Texas Instruments Incorporated Business Update Call Transcript

Sep.10.08 | About: Texas Instruments (TXN)

Texas Instruments Incorporated (NASDAQ:TXN)

Business Update Call

September 9, 2008 5:00 pm ET

Executives

Ron Slaymaker – Vice President & Manager of Investor Relations

Analysts

Christopher Danely – JP Morgan

James Covello – Goldman Sachs

Uche Orji – UBS

John Lau – Jefferies & Co.

John Pitzer – Credit Suisse

Cody Acree – Stifel Nicolaus & Company, Inc.

Srini Pajjuri – Merrill Lynch

Steven Smigie – Raymond James

Krishna Shankar – JMP Securities

Tim Luke – Lehman Brothers

Glen Yeung – Citigroup

David Wong – Wachovia Capital Markets, LLC

Operator

Good afternoon and thank you for joining TI’s third quarter mid-quarter financial update. (Operator Instructions)

Ron Slaymaker

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. In general, I will not provide detailed information on revenue trends by product or end markets 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 discussions 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 expected range for TI revenue to between $3.33 and $3.47 billion. We have narrowed the earnings per share range to between $0.42 and $0.46. Both of these estimates are narrowed around the middle of the prior ranges.

Operator, you can now open the line 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) Your first question comes from the line of Christopher Danely – JP Morgan.

Christopher Danely – JP Morgan

You guys guided for a little bit less than seasonal and you talked about in the July quarter that wireless would be a little bit weaker. Is that true and can you just talk about your leading customer that recently lowered its estimates and was that a surprise?

Ron Slaymaker

I will say that it is true that our original guidance was below normal seasonal or average seasonal for TI. I would say it’s probably not significantly but probably a couple of points or so below what we would see in third quarter on average. With respect to wireless, I guess what I would say is that overall wireless is tracking very consistent with our initial expectations. Some customers are doing better than planned, others are doing worse than the initial plan. Also, I remind you that we came in to this quarter with a subdued outlook for wireless as you said. Up to that point in the year, the wireless market had been running weak and we came in to the quarter not seeing any emphasis that would cause us to turnaround in the current quarter given the overall economic environment. So, I guess I would just say it’s largely playing out as we had expected. Did you have a follow up Chris?

Christopher Danely – JP Morgan

Yes, can you just take a minute or so and just kind of give us your updated stance on your wireless business? Base banned or I guess modem versus OMAP, how you feel about each business and what’s going on there?

Ron Slaymaker

Well, I think as we’ve noted for some time, our view as the wireless market clearly is going through a lot of change you see increasingly the customers, the handset customers shifting more of their R&D investment to achieve differentiation in the form of software, services, applications, user interfaces as opposed to what I would call the connection to the network or the communications technology inside the handset. What you see is more of a trend toward moving toward merchant solutions, merchant chipset solutions on the base ban or the modem side of the handset and for the most part again, focusing more their energies and investments on applications.

From a semiconductor perspective and as we see it with respect to our own strategy, that means first of all it’s not a surprise. I mean, we have been in investing in our OMAP applications processor for over a decade now so it’s a welcome opportunity in terms of the growth that we foresee in Smartphones and high end handsets and what that means for the applications processor opportunity. At the same time, those trends likely are not going to be positive in terms of the value of the base ban or the modem technology from a semiconductor perspective. So, our view is the base ban looks less attractive going forward from a value perspective for TI yet at the same time what we’re doing is putting, just as the customers are, more of our energies, more of our R&D investment focused on applications processors as opposed to the modem technology. And again, that should be nothing new, I think that’s basically the strategy that we’ve been explaining to investors probably for going on a couple of years now but it’s probably becoming clearer as the customers action as the market development is actually playing out in that direction.

Operator

Your next question comes from the line of James Covello – Goldman Sachs.

James Covello – Goldman Sachs

Just one question around inventories, could you give us an update on kind of what kind of the updated thoughts for you guys would be on inventories exiting the quarter and heading in to the next quarter? Obviously, the plan has been to try and bring it down gradually. Are you seeing anything in the marketplace as we head in to the next quarter which might make you change your plan on inventories, bringing it down a little bit more?

Ron Slaymaker

Jim, I guess I’m not sure gradually is the word that we would use. I think what you heard us say in July was that we believed our inventory was about $100 to $150 higher than we desired and that our objective was to bring it back to the desired level by the end of the year. Basically, a couple of more quarters to execute that. So, in fact we are executing to that plan. Inventories should be down this quarter compared to the second quarter and then we would expect it to be down additionally in the fourth quarter.

Operator

Our next question comes from Uche Orji – UBS.

Uche Orji – UBS

Ron, to follow up on Chris’ question to understand, are you saying that what you’re seeing in wireless is as a result of the efforts that you’ve made in focusing on [inaudible]? Is that an implied statement that you’re seeing mix improving within the wireless sector? Can you just try and explain how that works in terms of mix in mid range, high end and low end? What are you seeing now versus what you would normally expect for this time of year and for your earlier guidance in wireless? The question here is are you seeing more mix towards high end versus low end?

Ron Slaymaker

Uche what I would say first of all, in my response to Chris I was really – that was not focused on third quarter results, that was more to do with our overall wireless strategy as we see it playing out over a multiyear timeframe. More near term, we have seen mix improvements inside of our wireless business very consistent with strong growth at the high end of the handset mix but that can and does vary quarter-by-quarter but in fact this quarter we are seeing a strong mix inside of wireless.

Uche Orji – UBS

On the analog side, do you have any insight not just in to your own [inaudible] plans but also do you have any insights on what’s happening within the channel?

Ron Slaymaker

Within the distribution channel?

Uche Orji – UBS

That is correct, yes.

Ron Slaymaker

Yes, but Uche I’ll have to broaden the discussion probably to be a little wider than just analog. We do sell a significant part of our high performance analog products through distribution but when I talk in general about distribution it would also encompass some of the catalog embedded processing products as well as some of the standard logic products. But, just in general I think in terms of distribution what I would say is that we would expect distributor’s resales or their shipments of TI products out of the channel to be about the same level as we saw from them in the second quarter. Our shipments in to distributors, therefore our revenue from the distributors should be about the same, maybe slightly down from what we saw last quarter. So, I think as a result distributor owned TI product inventory will likely decline a little this quarter compared to the June quarter. I think if you include some new pilot consignment programs that we have underway with distributors you’d probably find the total distributor inventory would remain about the same as we saw last quarter.

Just to elaborate a bit, these consignment programs that I’m referring to were deployed in the month of June on a very limited number of parts and with a focused group of distributors. I would say these programs are part of our strategy to further extend our differentiation and market share gains for products that we sell through distributors such as I mentioned previously, areas like high performance analog and catalog embedded processing.

Operator

Your next question comes from John Lau – Jefferies & Co.

John Lau – Jefferies & Co.

Ron, in terms of switching over to the analog side, I was wondering has there been any change in the analog business there? Another analog competitor recently reported and their guidance was slightly weaker, have you seen any changes on that side of the business?

Ron Slaymaker

No, not inside the quarter John. What I would say is it’s interesting but really there have been no notable variances to our initial expectations this quarter. All of our major product lines are tracking very closely to plan. I know I talked about wireless previously but the same comment applies to analog as well as the other areas.

Operator

Your next question comes from John Pitzer – Credit Suisse.

John Pitzer – Credit Suisse

Can you talk a little bit about linearity through the September quarter for both revenues and bookings? And I guess specifically to get the midpoint of your revenue guidance, are you expecting anything unusual out of the month of September?

Ron Slaymaker

We’re not John. I guess what I would say is this guidance or I guess the middle of the range that you described basically requires nothing other than a very normal month of September. So, practically every quarter the last month is slightly more weighted than the first two but for TI it’s a pretty small difference, it’s not a significant difference and this quarter is no different from that overall trend.

John Pitzer – Credit Suisse

Given your comments around inventory and your plan to bring it down by year end, can you talk a little bit more about sort of the wafer starts right now both internally at your fabs and with your fab partners? Have those essentially bottomed? Have you made those adjustments you think you need to make to hit those inventory targets or do you think we still need to go lower from here?

Ron Slaymaker

Let me talk mainly about what we’re doing with our internal factories. I think back earlier in the year we had wireless as we noted inventory build and we quickly adjusted that, probably back even late first quarter second quarter timeframe. But, in terms of wafer starts, in terms of TI’s own factories, yes in fact they’re coming down, factory utilization will be down this quarter compared to last and it ties directly to the inventory reduction that we’re in the process of executing.

Operator

Your next question comes from the line of Cody Acree – Stifel Nicolaus & Company, Inc.

Cody Acree – Stifel Nicolaus & Company, Inc.

Ron, you talked about wireless being kind of in line with expectations, were there any areas that you can point to this quarter that kind of surprised you up or down below expectations?

Ron Slaymaker

No, that’s what I was trying to describe previously that at least at a major product line perspective, for the most part, everything is tracking to plan. It varies down below that in terms of individual product lines possibly but that’s more detail than I have for this call.

Cody Acree – Stifel Nicolaus & Company, Inc.

We recently had an announcement from ST Micro and NXP with their tie up to Erickson Mobile, I think this was the first time we got you in a public forum. Is there anything that you can talk about, about how that impacts possibly some of your future relationships?

Ron Slaymaker

I think clearly it will impact our relationship with EMP. Let me try to hit it on multiple fronts, the first would be that the most direct impact in terms of business or revenue for TI will be on future programs that maybe we had been anticipating with Erickson Mobile Platforms as we would clearly expect these to be pulled in to that JV. In reality, the revenue impact from where we are today will be minimal as I think we described before that our programs with EMP, will essentially all be wound down by year end but in terms of future opportunities that we may have anticipated for the most part we would not expect those at this point.

Operator

Your next question comes from Srini Pajjuri – Merrill Lynch.

Srini Pajjuri – Merrill Lynch

Ron, I guess last quarter the distributors kind of cut back in the last couple of weeks of the quarter. I’m just wondering what’s the risk of that repeating this quarter and how much visibility do you have one way or the other?

Ron Slaymaker

Srini, I would say we believe we’ve appropriately comprehended our distributor’s plans. Distributors are independent companies, they make their own decisions with respect to their outlook and inventory needs so there is always risks that their plans can change as you pointed out for last quarter. But, that being said, you know our best belief is that our guidance that we are providing you here is in line with our distributors current expectations.

Srini Pajjuri – Merrill Lynch

Given that there is some amount of inventory out there, are you seeing any impact on pricing at this point?

Ron Slaymaker

We have not seen any unusual circumstances with pricing. Again, most of our products are highly differentiated so it’s not really a direct interchange between TI’s product and somebody else’s. So, for the most part we don’t see the kind of near term pricing pressure overall in our product portfolio that say a more commodity type of product line would experience. But again, I would say in general we’re not seeing unusual pricing trends at all at this point.

Operator

Your next question comes from Steven Smigie – Raymond James.

Steven Smigie – Raymond James

Ron, to the extent you’re willing to talk about it, can you talk about how sort of orders you’ve been receiving in the quarter say for Q4 are progressing? Is that sort of in line with what you might characterize as seasonal orders?

Ron Slaymaker

I’m not sure what I would describe as seasonality Steve on order trends. What I can say is that quarter-to-date, we’ve seen orders down probably a few percent compared to where they were at the same point in the second quarter but I don’t have any more data other than quarter-to-date orders are a little below where they were at this point last quarter.

Steven Smigie – Raymond James

Just quickly, obviously you did have a large customer that had business that was somewhat softer for themselves and yet your guidance is unaffected here. Can you walk me a little through your thought process as you go in to the quarter you somewhat haircut customer’s forecasts or how you prepare for those potential eventualities?

Ron Slaymaker

Steve, that’s a deep secret. I guess what I would say is that we don’t simply take all of our customer’s forecasts, add them up and that’s our internal forecast and guidance Steve. Clearly, we have our own view of the macro environment and build that in to our plan. So, let me probably just leave it at that.

Operator

Your next question comes from Krishna Shankar – JMP Securities.

Krishna Shankar – JMP Securities

Are you seeing anything unusual in terms of recent order patterns? Anything with regard to the macro situation which seems to be impacting your order patterns from the distribution channel by region?

Ron Slaymaker

Regional, Krishna to be honest I don’t have a lot of regional detail at this point. For the most part when we consider our businesses we look at them more on a global perspective and regional considerations are really just more a factor of where our customers manufacture products as opposed to a statement about consumption. Clearly, the US market is week in terms of consumer demand and maybe even what the corporate spend is looking like. I would say the same for Europe. But, that’s more what we’re seeing in the overall macro environment as opposed to a statement about regions that are driving orders or that are not placing orders currently.

Krishna Shankar – JMP Securities

Quickly, I know you have limited exposure to the PC market but any comments on your disc drive or PC power management business, how that is shaping up?

Ron Slaymaker

Both are running pretty strong in the third quarter. As you point out, power management products that we sell on the notebooks as well as our storage business are looking good this quarter although third quarter would be expected to be stronger from a seasonal perspective. But, both are doing well this quarter.

Operator

Your next question comes from Tim Luke – Lehman Brothers.

Tim Luke – Lehman Brothers

Ron, I was wondering if you might have been able to remind us as to how to frame seasonal expectations for the calendar fourth quarter? Last year I think it was down 3% and it’s down 8% in the year before that. Any framework – you noted earlier that the orders were somewhat lower sequentially so far this quarter as to what historically you’ve seen there.

Ron Slaymaker

Tim, I will just throw the statistics out and then maybe we can talk a little bit about them. The 10 year average for our semiconductor business is we’re probably up in the 4% range sequentially. That’s an average number so mean. The range around that is -5% to 15% so I’m not sure how much meaning that 4% growth number has. We have seen shift in some of the seasonal patterns. For example, wireless as we have now something like 80% of those customers on consignment inventory programs our shipments don’t need to lead their end shipments as much as they did historically so that’s the data but again there is a caveat there that, that seasonal information may not be worth a lot. Then finally, I don’t think the seasonality from a sequential perspective has applied at all year-to-date so I’ll just leave it at that.

Tim Luke – Lehman Brothers

Can you just update us on how you perceived traction with Motorola on the 3G products for that family and any color you had on broad lead times would also be helpful.

Ron Slaymaker

We have a program at Motorola. As you noted, it’s a custom program for 3G, their 3G handset. We’re executing that program, kind of heads down. I don’t have anything new to report other than the targeted production date is 2009. I will kind of add to your question probably one of my more popular questions that I get from investors is whether the recent management changes at Motorola would be expected to impact that program and I would just have to say that we have no information from Motorola to support that to date. That being said, we’re well aware that any time you have executive changes made at any company there’s always potential that strategic directions can shift. But, as I said before, today we’re heads down focused on executing the program and supporting that customer.

Broad lead times, I really don’t have much to say there. In most product areas I would say that lead times remain stable and they are relatively short. But, I don’t have an update that lead times have changed substantially one direction or the other.

Operator

Your next question comes from the line of Glen Yeung – Citigroup.

Glen Yeung – Citigroup

You made the point that your down [inaudible] 3% here on orders in the third quarter. I wonder if your customers in light of the economic conditions that we’re in are changing their order patterns noticeably specifically because of that? I’m not really asking you about these sort of longer term trends [inaudible] to hold more inventory. But, do you see just because of the economy how that is changing now?

Ron Slaymaker

That’s a good question Glen and I wish we had better clarity on that but we don’t. It’s difficult to say. Clearly, customers are managing everything very tightly, their inventories, their backlog commitments, all of that. Is that the explanation or is it the fact that they anticipate demand to be down? You’ll probably have to wait until January before we have that answer but we’re aware of the potential that it could be a combination and it likely is a combination but we’ll just have to see as we progress.

Glen Yeung – Citigroup

You made the point that now that [inaudible] are merging you’re not expecting future business there but there is a function of time right for them to get new [inaudible] so I wonder when that may begin? Do you think that some of the stuff you were anticipating for second half 09 you may now not get?

Ron Slaymaker

Glen, I guess what I would say is that our view is – and I’m going to have to differentiate, try to draw bright lines between EMP and Sony Erickson. Sony Erickson, TI has a great relationship with, products like OMAP where we are engaged directly with Sony Erickson, we would anticipate seeing those continue to march their way through Sony Erickson’s product line and represent a great business for us. But, the group inside of Erickson that did customer chip design, the EMP group, as I said our revenue was essentially going to be wound down by the end of this year. You’re right, we had other programs underway that we would have previously expected to ramp up late in 2009 and our view is that those likely will not occur at this point and it is probably in their best interest as well as TI’s best interest to go ahead and move more in the longer term direction that both companies will be headed as opposed to that carrying through on those programs that were partially completed.

With that operator let’s take one final caller and we’ll wrap up from there.

Operator

Your final question comes from David Wong – Wachovia Capital Markets, LLC.

David Wong – Wachovia Capital Markets, LLC

Ron, when you said orders to date where down from where they were in the second quarter are you referring to semiconductor orders or is there some seasonality of calculator orders play in to this?

Ron Slaymaker

I am referring specifically to semiconductor orders there David.

David Wong – Wachovia Capital Markets, LLC

The other one quickly, you mentioned inventory at distributors looked like it might jump a little in the quarter, are you seeing signs of inventory of TI products being brought down elsewhere in the supply chain either contract manufacturers or OEMs or anywhere else?

Ron Slaymaker

David, I don’t have any data to support that, that would be the case. In fact, at this point it wouldn’t be surprising to see certain customers, especially those that have more of a consumer type of product play building component inventories, building finished good inventories of their own products as they’re preparing for the holiday season. But again, I’m not aware that there’s an inventory trend at either the subcontractors or our OEM customers that would be outside of the norm.

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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