Texas Instruments, Inc. F2Q08 Mid-Quarter Financial Update Call Transcript

Texas Instruments, Inc. (TXN)

Q2 2008 Financial Update Call

June 9, 2008 5:00 pm ET

Executives

Ron Slaymaker – VP & Manager Investor Relations

Analysts

Tim Luke - Lehman Brothers

Srini Pajjuri – Merrill Lynch

Jim Covello - Goldman Sachs

Uche Orji – UBS

Glen Yeung – Citigroup

Tore Svanberg – Thomas Weisel Partners

Doug Freedman – American Technology Research

David Wong – Wachovia Capital Markets

David Wu - Global Crown Capital

John Dryden – Charter Equity Research

Joanne Feeney - FTN Midwest Securities

Unidentified Analyst

[Eric Kobayashi-Salome] – Morningstar

Presentation

Ron Slaymaker

Good afternoon and thank you for joining Texas Instruments’ second quarter mid-quarter financial update. In a moment I will provide a short summary of TI’s current expectations for the quarter, updating the revenue and EPS estimate ranges for the company as well as the revenue range expectations for both of the segments; semiconductor and education technology.

In general I will not provide detailed information on revenue trends by products 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 SEC filings for a complete description.

We have narrowed the range of our revenue guidance as follows: company revenue is now expected to be between $3.33 billion and $3.46 billion; semiconductor revenue is expected to be between $3.17 billion and $3.28 billion; and education technology revenue is expected to be between $160 million and $180 million, unchanged from the prior estimate.

We have narrowed the earnings per share range to between $0.43 and $0.47 compared with the prior range of $0.42 to $0.48.

I will now take your 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) Your first question comes from the line of Tim Luke - Lehman Brothers

Tim Luke - Lehman Brothers

I was wondering if you describe, I think in the earnings call you had suggested that having seen growth in analog in the prior quarter you expected the similar trend in the calendar second quarter whereas you might have seen trends more subdued in the wireless arena. Can you clarify that? Has it played out as you had expected with respect to the broader areas?

Ron Slaymaker

Yes actually it’s very similar to what you in fact described there. I think overall the environment is probably been a little weaker so far this year, yet as you pointed out we have many businesses that are growing. So for example, analog is an area that should grow sequentially and year-on-year. Similarly embedded processing which you’ll recall includes our catalogue DSPs and microcontrollers, we would expect to grow sequentially this quarter as well as year-on-year.

On the other hand there are a couple of areas where we’re seeing weakness, one of which is wireless handsets revenue which continues to be unseasonably weak in the second quarter and at this point we would expect that its probably going to be down a little bit from the first quarter level. Another area would be [RF] processors which are running weak this quarter.

Tim Luke - Lehman Brothers

With respect to the broad channel inventory, could you give us a sense of how you’ve seen that and whether you have also any comment on your broader lead times.

Ron Slaymaker

I would say in terms of lead times, really not much change. In most product areas lead time remains stable and also relatively short. In terms of channel inventory just in general the trends in distribution, we would expect at this point that distributor re-sales or sell out of the channel will be up a little bit on a sequential basis as well as our shipments into the distributors from an inventory perspective, we really would expect distributor inventory to be about even compared with where it was at the end of the first quarter. So not a lot of change in distributor inventory levels and again, both sell in as well as sell out of the distribution channel being up a little bit in the quarter.

Operator

Your next question comes from the line of Srini Pajjuri – Merrill Lynch

Srini Pajjuri – Merrill Lynch

On the wireless weakness that you mentioned, has the business gotten any incrementally weaker since you gave the guidance and also if I recall correctly, last quarter you had an issue with the mix not necessarily the units, is that still the case?

Ron Slaymaker

I would say if you look at—second quarter is somewhat different then first quarter in terms of the driving factors inside of wireless. You’ll recall as you pointed out in first quarter we saw a pretty significant decline in 3G mix and low-end was pretty much holding up. In fact this quarter we’ve seen growth in 3G but again that was compared to a very weak first quarter level. However that growth in 3G is being offset by weakness in legacy technologies; both entry level as well as mid-range.

Srini Pajjuri – Merrill Lynch

If I look at your revenues I think just taking the mid-point, it looks like they came in about $25 million or so better and your EPS is in line, I’m just wondering and I know you don’t want to talk about the margins but is there something to do with the margins here or is there something below the line that’s impacting that one penny or so EPS that we should have seen here?

Ron Slaymaker

I would say—let me just describe it this way, we are seeing a mix improvement as you would ascertain from my comments on growth in both analog as well as imbedded processing, however the mix improvement we’re seeing this quarter when compared to the first quarter, will be largely offset by lower utilization as we’re in the process of adjusting inventory down. And recall we said at the end of first quarter that inventory had moved higher then we would have liked and we would be taking actions over the next couple of quarters to reduce it. So in fact, that’s what’s offsetting some of mix benefits somewhat in the current quarter.

Operator

Your next question comes from the line of Jim Covello - Goldman Sachs

Jim Covello - Goldman Sachs

First question is kind of high level, relative to the targets that were laid out for revenue growth at the Analyst Meeting, when is it fair or reasonable to expect us to kind of hold—start to kind of hold you guys to those targets? When should we start to see the revenue growth especially in the analog part of your business that Rich referred to at the Analyst Meeting?

Ron Slaymaker

I think the—as Rich described at the Analyst Meeting those growth numbers that he provided were meant as a [kaegar] from 2008 until 2013 I believe is what he described. And specifically to analog if you look at the area that we said we really needed to see some accelerated growth was the application-specific side of our analog business, I think what we described there was that especially in the wireless area where we had seen some revenue declines we felt confident that we had some things turning around there but it would in fact be probably second half 2009 before that revenue starts to grow again. Maybe the profile which I would outline is we’re probably seeing what has been declining wireless handset revenue for our analog business in the process of bottoming now and then by second half 2009, we should turn that back into growth again.

Jim Covello - Goldman Sachs

If I combine the comment that was made at the Analyst Meeting about expecting TI to see significant growth at Nokia in the second half of the year, with the comment that you just made about maybe some of the lower end handsets being a little more challenging this quarter compared to the higher end handsets, would those two things be at odds at all? Would the change in the lower end or the little bit softer of a market on the lower end create any kind of risk to the growth that you see at Nokia in the second half of the year?

Ron Slaymaker

Again what the comment that was made at the Analyst Meeting was just for the broader audience benefit was that we did in fact expect our revenue at Nokia to be up this year as well as 2009. There is no change in that expectation and in fact, I would say, if anything we’re encouraged by what we’re seeing this quarter which is some recovery on the 3G side and just as we talked about even back in the April call, so much of our wireless revenue results are driven based upon 3G just because of the richer content or the higher content level there. So having that stabilize and move back into growth mode for us is probably much more impactful then what we’re seeing on the low end. Although certainly we would like to have both the low end as well as 3G moving forward but just from a unit perspective, if we can get more units out of 3G it’s going be much more impactful for TI.

Operator

Your next question comes from the line of Uche Orji

Uche Orji

The weakness you referred to on the low end handsets, was that customer-specific or was that due to any region say China, any color that would be helpful?

Ron Slaymaker

I would describe it that demand in wireless is mixed by customer. In fact we have some customers that are trending completely consistent with the normal seasonal pattern in second quarter and we have others that are weaker. It’s really unclear to us at this point on how the overall handset market is performing but what we’re seeing very well could be customer-specific. I read some of the speculation about the impact the earthquake in China might have. I guess what I would say is I don’t have any information to support that other then we are in fact seeing weaker low and mid-range sales this quarter compared with the last. We don’t have direct insight into which regions our customers ship their products into so again is this a China situation or beyond that, I really don’t have any direct perspective.

Uche Orji

If I look at the risk you mentioned some weakness in the risk business, is it possible for you to give us an idea of what the size and what is driving the weakness in the risk revenue?

Ron Slaymaker

When you say size, are you referring to the size of that business or how much decline we’re seeing?

Uche Orji

How much the decline was?

Ron Slaymaker

I’d prefer to wait until we report in July to make any further comments on that. Probably the color I would add is I think it’s a combination of a customer working through some component inventory there as well as maybe just some issues in terms of acceptance with specific products they had on the market. This isn’t a TI share consideration or anything like that. Its just a combination of I would say maybe in-demand in that specific space and some component inventory.

Operator

Your next question comes from the line of Glen Yeung - Citigroup

Glen Yeung – Citigroup

Can you give us some color on order trends that you’re seeing in the quarter both in wireless and in analog?

Ron Slaymaker

I don’t know that I can break it out between those two areas but what I would say is that order trends overall actually have been encouraging. They’re up compared with the same point in the first quarter. We’ve seen some customers move to begin extending their backlog coverage for us a little further out in time recently and that in fact starting to give us some additional visibility into third quarter. I don’t have the break out specific to wireless and analog though.

Glen Yeung – Citigroup

I don’t suppose if I asked you what the initial orders for the third quarter, what they might tell us about the third quarter you would actually answer that question?

Ron Slaymaker

That would be correct. Again, in terms of how that order trend plays out against third quarter, we’ll have more to say about our specific third quarter expectations when we report in July.

Operator

Your next question comes from the line of Tore Svanberg – Thomas Weisel Partners

Tore Svanberg – Thomas Weisel Partners

Just very largely if we look at your customers whether its OEM or distributors, would you say that they are incrementally more encouraged to where we stand right now about the second half of the year or have they become even more cautious since last time we spoke?

Ron Slaymaker

I would say some are more encouraged and probably the most specific data there would be the order trends that we’re seeing. So again, I think if you look at it you’d have to say second quarter, first half in general feels like a bottoming process and orders are encouraging going out of this quarter at least as they play in the third quarter.

Tore Svanberg – Thomas Weisel Partners

If you look at your analog business that’s going to show some growth this quarter, is that fairly broad based or any single markets standing out?

Ron Slaymaker

No broad based so combination of high performance analog which is broad based in and of itself, but also we would expect growth out of the application-specific analog area as well on a sequential basis. So broad based, in fact I would say one of the things that we’re encouraged by at this point in the quarter is again the areas where we’re seeing weakness do seem fairly focused in the wireless area as well as kind of the one-offs in the risk processor area.

Operator

Your next question comes from the line of Doug Freedman – American Technology Research

Doug Freedman – American Technology Research

Can you give a little bit of color on geographically what you are seeing?

Ron Slaymaker

Actually at this point in the quarter we don’t have any geographical information to share. We can provide that type of regional breakout in July when we report.

Doug Freedman – American Technology Research

Any chance of being able to tell whether you’re seeing any sort of—what direction you’re seeing in business from the infrastructure market and then your mix on the applications processor maybe the attach on app processors?

Ron Slaymaker

I’ll take the second one and the first one I’ll probably have to beg off on just because I don’t have the infrastructure data here. From the apps processor perspective as you might get, in general when a high-end phones are moving again, that positively impacts not only our base band sales but our application processor sales as well as even connectivity areas such as GSP, Bluetooth, Wi-Fi, just in general types of features and functions you would expect in a high-end handset. Those areas will move not necessarily all in [lock] steps so you’ll have certain areas that will be up possibly more then others but in general all of those will benefit from stronger high-end handset demand this quarter.

Operator

Your next question comes from the line of David Wong – Wachovia Capital Markets

David Wong – Wachovia Capital Markets

Do you think you’ll be able to get your inventory to the right level by the end of this quarter or do you expect you’ll have to take ongoing action to keep moving down inventories?

Ron Slaymaker

I would say the latter and that’s consistent with our plan coming into the quarter and so just as a refresher for everyone, first of all we do expect that inventory should be down this quarter. As we had described back in April, the excess that we—we really had described we had three buckets driving inventory growth in first quarter. The first was excess wireless inventory, that will be quickly adjusted downward. Wireless inventory is mostly custom product, mostly sourced from foundries and we’ve taken action quickly as you might guess on that.

The second area where we had inventory build, not excess, was in catalogue products such as high performance analog, the inventory build there was planned and its part of our strategy there to further improve our customer service levels by holding a higher level of inventory. For the remainder of the inventory that we built last quarter, we previously said that it will be reduced at a measured pace over a two to three quarter time period and that in fact remains our plan to date.

Doug Wong – Wachovia Capital Markets

The revenue trends you’ve described in the various segments, is unit growth roughly tracking back as well or are there some segments where the revenue shouldn’t have been driven by pricing rather then unit demand?

Ron Slaymaker

Revenue for us rarely is driven by pricing; it’s almost always unit. I don’t have any unit data specifically at this point but all the data that I do have says that pricing trends overall remain stable and I really don’t expect any difference this quarter from what we normally see which is given the proprietary nature of our product versus product portfolio where pricing in some areas it moves down, but it moves down steadily. It moves down consistent with our cost and other areas such as high performance analog, pricing remains generally very stable over a time period. I don’t see any change to those general trends this quarter.

Operator

Your next question comes from the line of David Wu - Global Crown Capital

David Wu - Global Crown Capital

Can you give a little bit on the 3G side; is the 3G demand in Q2 seasonal or better then seasonal at this point?

Ron Slaymaker

Its better then seasonal would be for wireless overall. But 3G is still such a new technology I’m not sure that there is a specific seasonal pattern that I would apply but if you look at what wireless would normally grow in the second quarter which for us, the average growth is about 4%, 3G is doing better then that but again, that’s being pretty much fully offset by weakness in some of the legacy technologies. The only other thing I would add to that is that just a reminder, that the comparison on 3G is pretty weak. It was down very significantly in first quarter. I think what was imbedded inside of that first quarter decline was a combination of a change in demand outlook by our customer base as well as probably some inventory adjustment. So to some degree the [step] back that we’re seeing in second quarter is the end of the inventory adjustment and probably the consumption our customers are seeing or placing on us probably timed more to just their view of their own shipment levels going forward.

David Wu - Global Crown Capital

The Smart Phone in your case is lumped with 3G right?

Ron Slaymaker

It is not—Smart Phones are largely 3G but there are some edge-based Smart Phones as well so it’s not a full overlap of 3G.

David Wu - Global Crown Capital

And if I were to understand it, basically HPA margin improvement is offset by lower utilization rate, that’s why gross margin is no change, right?

Ron Slaymaker

Yes the only exception I would take is to what you said is it was specific to HPA, so again, we’re seeing growth in analog overall both HPA as well as application-specific. And then we’re also seeing growth in imbedded processing. And all of those areas generally are—will represent a positive mix for TI.

Operator

Your next question comes from the line of John Dryden – Charter Equity Research

John Dryden – Charter Equity Research

Can you comment on the market for infrastructure since you spent a lot of time on handsets for both DSP and HPA?

Ron Slaymaker

I don’t have infrastructure inputs here with me today so I can’t comment on that.

John Dryden – Charter Equity Research

Any change in the liquidity improvement for the auction rate securities moving back to short-term investments?

Ron Slaymaker

No change there and again, we have reclassified those as long-term investments and they will remain there this quarter so no change at all in those auctions.

Operator

Your next question comes from the line of Joanne Feeney - FTN Midwest Securities

Joanne Feeney - FTN Midwest Securities

You talked about Nokia’s change in expectations regarding 3G, is your other customer also seeing—did you also lump your other customer into that camp?

Ron Slaymaker

Actually I did not make any customer-specific comment there, though I did say that we’re seeing strength in 3G but I’m trying to avoid getting into specific customer descriptions. So I’ll just leave it at that.

Operator

Your next question comes from the line of Unidentified Analyst

Unidentified Analyst

I just want to clarify your comment on wireless, do you expect your wireless revenues to grow this year or do your expect your Nokia revenues to grow in 2008?

Ron Slaymaker

No, what was described at our Analyst Meeting was that we expect our Nokia revenue to grow this year and that was really in response I believe to questions about a lot of the competitive concerns of that customer specifically. I think wireless revenue overall very likely will be down in 2008 compared to 2007 and that’s primarily being driven by the transition of the 3G program at Ericsson Mobile Platforms that we’ve talked about for some time. And all of this can vary depending upon things like mix and of course the overall market, but the only real competitive dynamic where you could say it’s a share consideration is EMP this year and in fact we expect our revenue at Nokia to be up this year.

Unidentified Analyst

Do you expect your Nokia revenues to be up during the first half of the year or is it predicated on what happens in the second half?

Ron Slaymaker

I think if you look at our wireless revenue trends overall this year, first half clearly we’re seeing weakness so let me not try to describe—make it any more customer-specific then that but clearly we’re seeing with the sequential decline we saw in first quarter, that was unseasonably weak. With second quarter potentially being down a little bit from that first quarter level, clearly that is seasonally weak and we’ll see where it goes from there in second half.

Operator

Your next question comes from the line of [Eric Kobayashi-Salome] – Morningstar

[Eric Kobayashi-Salome] – Morningstar

I just wanted to ask previous quarter you characterized weakness in 3G as being kind of customer-specific, this year I wonder if the present strength that you’re seeing in 3G is kind of a turnaround for that specific customer or whether that you characterize it that a new program starting, maybe a new customer or what?

Ron Slaymaker

Its not really a new program and I think the new programs that we publically discussed, one of which is that Motorola for a custom 3G base band program, we’ve characterized that the timing on that will be 2009 before that customer moves into production with 3G handsets based upon that technology. And then the other new program that we’ve discussed and we’re encouraged by is basically the turnaround at Ericsson Mobile Platforms where we have re-won that 3G digital base band and we would expect that to turn into growth probably second half 2009.

So just try to try to summarize that Ericsson program, we are seeing declines on the first generation of program there, that will continue—those declines will continue until they bottom out some time in second half of this year at which point they will stabilize at that level until second half 2009 when this new program that I just described will move into production. But on the base band side those are probably the significant new programs that we’ve discussed and what we’re seeing in second quarter therefore is not a new program moving back into production but is just more a turnaround in ongoing business I guess is how I would characterize it.

With that we’ll end the call. Before we end let me remind you that the replay is available on our website. Thank you and good evening.

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