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Executives

Ron Slaymaker

Analysts

Vivek Arya - BofA Merrill Lynch, Research Division

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

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

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

Ross Seymore - Deutsche Bank AG, Research Division

Christopher J. Muse - Barclays Capital, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Joseph Moore - Morgan Stanley, Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

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

Parag Agarwal - UBS Investment Bank, Research Division

Texas Instruments Inc. (TXN) Q2 2012 Mid-Quarter Update Call June 11, 2012 5:00 PM ET

Operator

Good afternoon, and welcome to the Texas Instruments Second Quarter 2012 Mid-quarter Update. At this time, I would like to turn the conference over to Mr. Ron Slaymaker.

Ron Slaymaker

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

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

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

We have narrowed our expected ranges for TI's revenue and earnings from our previous ranges. We now expect TI revenue between $3.28 billion and $3.42 billion. We expect earnings per share between $0.32 and $0.36 on a GAAP basis. Our estimates for acquisition-related charges and restructuring charges are unchanged and are expected to total to about $0.06 per share, assuming TI's marginal tax rate of 35% is applied to these charges.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

Ron, in the last few weeks, we have seen a number of macro indicators starting to get softer, but you are maintaining the midpoint of your outlook. I'm curious, have you noticed any changes versus your prior expectations whether it be by regional or product basis or end market perspective? Any color you could provide would be very helpful.

Ron Slaymaker

Okay, Vivek. Thank you for your question. And I guess what I would say is that, as you might imagine, just given what we did in terms of maintaining or just narrowing our guidance around the prior middle of the range, our business is generally tracking well and consistent with our initial expectations. We do expect solid sequential growth in our Analog, in our Embedded Processing as well as our other segments, while we expect that Wireless will decline. From an end market standpoint, the industrial market, that we began to see some early indicators of recovery in the first quarter, continues to recover in the second quarter. Although, I would describe that visibility there continues to remain low. Probably in terms of notable strength, Communications Infrastructure, we expect, will be up strongly this quarter but, even so, not back to the levels that we saw in third quarter of '11. Now probably another major market worthy of mention would be Computing where I would describe that sales in the computing applications are somewhat mixed. But then inside of that, our sales of storage products in the hard disk drive customers, we expect to grow again this quarter. And really, this quarter we believe that things have come back into sync in terms of our shipments have -- are really reflecting a fully recovered situation in Thailand from that flooding situation. Do you have a follow-on, Vivek?

Vivek Arya - BofA Merrill Lynch, Research Division

How would you characterize inventory both at your sites and at your distributors?

Ron Slaymaker

Okay, that's a good question. And probably a little different than in the 2. So in distribution, we would describe that inventory is low. In fact, I think I would extend that to customers in general. You'll recall that, I think, for the last couple of quarters, we've described that distributor inventory is about 6.5 weeks, and that again is low by our historical standards. And what we've noticed is that both distributors and customers are really reluctant to build inventory, given kind of your first question, which has tight uncertainty in the overall macro environment. In terms of TI's own inventory, as you saw last quarter, we are well positioned with our inventory and we will maintain that position strength in terms of inventory. And I'd also extend that to we're well positioned with available manufacturing capacity really to support whatever demand situation develops. So if demand were to suddenly strengthen, which is often the case in an upturn situation, we're -- we believe we're going to benefit from the strong inventory situation we have. If the recovery builds more slowly, in that case, our inventory is mostly comprised of what I would describe as long-lived catalog products, and our risk there is low. So in short, the upside opportunity really more than justifies the downside risk. Okay, Vivek, thank you for your questions.

Operator

We'll go next to Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Ron, could you talk a little about linearity either by bookings or billings or both?

Ron Slaymaker

Tore, I really don't have kind of the month-by-month or, I guess, the -- I'd probably call it with -- a week-by-week linearity. Most quarters for TI, this -- the last month of the quarter tends to be our strongest. But even so, typically, the last month we'll be still in the upper 30s as a percent of revenue in the quarter, but -- and so this quarter would be no exception. We, with this guidance, don't expect any kind of a heroic act in the month of June, just more of a normal type of build in that final month of the quarter. Do you have a follow-on, Tore?

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Yes, I do. You mentioned Communications should be up strongly in the quarter. Could you maybe add a little bit more color in there, maybe specifically talking about wireless versus wireline?

Ron Slaymaker

Sure, Tore. Most of our Communications Infrastructure revenue and exposure is to wireless base stations, so it would be specific to that. And then down inside of that, it's really the North American market, and deployments of WCDMA infrastructure is what's driving it. So kind of more of the same of what we've seen over the last couple of years where North -- developed markets in general, and probably North America specifically, as service providers are adding data capacity to try to keep up with demand from consumers really arising from the broad deployment both of smartphones as well as tablets. So we had a little bit of what I'll call a glitch back late last year with some of the operators putting on -- tapping on the brakes, but it seems like we're out of that mode and back into growth again. Okay, Tore, thank you. And we'll move to the next caller.

Operator

We'll go next to Stacy Rasgon with Sanford Bernstein.

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

I was curious, how much of the low inventory levels at distribution is a function of your move more toward consignment, as well as the canceling of the one distribution contract from Nat Semi?

Ron Slaymaker

Some of it is consignment. If you look at -- certainly if you look at, Stacy, back multiple years of history, you would say that we're probably down a good couple of weeks versus where we would've been, say, 3 years ago because of the consignment programming. And then again, we have about 30% or so of our distribution revenue now being supported by a consignment inventory program. But when I talk about "6.5 weeks is low by historical standards," I'm making the adjustment already to comprehend the consignment program. So certainly down partly because of consignment but even comprehending what you would expect from a consignment program in terms of reduction of the distributor-owned inventory were low by those adjusted standards, as well. Do you have a follow-on, Stacy?

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

Yes, I do. I was wondering if you could give us a little bit of your thoughts on the departure of Gregg Lowe.

Ron Slaymaker

Well, Gregg obviously is pursuing an opportunity that he believes will be in his best interest. Gregg is a great manager, a great leader. He was well-respected at TI. And we wish him the best. Not -- we don't wish him too much best because obviously we're competing with him at Freescale. But he's a good man and I suspect he'll do well there. Okay, Stacy, thank you for your questions. And we'll move to the next caller.

Operator

We'll go next to Christopher Danely with JPMorgan.

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

Ron, last quarter, you commented, I think, that your book-to-bill is tracking above 1 so far. Could you just give us comments on how book-to-bill is tracking so far? Have you seen any changes or fluctuations in bookings for next quarter?

Ron Slaymaker

You're right. Book-to-bill was positive last quarter. And Chris, probably what I'd prefer to do instead of talking about book-to-bill, just because it tends to be very noisy with both the numerator and denominator changing, let me, as usual, wait till the end of the quarter to specifically comment on book-to-bill and maybe just describe more what we're seeing in terms of orders. So what I would say on orders is that they're trending well this quarter, as we saw last quarter, and that we expect both orders and backlog to grow sequentially based upon what we've seen during the first couple months of the quarter here. Okay Chris, do you have a follow-on?

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

Yes. Can you give us any progress or update on how the SVA is doing versus your overall Analog business?

Ron Slaymaker

SVA, we continue to be encouraged with the progress there, but I'd really probably would rather wait till the end of the quarter to start getting into the various subsets of Analog. But everything that we've seen in terms of the integration of National Semiconductor, the customer response to that integration -- I'm sorry, the customer response to the acquisition and integration inside of that -- inside of our Analog business continues to be very encouraging to us. So green lights there, but in terms of specific revenue trends and relative to the rest of the Analog business, I'll wait till the end of the quarter. Okay, thanks, Chris. And let's move to the next caller.

Operator

Our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

You mentioned the Wireless business will be down sequentially. Can you give us a little more color? Is that because of the baseband side? OMAP connectivity? Any color on that would be appreciated.

Ron Slaymaker

Okay, sure, Ross. Baseband, we would expect to be about even with what we saw last quarter. You'll recall that, I think, earlier in the year or maybe late last year, we described that we expect that it will be running about $50 million to $100 million per quarter in general this year, so well within that but about even with where we were last quarter. The remainder of the Wireless revenue, we expect, will decline this quarter sequentially. And that's really tied to customers completing their inventory correction that we described last quarter and also as they prepare for new model launches later this year and basically cleaning out inventory in anticipation of those new phone models. Do you have a follow-on, Ross?

Ross Seymore - Deutsche Bank AG, Research Division

I do. Just back to the distribution side of things, rather than the inventory that you've answered already, what about on the demand side? How are you seeing demand from just used versus your OEM customers?

Ron Slaymaker

Not dissimilar on either front. So we expect that resales from the distribution channel will increase sequentially. It's not exactly the same as what we're expecting overall but within striking distance, anyway. So in general, pretty similar. Okay, Ross, thank you. And we'll move to the next caller.

Operator

We'll go next to CJ Muse with Barclays.

Christopher J. Muse - Barclays Capital, Research Division

I guess, curious, as you think about your conversations in the last few weeks, how have things changed, if at all, given what we're seeing in terms of the macro backdrop?

Ron Slaymaker

CJ, I probably don't have a lot more to say specific in terms of the last couple of weeks other than what I said previously, which is obviously part of our growth is just tied to us. We believe that, over the last -- just over to last, what, starting third quarter of last year continuing through first quarter of this year, our customers were going through an inventory correction. And therefore, we were undershipping their demand. What we're seeing in the second quarter is that we've begun the process of moving back toward their end demand level. So the reality is we could have -- I mean, I -- the macro matters and demand matters but it can wobble a little bit and not affect our near-term growth just as we continue to recover from that correction. Obviously, it can impact a slope. It can impact our customer's motivation to replenish inventory, which again we don't believe has happened at all to this stage. We're just coming out of the correction as opposed to any replenishment. But to date, this quarter is tracking generally consistent with what we had expected back in April when we gave our initial guidance. Do you have a follow-on, CJ?

Christopher J. Muse - Barclays Capital, Research Division

Yes, real quickly. On the Embedded business, can you share whether that business is tracking in line with the overall guide here in Q2 or above or below? And any color there would be great.

Ron Slaymaker

Well, I would say Embedded is growing. I don't -- in terms of versus the guidance, I'd probably not like to get into all that detail. But keep in mind, in the -- inside of Embedded, a big piece of that is Comms Infrastructure, which I described as doing very well this quarter. Also growing inside of that is the broader-based catalog product line. So Embedded, overall, is doing very well, mostly driven by Comms Infrastructure and again also driven by catalog. Okay, CJ, thank you. And we'll move to the next caller.

Operator

We'll go next to Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

You had commented that you don't believe customers are rebuilding any inventory this quarter. Do you think they are going all the way toward ordering back in line with their demand? In other words, do you need demand improvement in the September quarter to drive further revenue growth? Or could you see some incremental catch-up from customers continuing to order back the demand level?

Ron Slaymaker

Boy, that's a tough one. I think, even at our analyst meeting, we described that we believe that the industry overall was lagging, I -- call it historical trend. And the extrapolation of that trend, by about 20% coming out of first quarter. Now I don't know that -- you probably and you might assume that, that trend line is a rough proxy for end demand, but obviously it's not going to be a perfect proxy. So I'll probably hold off on making any extensions on whether we will still be able to benefit just from -- in the movement back toward end demand in third quarter until we finish this quarter and are ready to give guidance for that quarter. Do you have a follow-on, Jim?

James Covello - Goldman Sachs Group Inc., Research Division

Sure. I'm assuming the answer is no, given your comments about this inventory and capacity, but I just wanted to check to see if lead times have stretched out at all yet, or kind of have remained stable.

Ron Slaymaker

Our lead times are still short, with the strong majority below 8 weeks. And I think, given what we've done in terms of manufacturing capacity and given what we've done in terms of inventory, we will be able to maintain those lead times at those currently attractive levels. Now I think it's also -- what typically happens at -- as we move through an upturn is it doesn't take our lead times extending. All it takes is for anybody in our customer supply chain to start extending lead times for the customers to then move to that next phase of the upturn, which is basically replenishing inventory versus just trying to maintain really low levels of inventory. And again, that's what we have not yet seen, but again, we're not -- the fact that our lead times are short and are expected to remain short by no means will limit our ability to benefit from that next phase of the cycle. In fact, it's the exact opposite: the fact that we will have product availability as customers start to replenish inventory and put pressure on other parts of the supply chain, we would actually hope to be able to pick up share as we move through that process. Okay, Jim, thanks for your questions. We'll move to the next caller.

Operator

And we'll go next to Joe Moore with Morgan Stanley.

Joseph Moore - Morgan Stanley, Research Division

Can you talk about the direction of your fab utilization as you -- as you move through this quarter? And you mentioned being happy with the current level of inventory. Do you think you need to keep that flat? Or how are you thinking about those things?

Ron Slaymaker

Okay. Utilization this quarter will likely be about the same on average as what we had last quarter. And in terms of our inventory level, I guess, probably the best way to describe it would be from a day standpoint. And on inventory days, we would expect that we're going to land probably flat, maybe even down a little as our revenue increases this quarter. So obviously, we're keeping our inventory well positioned to support future growth. Do you have a follow-on question?

Joseph Moore - Morgan Stanley, Research Division

Sure. Can you talk about what you're seeing in the automotive space? I mean, it's been fairly recent but we've had some weaker data points on end demand in the U.S. Do you think you'll see that? And if you did see it, over what time frame would you see it?

Ron Slaymaker

Okay, Joe, I really don't have any specific data on automotive. It's been a market segment that we've -- has been driving a lot of growth even over the past few quarters. This quarter, we would expect it to do well, but it's not -- if I look inside at Embedded Processing, Comms Infrastructure and the catalog product areas are really the ones that are driving the growth this quarter. So automotive, maintaining the strength that we've seen over the last few quarters. Not giving any of that back, but again not the driver of Embedded Processing growth this particular quarter. Okay, Joe, I believe that was your follow-up. We'll move to the next caller.

Operator

We'll go next to Ambrish Srivastava with BMO.

Ambrish Srivastava - BMO Capital Markets U.S.

Ron, I apologize if you already addressed this. Geographically, what are you guys seeing in the business?

Ron Slaymaker

We did not address that. And what I would say is, just based on kind of where we've -- what we've done in the first couple of quarters -- or couple months of the quarter, growth has been led by the U.S., followed by Asia and Europe. Japan is the only region that we've seen a sequential decline in the quarter. So again, U.S., followed by Asia and Europe, with a small decline in Japan this quarter. Do you have a follow-on, Ambrish?

Ambrish Srivastava - BMO Capital Markets U.S.

The business is a little bit different than it has been in the past few years, so normal pattern for 2Q. What should we be looking at?

Ron Slaymaker

Okay, sure. And that is a good question because our business profile has changed with the inclusion of National, our SVA Analog business and also, as Baseband has declined, and obviously it had pretty strong seasonal patterns on its own. So if you adjust out to add in Silicon Valley Analog and take out Baseband, I'll give you, second quarter on average would be up 9%. So I think, if the -- if you look at our guidance and you make the adjustment for the insurance proceeds that were in the revenue line for first quarter, you'll see that this quarter is just above that. Right around 10%, I believe, is the middle of our guidance range. So we're well aligned with the seasonal 5-year average. I'll just go ahead and give you the rest of the year, if you would like, so we can do this once. Third quarter then would be 6% on average. Fourth quarter would decline 8%, and I'll have to put an asterisk on that, that includes fourth quarter '08. If you exclude that quarter, it would be down 4%. And then rolling over to first quarter, the 5-year average is down for -- again highly impacted by first quarter '09. If you take that one quarter out of that 5-year average, first quarter would be flat seasonally to fourth quarter. Okay, do you -- I believe that was your follow-on, Ambrish. And we'll move to the next caller.

Operator

[Operator Instructions] And we'll go next to David Wong with Wells Fargo.

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

Maybe an obvious question, but given that you've hit the midpoint -- that you're reaffirming the midpoint of your guidance, what's the pattern of your sales through the quarter up to now? How much have you expected? And does that mean that you exit this quarter on a business high?

Ron Slaymaker

David, I didn't understand everything you said. Could you repeat your question?

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

Well, with the National [ph] business through the various months of this quarter, much as you expected? And does that mean that each month has been stronger than the last and you expect June to be the strongest month so you exit the quarter significantly higher than you started the quarter in terms of business progress?

Ron Slaymaker

Okay, so a question about linearity. Our expectation is that June will be the strongest month of the quarter, which is pretty much the case every quarter. As -- I'll just reiterate what I said before so there's no confusion: Typically, the final month of the quarter for TI will run in the upper 30s as a percentage of the total quarter's revenue, and so it is not a disproportionately strong quarter. And part of that even just has to do with when we book royalties and such in the final month of the quarter as opposed to in the earlier 2 months. So we expect this June quarter to be pretty much like every other quarter, which is a strong June relative to April and May but not stronger than would-be typical in a second quarter. So we will come out of the quarter with -- off of the strongest month, but that doesn't imply necessarily anything about going into the third quarter. Do you have a follow-on, David?

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

Well, I guess related to that, has order momentum grown through the quarter?

Ron Slaymaker

I don't want to talk about momentum per se because that gets into more complex math than I think I may be even capable of doing, but what I will say is orders will be up. And we have orders and backlog that are growing sequentially, as we did last quarter. Okay, David?

Operator

We'll go next to Uche Orji with UBS.

Parag Agarwal - UBS Investment Bank, Research Division

This is Parag for Uche. Ron, just wondering if you could provide any update on your Windows ARM program. Like, there were a lot of demos in Computex. Any update on that front will be very helpful.

Ron Slaymaker

Okay, thank you, Parag, and sure. I think, at Computex last week, you've -- many of you may have noted that Toshiba announced their Windows 8 roadmap, including 2 Windows RT devices that are -- that they're working with TI's OMAP to develop. They announced a roadmap for a clamshell PC as well as a tablet. And again, in both cases they're working with TI. Separately, we demoed our -- we had our own demonstration, which showed Windows RT running on an OMAP 4470 at that same show. And I think most that saw it had some pretty good things to say in terms of the performance of that operating system on OMAP. Do you have a follow-on, Parag?

Parag Agarwal - UBS Investment Bank, Research Division

Sure. As for the timing and the revenue parts from this -- for this concern, when should we expect any revenue from this program?

Ron Slaymaker

Yes, Parag, I don't want to try to get out ahead of our customers in terms of specific -- or announcement of specific products and when they might ramp that. But I think, incrementally, what came out of that show was that, in fact, TI and Toshiba are working together and then also that we're pretty far along in terms of porting that technology over to OMAP. But I don't really have any forecast to provide separate from what Toshiba might say on their product plans.

Okay, and with that, let's wrap up. Before we end the call, let me remind you that the replay is available on our website. Thank you, and good evening.

Operator

This concludes today's call. Have a wonderful day.

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