Good day, everyone, and welcome to the Texas Instruments fourth quarter 2012 mid-quarter update call. At this time, I would like to turn the conference over to Ron Slaymaker. Please go ahead, sir.
Good afternoon. Thank you for joining TI's mid-quarter financial update for the fourth quarter of 2012. In a moment, I will provide a short summary of TI's current expectations for the quarter, updating the revenue and EPS ranges for the company. In general, I will not provide detailed information on revenue trends by segment or in 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 $2.89 billion and $3.01 billion, a range that has been narrowed to the middle of our prior range. We expect earnings per share between $0.05 and $0.09 on a GAAP basis.
In addition to the $0.06 of acquisition and restructuring charges included in our original guidance for the quarter, EPS also now includes $0.21 of charges associated with the previously announced restructuring in our wireless segment. As a reminder, we said the wireless restructuring charges would be about $325 million in total, of which about $220 million is for severance and related benefits, and most of the remainder is for non-cash impairments related to the wireless business. Most of these charges will be recognized in the current quarter, although some are subject to the outcome of required negotiations in countries outside the U.S. If you are having trouble translating the charge amount to the EPS impact in the quarter, please note that goodwill impairment is not tax-deductible. The $0.21 impact that I identified comprehends this tax treatment. 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. Operator?
Thank you. If you would like to ask a question, please signal by pressing the star key, followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you have signaled for a question prior to hearing these instructions, please repeat the process now by pressing star one again to ensure your signal has been captured. We'll hear first from John Pitzer with Credit Suisse.
Hi, Ron. This is Patrick Walsh calling in for John Pitzer. Just had a quick question on the profitability. On a non-GAAP basis, it looks a little better. I'm curious, is that all driven by wireless?
No. Actually, the cost reductions, the restructuring that we're doing in wireless really won't have any significant impact this quarter, as most of the employment reductions are happening late in the quarter. What you're seeing probably translates to about $0.01 better on a, as you call it, a non-GAAP basis or however you would get there. What I would say is that's really just we're continuing to generally tighten down on expenses where possible, and that really is just considering the weak environment that we're operating in. Again, just holding a tight rein on expenses. Do you have a follow-on, Patrick?
Yeah. As a follow-up, do you think that the wireless business can get to breakeven in the calendar first quarter? If so, do you expect to be able to stay breakeven as revenue declines going forward?
Okay. The answer, or that whole situation is complex. Let me just start with the fourth quarter. I would say that wireless, clearly in the fourth quarter, will have an operating loss because it will include the restructuring charge. Going forward, I really don't have a date for you on when that loss will go away, as it depends on how fast the revenue declines relative to the cost. I think we said back in our October call that we expect that our baseband revenue in the first quarter will be about half of the level that it was in the fourth quarter. Again, considering the baseband revenue's declining, then on top of that, how fast the OMAP and connectivity declines occur from a revenue standpoint will really drive what happens from a profitability or loss perspective.
Okay, Patrick, thank you for your call, and let's move to the next caller, please.
Thank you. Next, we'll hear from Joe Moore with Morgan Stanley.
Great. Thank you. Let me just follow up on the last question. What do you see as the tail for the OMAP and connectivity business? Your customer base in the next couple quarters probably doesn't change all that much. Is there going to be a fairly healthy tail in that business in the next couple quarters?
Joe, that's a good question. I should've clarified that on the prior call. The revenue that's there, which this year for OMAP and connectivity products that are sold into smartphone and tablet applications, probably will be about $800 million total. In the fourth quarter, it will be right around $200 million. Again, that's not the entire segment revenue for OMAP and connectivity, because some of that is sold into embedded applications, probably a couple of hundred million dollars in 2012. The $800 million overall for 2012 that's sold into smartphone and tablets, or the $200 million in fourth quarter for smartphones and tablets, we would expect to decline through the course of 2013, such that it's gone by the time we enter 2014.
Probably a similar trajectory in terms of the cost savings, the cost will decline through the course of 2013, and as we enter 2014, we will have about $450 million of annualized cost savings again, as we enter 2014 or by the end of 2013. Do you have a follow on, Joe?
Yeah, just on that note, the $450, how does that split between operating expense and cost of sales savings?
Okay. The estimate we have is about 75% of that will be R&D, about 15% SG&A, and then about 10% cost of revenue. Okay, Joe. Thank you, we'll move to next caller, please.
Our next question comes from Ross Seymore of Deutsche Bank.
Hi, Ron. First one, following up on that OMAP side of things with connectivity. Do you expect any impact on your analog side of your business as some of those connectivity products in OMAP brought analog along for the ride?
Ross, I'm not sure I would agree that they're along for the ride, but we do have good analog content, typically, in a system where we're selling OMAP. Clearly, if we have an applications processor in the system, that gives our sales folks good visibility into that overall system. That being said, those analog products kind of have to earn their way, each product. Customers aren't going to accept an inferior analog product just because they're using our application processor. Our view is that our analog products will continue to do fine in these tablet and smartphone applications. In fact, I can also envision a scenario that they could even benefit because, think about, we work with other application processor suppliers on their reference designs to include our analog products.
To the extent they don't view us as an application processor competitor, we might find some of those other application processor suppliers more amenable and cooperative on the analog side. We'll see. That's conjecture, but I think we'll do just fine on the analog side of those systems. Do you have a follow on, Ross?
Yes, I do. Just getting away from OMAP maybe for a second, just talk about the quarter. The mid-quarter, you guys tightened to the midpoint of the range on revenues. Any either product line or end market color you can give us about positives and negatives quarter to date, please?
Okay. Sure, let me just make a couple of reminders. As you would probably guess, the fact that we tightened to the middle of the range says, generally, most areas are tracking consistent with our expectations that we had in October. Just as a reminder, there are a few special considerations in the sequential trends this quarter that a reminder's probably worth a few minutes. First of all, our calculator revenues typically declines by about $100 million in the fourth quarter, following the peak third quarter back-to-school season. The second consideration is that we had $60 million in the third quarter of business interruption insurance proceeds. That was the final settlement from last year's earthquake in Japan. That amount will not recur again this quarter.
I think the final point I would make is that in our October call, I explained that our SVA analog product line would begin to convert over to a consignment inventory program at distribution this quarter, and that really is the result of us getting that SVA business, which again, was the former National Semiconductor operation, converted over to TI's IT system. With that, we'll be able to move them to the same type of consignment inventory program we have with distributors. That conversion will impact our revenue this quarter. Certainly, distributors are anxious to move over to the program. With those three considerations, I would say the remainder of our semiconductor revenue is generally clustered around a 7%-8% sequential revenue decline. From an end market standpoint, let me just quickly go through those. Computing continues to be weak this quarter.
In communications, I would characterize it also as weak. If you look at handsets and tablets, our baseband revenue, we would expect to be seasonally flat, maybe even up a little this quarter. Although that will be more than offset by revenue declines in OMAP and connectivity, again, for smartphones and tablets. I guess I don't normally provide a longer-term outlook in this update, but given our recent announcement to discontinue our investments for OMAP and connectivity products in the smartphone and tablet areas, let me go ahead and note that we expect this revenue, again, to decline then from about $200 million to be gone by the end of 2013. Just a reminder on that.
In communications infrastructure, particularly wireless base stations, that revenue continues to be weak, with spending levels by operators constrained pretty much across the world, specifically the U.S., Europe, and China, those regions have historically been drivers there. Consumer, I'd say results are somewhat mixed. TV sales remain weak as they were last quarter, reflecting the overall economy, and we believe actually the emergence of tablets as an alternative viewing device for video is probably having some impact there as well. Game consoles are doing well, and eBooks also are doing well for TI. Finally, in industrial, I would say overall demand generally remains weak. Inside of that, automotive sales are mixed regionally with the U.S. strong, but both China and Europe weak. Okay. That was a long answer to a quick question, Ron, so thank you for that, and we'll move on.
Next, we'll hear from Stacy Rasgon with Sanford Bernstein.
Hi, guys. Thanks for taking my question. I was wondering if you could give us a little bit of color, Ron, on order linearity. I think at the earnings call, you'd said September orders were the low point in Q3. October was kind of flattish. Can you give us some view for how November and December are tracking relative both to those points in September and October and relative to your expectations?
Stacy, I don't have feedback for you on linearity. What I will say is just in general, we expect that orders will decline this quarter, and they're largely tracking the revenue result trends. What I mean by that is they're weakest for our other segment due to the seasonal calculator declines and again, that non-recurrence of the business interruption insurance. They're also weakest for our SVA product line due to the conversion to the distribution consignment program and the impact that has both on revenue as well as orders. I don't have the month-by-month linearity feedback for you. Do you have a follow-on, Stacy?
Yes, I do. That's helpful. If I go back to wireless for a second, the chunk that's remaining, the embedded OMAP and connectivity, it's about $200 million in annual revenue right now, I think you said. What are your targets for the economics of that business following the completion of your restructuring actions? Is that going to be making money? Is it going to be breakeven? Will it be losing money at those levels with some growth in order for it to make money?
No, our expectation is that the loss that you've seen our wireless segment incur over the last few quarters will largely be eliminated by the restructuring action that we have underway. That's not assuming growth or anything like that. It's just taking the loss and taking the cost actions and recognizing we're going to lose about $800 million of revenue and therefore gross profit associated with that. The cost savings that we're implementing should largely offset or essentially offset that loss. We'll just leave it at that. Okay, Stacy, thank you, and we'll move to the next caller.
Moving on, we'll hear from Jim Covello with Goldman Sachs.
Great, Ron. Thanks so much for taking the question. I appreciate it. Thanks especially for the market commentary by area. In consideration of that, is there an area where you feel most confident that you're under-shipping demand and inventory is getting drawn down in the channel? Conversely, are there still areas where you think you might be over-shipping demand?
Jim, I don't know of any area that we're over-shipping demand. There could be some out there, but they're not visible to us. I would say in general, we're shipping consistent with demand and inventory levels are very low, or there still could be some areas that inventory's continuing to be reduced. I know one area that I don't know that I would underscore anything in terms of what we're seeing this quarter, but I know, for example, in the third quarter, communications infrastructure was an area that we highlighted was experiencing some inventory reduction. Probably another one that I would highlight is distribution this quarter, and I guess I would note that resales from distribution, we expect to decline this quarter. At this point, it looks like distributors could also reduce some inventory, and we'll see how the rest of the year plays out.
At this point, we would expect they're going to reduce some inventory. Do you have a follow-on, Jim?
I do. First of all, thank you for that. That was helpful. Kind of going back to Ross's question about the attach rates of the pull-through as we look at the wind down of the OMAP and connectivity segments in certain areas. When you look back on the history or lessons learned from the baseband wind down, did you see any reduction in pull-through or attach rates on analog in those segments, or did you see pretty steady share with the customers or the SKUs that you wound down with baseband?
Jim, I'm not aware that there was any notable shift in our penetration in those customer systems where we had baseband that then when we got out of the baseband, we saw, we saw declines in other product lines. I would say in the case of baseband, practically no, if any, impact, and we would expect similar with the analog products and the OMAP connectivity. In fact, again, we do have good analog content in many of the OMAP systems, but we can also find customer systems that don't use our OMAP product at all, where our analog content was just as high. Again, I think for the most part, you'd have to say those analog sockets are one individually, and they tie very little directly to the OMAP processor. Okay, Jim, thank you. We'll move to the next caller, please.
Our next caller is Tore Svanberg of Stifel Nicolaus.
Yes. Thank you, Ron. Could you just give us an update this quarter about any shutdowns that you're planning or just any color at all on your manufacturing?
Well, the shutdowns and the idling that occur through the course of the holiday period will vary from factory to factory as it does every year. That'll just depend upon demand, et cetera, for particular products that are manufactured in those factories. Some we certainly will be idling through the course of the holidays, as we typically do. By the way, that's just a means by which we can most cost effectively manage when we have open capacity such as we do. That's just a means by which we handle lower levels of utilization cost effectively. We will be doing that through the course of these holidays, but it'll vary factory by factory. Okay, Tor, do you have a follow-on?
Yes. Could you also talk a little bit about lead times? If I recall correctly, lead times were fairly short at the beginning of the quarter. Just wondering, have they remained short or any movements at all there?
Really, no movement of significance at all. I would say lead times overall remain very short, with the strong majority continuing to be below six weeks for TI. Okay, Tore, thank you. We'll move to the next caller.
Our next caller is Shawn Webster of Macquarie.
Great. Thank you very much. Kind of on that thread, do you guys expect utilization rates to come up in either Q1 or Q2? My follow-up question would be, for your own inventories, what's your expectation for them in terms of dollars and days in Q4, maybe in Q1, if you have a view on that?
Okay. Maybe you missed, Shawn, this is the fourth quarter mid-quarter update. I can talk about utilization trends this quarter, which really are consistent with what we expected in October. Utilization will be lower in fourth quarter compared with third, as we've reduced new production starts in response to weaker demand. What happens with utilization in first quarter and beyond, I really have nothing to comment on at this point. In terms of TI's own inventory, I guess I would say, in light of our actions to reduce the production levels in our factories that I just described, we would expect that our inventory will decline this quarter. From a day standpoint, it's a little more complex.
I would say inventory days, even with the absolute reduction in inventory, you could see days still drift up a little, and that's just in consideration that revenue will also decline in the quarter. Shawn, I believe that was your first two questions. Do you have a follow-on?
Yeah. Well, thanks for the extra one. It sounds like your expenses are doing a little bit better. Can you remind us in terms of the OpEx linearity normally comes up in Q1 and then partially in Q2. Is that the normal linearity? I'm talking normal. I know you have restructuring going on, which is going to bring it down.
Good point, Shawn. OpEx typically is down in Q4 seasonally, and that really just reflects that more vacation time and holiday time is taken in the fourth quarter compared with the third, and then that will reverse itself in the first quarter, typically, as less holiday and vacation time occurs. The other consideration in the first quarter is that the annual pay and benefit increases are implemented in the month of February. Usually from a seasonal standpoint, we see some increase in OpEx in the first quarter as well. Okay, Shawn, I didn't mean to give you three questions there, but I'm glad you appreciate that. We'll move to the next caller, please, operator.
Our next caller is Chris Caso of Susquehanna Financial Group.
Hi, Ron. Thank you. I wonder if you could expand a little bit on some of the comments you made about inventory in the channel. We also heard from one of your competitors who recently thought that there was some destocking going on. Do you have any metrics that you could share with us in terms of where we are relative to normal levels and just looking forward, just comment on perhaps the sustainability of the channel inventory at these levels, even taking account where the levels of demands are right now.
Okay. What I would say is, if you've listened to us over the past few quarters, we've been running six and a half weeks or so over the last few quarters. That is a lean inventory level. We've characterized it that way. That's lean by historic standards, and that's lean even comprehending that we are carrying some of what historically was distributor inventory on TI's books as consignment inventory. Okay, again, a couple of things have happened. The inventories are lean, but we've also implemented the consignment program. Even adjusting for that, they were lean. I really don't want to give you any kind of specific projection on the fourth quarter other than, we could see a few more days come out of that inventory level. At this point, the data usually is not very predictive of the full quarter.
I would say we, at this point, probably would be expecting to see a few more days of inventory come out of distribution. Is that sustainable? I don't believe so. I think in general, the channel inventories and to the insight we have at customers, I would say we believe inventory levels are lean and therefore, from a risk standpoint, it's probably somewhat asymmetric. They are lean relative or in consideration of the weak environment. If there's any growth that starts to occur again, we would fully expect replenishment to occur both in distribution as well as at customers that carry their own inventory. Again, the lean inventories that are there reflect economic uncertainty and relatively weak demand currently. Clearly, there will be replenishment if growth is to occur again. Okay, Chris, thank you. Let's move to the next caller, please.
Our next caller is Romit Shah of Nomura.
Yeah, thanks, Ron. Just to clarify, did you say your lead times are four to five weeks right now?
I said, the strong majority of our lead times are six weeks or less.
If the channel is carrying about six weeks, then I understand that it's lean from a historical perspective, but isn't that sufficient given where your lead times are? What would be the incentive for them to restock?
That's kind of the false impression that pulls everybody in. It's fine if lead times and everything are totally stable. Romit, from the standpoint of positioning our own inventory and all that, and certainly our capacity, we try to keep it positioned such that we will be able to maintain lead times short. More generally, in our industry, cycles or during relatively weak periods, and then when customer demand starts to come back, lead times tend to extend, and that causes customer demand to get even more heated as customers then try to replenish inventory. Do I believe more broadly in the industry that current inventory levels and current lead times are sustainable? No way. We'll see. That's only just based on 30 years of semiconductor industry history that I have. Maybe this time will be different, but I wouldn't bet on it.
Okay, Romit, you have follow on?
Yeah, I appreciate that, though. That's helpful. I was hoping you could just talk specifically about comm infrastructure. It's a big business for you guys. On one hand, we're hearing about AT&T spending more capital. At the same time, you guys are talking about a reduction in inventory. Maybe just some specifics on what you're seeing from the comm infrastructure space, and if you could segment it by geography, that would be helpful.
I probably don't have a lot to say there other than U.S., Europe, China, all being weak, as I said previously. We believe that when I just look at TI's revenue trends this quarter, they're very consistent with what we believe the card shipments are from the equipment providers overall. There could be, as I said, some component inventory reduction, but there's not a big sync difference between what we're seeing with our shipments and what we believe is happening in terms of shipments to the operators currently. I realize there are operators that have forecast more capital spending, et cetera, but I think that's still likely ahead of us as opposed to anything that's impacting our business this quarter. Okay, Romit, thank you for your questions. Operator, we have time for one final caller.
Certainly. That will come from David Wong of Wells Fargo.
Thanks very much. Ron, the cost savings that you get from your exit of the wireless business, as 2013 progresses, do you actually manage to reduce, in absolute terms, your operating expenses, or do they keep rising because you have other things that you're investing in?
Oh, you mean for TI?
Yes, TI as a whole.
Boy, David, I don't want to try to project that. I think you're seeing TI manage our expenses overall pretty tightly, and I think you will continue to see that going forward. What I can assure you is that $450 million is not just moving out of our wireless segment into other parts of TI. These are costs that are leaving Texas Instruments. I think if you consider how much we're spending in operating expense currently, that probably would clearly translate to a net reduction. Again, the only thing we're really forecasting here is what we're doing inside of our wireless segment, and I'll provide you the assurance that those costs are truly leaving TI as opposed to just shifting somewhere else inside of TI. Do you have a follow-on, David?
Yes. Thanks, Ron. The connectivity products you're exiting, are they manufactured in-house? If so, what % of manufacturing do these currently represent?
What I would say is in both of these areas, connectivity and OMAP, most of the production is done through third-party foundries. As we exit these, this will not have an impact on capacity utilization. We will not have stranded capacity as a result of this action. Okay. With that, we will go ahead and wrap up. What I will say is, before we end the call, let me remind you, there's a replay available on our website. Thank you and good evening.
Ladies and gentlemen, that does conclude today's conference. We thank you again for your participation.