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Texas Instruments Incorporated (NASDAQ:TXN)

F1Q08 Financial Update Call

March 10, 2008 5:00 pm ET

Executives

Ron Slaymaker – Investor Relations

Analysts

Tore Svanberg – Thomas Weisel Partners

David Wong – Wachovia Capital Markets, LLC

Ross Seymore – Deutsche Bank Securities

Cody Acree – Stifel Nicolaus & Company, Inc.

David Wu – Global Crown Capital

John Pitzer – Credit Suisse

John Lau – Jeffries & Co.

Steve Smigie – Raymond James

Srini Pajjuri - Merrill Lynch

Sumit Dhanda – Banc of America Securities

Allan Mishan – Oppenheimer & Co.

Eric [Obioshi] – Morningstar

Ron Slaymaker

Good afternoon and thank you for joining TI’s first quarter mid-quarter financial update. In a moment I will provide a short summary of TI’s current expectations for the quarter updating the revenue and EPS estimate ranges for the company as well as the revenue range expectations for both of the segments, semi-conductor and education technology. In general I will not provide detailed information on revenue trend by product or in markets below these segments and I will not address margins. In our earnings release at the end of the quarter we will provide these details as usual. After today’s call we will not be available for further discussion this evening. Considering the limited information available at this point in the quarter and in consideration of everyone’s time we will limit this call to 30 minutes. For any of you who missed the release you can find it on our website at www.TI.com/IR. This call is broadcast live over the web and can be accessed through TI’s website. A replay will be available through the web.

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

We have lowered and narrowed the range of our revenue guidance as follows. Company revenue is now expected to be $3.21 and $3.35 billion. This is a sequential decline of 10 to 6% and year-on-year growth of 1 to 5%. Semi-conductor revenue is expected to be between $3.14 and $3.26 billion for a sequential decline of 10 to 6% and year-on-year growth of 1 to 5%. And education technology revenue is expected to be between $70 and $90 million unchanged from the prior estimate. The reductions in TI’s and our semi-conductor segment’s revenue estimates are a result of weaker than expected demand from wireless. Revenue for analog and the remainder of our product line is generally consistent with our initial expectations. We have lowered and narrowed the earnings per share range to between $0.41 and $0.45 compared with the prior range of $0.43 to $0.49. Fourth quarter EPS was $0.54 and the year ago quarter’s EPS was $0.35.

Some of you undoubtedly will want to know how we will respond to the lower revenue level. From an operations perspective we have already made appropriate adjustments to our production loadings. Fortunately our hybrid manufacturing strategy provides us with good flexibility and today we can absorb demand changes with minimal impact to our gross margins. We will also remain diligent on expense control. At a higher level we will stay the course strategically. Our focus on analog is undeterred and our perspective on the opportunity that analog represents for TI is only heightened. Although the wireless market and our revenue in that market have often fluctuated on a short term basis we believe the long term trend toward smart phones represents a great opportunity for TI given the strength of our position with OMAP applications processors.

Operator, you can now open the lines for questions. In order to provide as many of you as possible the opportunity to ask a question please limit yourself to a single question. I will provide you the opportunity to ask a follow up question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Ron, you said because of the flexible model there would be minimal impact to gross margins. Can you elaborate a little bit on that please?

Ron Slaymaker

This is again tied to our manufacturing strategy especially where in the case of advanced [Sematch] logic products which, by the way most certainly the wireless digital base bands as well as application processors fall under those categories if you look at 2007 overall roughly about half of our demand we produced internally with about the half being produced externally of these advanced logic products. The mix probably on wireless is a little stronger toward outsourcing. So what that provides us in terms of flexibility is basically as demand shifts we’re able to maintain essentially full utilization of our internal factories and take adjustments through the foundries. Since for the most part that foundry cost would be considered a variable cost, swings in demand where we can make those adjustments through our foundries really doesn’t swing about our gross margin. If you look at historically our gross margin what tended to move it about was when we had high fixed cost operations that when we had to unload our internal factories and yet those fixed costs of course remained that’s what caused wider swings in our margins. Again we believe that these adjustments will have very minimal impact on gross margins in the quarter.

Operator

Our next question is from the line of David Wong with Wachovia. Please go ahead with your question.

David Wong – Wachovia Capital Markets, LLC

Ron, when you said the shortfall was in wireless, is it a sort of general weakness in wireless across the board or are there specific events or concentrations of wireless weakness affecting you?

Ron Slaymaker

No, I think it’s somewhat concentrated. Ed, you’ve noted that a lower demand is coming from wireless but I would say especially it would be in the high end or 3G products. And to date demand for entry level wireless products that are sold into more the emerging market base has remained consistent with our initial expectations in the quarter. What I would describe is very recently we received what I would call pretty significant downward revision in wireless customer demand and since almost of our wireless revenue these days is supported by consignment inventory programs at those large customers when those customers make internal changes to their build plans we see, and in this case we saw, an immediate adjustment on their demand in TI. So again, somewhat concentrated, especially in the case of 3G.

David Wong – Wachovia Capital Markets, LLC

And then can we infer from you the fact that analog is on track with your expectations, that there are no unexpected inventory adjustments or signs of inventory in the analog or other segments?

Ron Slaymaker

We’re not aware of – you’re saying in terms of in the channels and at our customer –

David Wong – Wachovia Capital Markets, LLC

Exactly, yes.

Ron Slaymaker

We’re not aware of anything that seems to be off track from our initial expectations in analog at least in a general sense. You always have some relatively small pluses and minuses but analog is a category that in general is tracking our initial expectations.

Operator

Our next question is from the line of Ross Seymore with Deutsche Bank. Please go ahead.

Ross Seymore – Deutsche Bank Securities

Just wondered again in the wireless side, would you constitute it as market share losses and the topic that everybody’s been asking about with some of the dual sourcing going on or is it more of a market-wide phenomenon?

Ron Slaymaker

No, it is not at all what we would characterize as share losses. In fact what we’re seeing are changing build plans from a particular customer specifically but we have full insight that this is not a share loss for TI inside that customer. And I don’t want to overstate it, it’s not a single customer. We have other customers also that haven’t fully lived up to initial expectations that we had but it is mostly a particular customer. So again, we have full insight, we’re confident it’s not share loss inside of that customer but that we are tracking with that customer’s build plan.

Ross Seymore – Deutsche Bank Securities

It sounds like it’s a relatively recent occurrence that that customer decided to some cancellations or is something that they’ve just remained below plan for the majority of the quarter?

Ron Slaymaker

No, I would characterize it as a revision that came in in the last probably week or so.

Operator

Our next question is come the line of Cody Acree with Stifel Nicolaus. Please go ahead.

Cody Acree – Stifel Nicolaus & Company, Inc.

Maybe following up there, would you attribute the change in orders inventory or do you think it’s change in demand, maybe your best guess?

Ron Slaymaker

I guess what I would say, Cody, is we don’t have full insight into – We know it’s not component inventory, it’s not TI semi-conductor inventory because these customers that are on consignment inventory programs don’t have their own semi-conductor inventory to adjust. So it’s not a component inventory adjustment. Whether it’s a handset inventory adjustment or whether it’s in demand, we can’t say. All I can describe for you is that we saw a change in their build plan that directly affected us. What‘s driving those build plan changes, we’ll probably leave to those customers to address. That’s not something I want to try to color for you.

Cody Acree – Stifel Nicolaus & Company, Inc.

I guess just continuing there though, we’ve got to put some arms around the links, the magnitude of this and do you feel is this an economic issue, is it something that needs to be burned off and if so, obviously you’ve only been dealing with it a week, so it’s something you don’t full arms around as well, but maybe can you help us out there a bit?

Ron Slaymaker

Cody, I can’t. All I can really describe is we have already which is we saw an impact to our first quarter, how long it goes, I don’t have any details at all for you on that one.

Operator

Our next question is from the line of David Wu with Global Crown. Please go ahead.

David Wu – Global Crown Capital

Can you help us a little further on the issue of is this OMAP or is it basebands 3G?

Ron Slaymaker

That’s a good question, David, and since this is 3G or high-end handsets it does impact both baseband and OMAP since we sell both of those products into 3G.

David Wu – Global Crown Capital

The other one I was wondering is, if you’re mix is favoring analog versus wireless would the product gross margin be richer in Q1 as a result of this variance? Even though the overall revenue is $130 million lighter midpoint to midpoint.

Ron Slaymaker

David, I guess I would acknowledge that wireless runs a little below the corporate average margin, probably if you think of TI corporate running 50, 52 I guess is – look at fourth quarter I guess it was 54%. Wireless runs probably in general in the mid-40’s. So from a blended perspective it does run below the corporate but I’m not going to sit here and say that we would expect gross margins to increase as a result of it. I think what I said before is that we don’t expect this to have a negative impact on gross margins, but I’ll probably leave it at that level until we report in April.

Operator

Our next question is from the line of John Pitzer with Credit Suisse. Please go ahead with your question.

John Pitzer – Credit Suisse

Just a couple follow ups to the last speaker, first if you look at the shortfall in OMAP versus the baseband is it split about equally or is one more to blame than the other when you look at the shortfall for the margin?

Ron Slaymaker

John, I don’t have that number specifically. In general the value or the content that we have in OMAP and its 3G handset tends to track pretty evenly with the value of the baseband or the price of the baseband. Whether there are any mix considerations, meaning not at every customer do you have an OMAP that goes hand in hand with a baseband, but at the same time I don’t have those specific numbers for you at this point in the quarter.

John Pitzer – Credit Suisse

Just Ron, on the follow up on the analog side, can you just talk a little bit about pricing trends and given that the wireless came in a little bit weaker did you guys take any price action to try to make sure that analog came into expectations?

Ron Slaymaker

No, not at all, and in fact, as I said, the acts on the wireless is only in the last week or so. What I would say in general with pricing is pricing continues to remain stable and I’ll just remind you that in high performance analog if you’re dealing with commodity products, which we’re not except for a very, very small percentage of our overall product mix, you can talk about how pricing actions might impact near term business levels, but when you’re dealing with differentiated products such as the vast majority of our analog product line represents, high performance analog they’re catalog products but they’re highly differentiated catalog products for which when you are designed in at a customer you generally have a sole source position. For the application specific part of our product line, those tend to be custom products so in both cases it makes no sense for us to consider a price move to somehow try to drive revenue. A price move would only lower our revenue in those type cases. So, if you make a little bit upstream to how designs are made and analog, specifically high performance analog, those design decisions are driven much more by technology and support considerations than pricing. On the application specific side of analog, I would say price probably tends to be more of a factor but it would be ranked after technology, execution and operational support. So in general our strategy is to be competitive on price while differentiating on those other more important factors.

Operator

(Operator Instructions) Our next question is from the line of John Lau with Jeffries & Co. Please go ahead.

John Lau – Jeffries & Co.

You mentioned that the weakness was in the high end of 3G and it’s an interesting comment that the low end was okay. In terms of your business for the low end on the chip sets is that evenly split or between OEMs or tier two or how does that break out?

Ron Slaymaker

John, I would say on the low end it is probably weighted much more strongly toward the large multinational as is quite frankly our 3G business as well. So this is not a tier two versus a multinational difference, it’s just different performance I think in these build plans for the high end versus low end. And again low end tends to go, our entry products, tend to go more to emerging markets and I think right now there’s probably just a different dynamic there than what we’re seeing in 3G this particular quarter?

John Lau – Jeffries & Co.

In speaking in the low end, there’s been a lot of talk that there was weakness in the emerging markets, specifically China on the low end, but it’s quite surprising you’re not seeing that and that may have to do with the different customer base?

Ron Slaymaker

I would be surprised if it was not due to customer base. And again I think where you’re hearing about weakness in China probably was weighted more toward maybe local manufacturers there where most of the business that we do in that region probably moves through the large multinationals.

Operator

Our next question is from the line of Steve Smigie with Raymond James. Please go ahead.

Steve Smigie – Raymond James

I was just wondering given that the low end is holding up relatively well here, I was just curious if you could talk about dollar market share? I see your largest customer, is it possible even though you see a wireless weakness out there in general that dollar wise you even are capturing market share even though there’s some general weakness?

Ron Slaymaker

Are you saying within a particular customer or you’re saying overall in the marketplace, Steve?

Steve Smigie – Raymond James

Within a particular customer, say your largest customer.

Ron Slaymaker

I think we’re capturing dollar share from the standpoint especially on the low end that the trend toward integration is strong and as more and more multiple of our customers handset move from less integrated solutions from TI to more integrated solutions – Well, first of all in the less integrated solution, very often we weren’t the supplier of the entire chip set. We may have been the digital baseband supplier, somebody else may have been providing an analog baseband, somebody else may have been providing the RF transceiver. So with all of that functionality moving into a single chip provided by Texas Instruments that is a dollar content driver for TI and in your terms a dollar share increase or driver for TI as well. The only thing I have to be a little cautious on with that direction though is that even with that high level of integration in our high percentage content of a low end handset our content in a 3G handset tends to be much higher. It typically will run, if we’re only providing a baseband and a 3G handset we probably still have twice the content compared with a low end handset and if it’s a 3G handset that also uses an OMAP applications processor from TI very often our content could be four times that of a low end handset. And then when you start getting things and functionality like Blue Tooth or WiFi or some of that other type of functionality it can only add even further. But in general we have much higher content in a 3G handset than we would even a highly integrated low end handset.

Steve Smigie – Raymond James

The analog product base or customer base seems to be fairly broad based and I was just curious if you could comment within that broad range of end markets if you’re seeing any particular difference in terms of demand in any particular market?

Ron Slaymaker

Steve, I really have not dissected analog market by market. I think if you look at even maybe just reinforcing what I said before. Overall analog is generally tracking our expectations. That includes high performance analog. I think when you move over to application specific analog I would say again it’s generally tracking our expectations but especially in application specific analog you’ll have certain sub-segments that would be expected to seasonally decline compared with fourth quarter but we don’t see anything really that’s an outlier from the perspective of seasonality, at least that I’m aware of at this point in the quarter, Steve.

Operator

Our next question comes is from the line Srini Pajjuri with Merrill Lynch. Please go ahead.

Srini Pajjuri - Merrill Lynch

Just a follow up to the previous question, I guess some of your competitors have reported weakness in the broader analogs base, I’m just wondering why, are there any trends that are helping you, why you’re not seeing that?

Ron Slaymaker

Srini, I don’t know that I can fully explain our results relative to those competitors other than I would say if you look at the relative results for the last several years you’ve seen a gap between what many of those, especially if you’re talking high performance analog competitors, we’re delivering compared with TI and so again that’s not meant to be any insight into relative results in this quarter because I don’t know what they’re delivering and I don’t know specifically what they’re seeing. But I can just say that at least from TI’s perspective analog overall is tracking consistent with what we had expected coming into the quarter.

Srini Pajjuri - Merrill Lynch

Any change in the visibility in the broader analog space Ron, since you reported the quarter?

Ron Slaymaker

No, I would say just in general lead time remains stable, remains relatively short but no real change in overall visibility there.

Operator

Our next question is from the line of Sumit Dhanda with Banc of America Securities. Please go ahead.

Sumit Dhanda – Banc of America Securities

Just a couple of questions, first one on your last conference you had mentioned that the up tick of distributors got slower towards the end of the quarter, can you talk about how that has changed if any how resales have tracked with your expectations and then National also talked about a lull in the middle of the quarter and a pick up recently. Any color you could provide along those lines?

Ron Slaymaker

In National’s case, Sumit, was that a broader market discussion or was that specific to their Asian wireless business.

Sumit Dhanda – Banc of America Securities

I think that was a broader discussion.

Ron Slaymaker

First of all in terms of resales I don’t have all the details on where they are landing versus expectations but what I can say is that in general we expect that distributor resales will grow a little bit in the quarter as well as our shipments into those distributors. So from an inventory turns perspective I would say they should remain about even with where they were in the fourth quarter. In terms of linearity or profile through the quarter unfortunately I just don’t have that data but we do expect some growth in resales as well as our shipments into those distributors.

Sumit Dhanda – Banc of America Securities

Best you can tell, is it fair to assume that your share losses at E&P will largely be done by Q2, is that the right timeframe to be thinking about it? And I’m assuming that was not a factor versus your prior expectations entering the quarter as it relates to your mid quarter update.

Ron Slaymaker

Sumit, that’s a good point and you’re exactly right. This adjustment that we’re making does not tie to that 3G program at E&P that we’ve been talking about for the last couple of quarters. In fact that program is transitioning consistent with our expectations. Just as a reminder that E&P program began the transition in the fourth quarter. We expect revenue there to continue to decline until I’ll say sometime in the second half of 2008 and then stabilize at a very low level and also as you’ll recall we – and I guess it was last July – we announced that we’ve also won Next Generation programs there and what I would say is we would expect those programs to ramp in terms of the baseband anyway, probably later in 2009. But in terms of the pressure on our revenue from the current program declining that will go until some point in second half at which point it’ll stabilize at that very low level.

Operator

Our next question is from the line of Allan Mishan with Oppenheimer. Please go ahead.

Allan Mishan – Oppenheimer & Co.

Just a quick question on the wireless weakness that you are seeing, is that the type of thing that’s a push out that potentially you could see it bounce back in Q2 or do you think this simply a lack of demand that’s driving it and we won’t see any blowback from that?

Ron Slaymaker

Allan, I don’t have that visibility and again the way it works with consignment programs we basically just see the customer’s build plan and what we’ve seen is for the rest of March a reduction in the build plan. So again any customer that’s on consignment programs, they’re not in that traditional order entry where you pull in orders or you push out, we’re just seeing what they’re expecting that build plan to be and in this case we’re seeing a lower build plan in the month of March.

Allan Mishan – Oppenheimer & Co.

Does the lower build plan also affect future months, April, May and so on or is that too far out?

Ron Slaymaker

At this point, we’re just discussing first quarter update, so you’ll have to wait until April for us to both have appropriate visibility as well as to comment on our guidance for second quarter.

Operator

Our next question is from the line of Eric Obioshi with Morningstar. Please go ahead.

Eric Obioshi – Morningstar

Ron, you had said that the midpoint of your range is similar to the first quarter of last year. I know that the news that the order push out just came to you recently, but I wonder if you would care to characterize 2008 vis-à-vis 2007?

Ron Slaymaker

I don’t know that I have perfect clarity of memory to be able to go back and talk about details of first quarter 07. What I would say is if you look at our guidance range basically we’re looking at revenue growth compared to first quarter of 07 of 1 to 5% and if you look at, I think I said the EPS in the year ago quarter was $0.35 and certainly that would be lower than the EPS range that we just gave this quarter as well. Every quarter certainly has its own set of dynamics in terms of both demand mix as well as what various customers might be doing from the inventory perspective, so I really don’t have the comparison to give or to provide how this quarter compares to that year ago quarter.

Eric Obioshi – Morningstar

Can you characterize whether or not you’re making some operational cost cutting or this pull in order are you seeing more evidence of macro weakness? Are you thinking about making some changes to your own operational program?

Ron Slaymaker

Well, certainly as I said we’ve made adjustments to the operations in terms of production loadings associated with this wireless demand and those are things that we’ve already accomplished. From a macro perspective – Well, let me make a couple of points. I think it’s way too early for us to try to read any kind of macro read into these adjustments we’re seeing in wireless especially since the rest of our product revenue currently is running very consistent with our expectations. And I think whether wireless is an early indicator of some broader emerging macro trend, we would say it’s impossible to know at this point. What I will say we’re doing is that in any case we’re moving forward aggressively with our strategic pursuits especially to advance our position in analog and frankly if we’re in a weaker environment going forward or whether we’re in a stronger environment going forward those strategic pursuits won’t change. As I said before, we simply stay the course. If it’s the scenario of a weaker environment then what I would say is oftentimes a weaker environment for a company is the best opportunity to make strategic progress. So for example in analog that could present better opportunities to hire field application engineers which are currently in short supply or it also could be an opportunity to buy used manufacturing equipment for pennies on the dollars which we’ve done in prior downturns. Again that’s not a forecast of what may happen. We don’t know what holds from a macro perspective, but I will say we’re focused on our strategic pursuits especially those associated with strengthening our position in analog and we look forward to doing that regardless of what kind of environment may be ahead of us.

So with that 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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