret that there is a lot of price competitions from other technology out there’s, such as LCD, such as PDT and yet we also feel very confident that, with CLPV base point semiconductor technology and all that coming normal learning that in cost learning that we’ve got a lot of experience and in implying to that technology, will be able to do quite well with DLP in terms of addressing those price points. Okay and with that, we are going to need to wrap up. Tristan thank you for your, for your question. Before we end the call, let me remind you that the replay is available on our website. Thank you and good evening.

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Source: Texas Instruments Q4 2005 Earnings Conference Call Transcript (TXN)
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