Welcome to the Texas Instruments Second Quarter 2012 Mid Quarter Update. At this time, I would like to turn the conference over to Mr. Ron Slemmaker.
Good afternoon, and thank you for joining TI's mid quarter financial update for the Q2 of 2012. In a moment, I'll provide a short summary of TI's current expectations for the quarter, updating the revenue and EPS estimate ranges for the company. In general, I will not provide detailed information on revenue trends by segments or end markets and I will not address details of profit margins. In our earnings release at the end of the quarter, we will provide this information. As usual with our mid quarter update, we will not be taking follow-up calls this evening.
Considering the limited information available at this point in the quarter and in consideration of everyone's time, we will limit this call to 30 minutes. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is broadcast live over the web and can be accessed through TI's website. A replay will be available through the web. This call will include forward looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations.
We encourage you to review the Safe Harbor statement contained in the news release published today as well as TI's most recent SEC filings for a more complete subscription. We have narrowed our expected ranges for TI's revenue and earnings from our previous ranges. We now expect TI revenue between $3,280,000,000 $3,420,000,000 We expect earnings per share between $0.32 $0.36 on a GAAP basis. Our estimates for acquisition related charges and restructuring charges are unchanged and are expected to total to about $0.06 per share assuming TI's marginal tax rate of 35% is applied to these charges. Operator, you can now open the lines for questions.
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 And our first question today comes from Vivek Arya with Bank of America Merrill Lynch.
Thanks for taking my question. Ron, in the last few weeks, we have seen a number of macro indicators starting to get softer, but you are maintaining the midpoint of your outlook. I'm curious, have you noticed any changes versus your prior expectations whether it be by regional or product basis or end market perspective? Any color you could provide would be very helpful.
Okay, Vivek. Thank you for your question. And I guess what I would say is that as you might imagine just given what we did in terms of maintaining or just narrowing our guidance around the prior middle of the range, our business is generally tracking well and consistent with our initial expectations. We do expect solid sequential growth in our analog, in our embedded processing as well as our other segments, while we expect that wireless will decline. From an end market standpoint, the industrial market that we began to see some early indicators of recovery in the Q1 continues to recover in the Q2, although I would describe that visibility there continues to remain low.
Probably in terms of notable strength, communications infrastructure, we expect will be up strongly this quarter, but even so not back to the levels that we saw in Q3 of 2011. Probably another major market worthy of mention would be computing where I would describe that sales into computing applications are somewhat mixed. But then inside of that, our sales of storage products into hard disk drive customers, we expect to grow again this quarter. And really this quarter, we believe that things have come back into sync in terms of our shipments have are really reflecting a fully recovered situation in Thailand from that flooding situation. Do you have a follow on to that?
Yes. Thanks, John. How would you characterize inventory both at your sites and at your distributors? Thank you.
Okay. That's a good question and probably a little different than in the 2. So at distribution, we would describe that inventory is low. In fact, I think I would extend that to customers in general. You'll recall that I think for the last couple of quarters, we've described that distributor inventory is about 6.5 weeks and that again is low by our historical standards.
And what we've noticed is that both distributors and customers are really reluctant to build inventory given kind of your first question, which is tied to uncertainty in the overall macro environment. In terms of TI's own inventory, as you saw last quarter, we are well positioned with our inventory and we will maintain that position strength in terms of inventory. And I'd also extend that to where we're well positioned with available manufacturing capacity really to support whatever demand situation develops. So if demand were to suddenly strengthen, which is often the case in an upturn situation, where we believe we're going to benefit from the strong inventory situation we have. If the recovery builds more slowly, in that case, our inventory is mostly comprised of what I would describe as long lived catalog products and our risk there is low.
So in short, the upside opportunity really more than justifies the downside risk. Okay, Vivek. Thank you for your questions. And operator, we'll move to next caller.
We'll go next to Tore Svanberg with Stifel.
Yes. Thank you. Ron, could you talk
a little bit about linearity either by bookings or billings or both?
Tory, I really don't have kind of the month by month or I guess the prior color was even hitting on week by week linearity. Most quarters for TI, the last month of the quarter tends to be our strongest. But even so, typically the last month will be still in the upper 30s as a percent of revenue in the quarter. But and so this quarter would be no exception. We, with this guidance, don't expect any kind of heroic acts in the month of June, more of a normal type of build in that final month of the quarter.
Do you have
a follow on, Tore? Yes, I do. You mentioned communications should be up strongly in the quarter. Could you maybe add a little bit more color on there, maybe specifically talking about wireless versus wireline? Thank you.
Sure, Tore. Most of our communications infrastructure revenue and exposure is to wireless base stations. So it would be specific to that. And then down inside of that, it's really the North American market and deployments of WCDMA infrastructure is what's driving us. So kind of more of the same of what we've seen over the last couple of years where developed markets in general and probably North America specifically as service providers are adding data capacity to try to keep up with demand from consumers really arising from the broad deployment both of smartphones as well as tablets.
So we had a little bit of what I'll call a glitch back late last year with some of the operators putting on tapping on the brakes, but it seems like we're out of that mode and back into growth again. Okay, Tore, thank you. And we'll move to the next caller.
We'll go next to Stacy Rasgon with Sanford Bernstein.
Hi, Ron. Thanks for taking my questions. I was curious how much of the low inventory levels of distribution is a function of your move more toward consignment as well as the canceling of the 1 distribution contract from Natsume?
Some of it is consignment. If you look at certainly if you look at Stacy Beck multiple years of history, you would say that we're probably down a good couple of weeks versus where we would have been say 3 years ago because of the consignment program. And again, we have about 30% or so of our distribution revenue now being supported by consignment inventory programs. But when I talk about 6 and a half weeks is low by historical standards, I'm making the adjustment already to comprehend the consignment program. So certainly down partly because of consignment, but even comprehending what you would expect from a consignment program in terms of reduction of the distributor owned inventory, were low by those adjusted standards as well.
Jeff, follow on Stacy?
Yes, I do. I was wondering if you could give us a little bit of your thoughts on the departure of Greg Lowe?
Well, Greg obviously is pursuing an opportunity that he believes will be in his best interest. Greg is a great manager, a great leader. He was well respected at TI and we wish him the best. Not we don't wish him too much best because obviously we're competing with him at freescale, but he's a good man and I suspect he'll do well there. Okay, Stacy.
Thank you for your questions and we'll move to the next caller.
We'll go next to Christopher Donnelly with JPMorgan.
Thanks, Brian. Last quarter you commented I think that your book to bill was tracking above 1 so far. Can you just give us comments on how book to bill is tracking so far? And have you seen any changes or fluctuations in bookings for next quarter?
You're right. Book to bill was positive last quarter. And Chris, probably what I'd prefer to do instead of talking about book to bill just because it tends to be very noisy with both the numerator and denominator changing. Let me as usual wait till the end of the quarter specifically comment on book to bill and maybe just describe more what we're seeing in terms of orders. So what I would say on orders is that they're trending well this quarter as we saw last quarter and that we expect both orders and backlog to grow sequentially based upon what we've seen during the first couple of months of the quarter here.
Okay, Chris, do you have
a follow on? Yes. Can you give us any progress or update on how the SVA is doing versus your overall analog business?
SVA, we continue to be encouraged with the progress there, but I'd really probably rather wait till the end of the quarter to start getting into the various subsets of analog. But everything that we've seen in terms of the integration of National Semiconductor, the customer response to that integration I'm sorry, the customer response to the acquisition and integration inside of that inside of our analog business continues to be very encouraging to us. So green light there, but in terms of specific revenue trends and relative to the rest of the analog business, I'll wait till the end of the quarter. Okay. Thanks, Chris.
And let's move to next caller.
Our next question comes from Ross Seymore with Deutsche Bank.
Thanks, Ron. Can you hear me okay?
I can hear you fine. Great. You mentioned the wireless business will
be down sequentially. Can you give us a little more color? Is that because of the baseband side, OMAP connectivity? Any color on that would be appreciated.
Okay. Sure, Ross. Baseband, we would expect to be about even with what we saw last quarter. And you'll recall that I think earlier in the year or maybe late last year, we described that we expect that it will be running about $50,000,000 to $100,000,000 per quarter in general this year, so well within that, but about even with where we were last quarter. The remainder of the wireless revenue we expect will decline this quarter sequentially and that's really tied to customers completing their inventory correction that we described last quarter and also as they prepare for new model launches later this year and basically cleaning out inventory in anticipation of those new phone models.
Jeff, on Ross?
I do. Just back to the distribution side
of things, rather than the inventory that you've answered already, what about on the
demand side?
How are you
seeing demand
from disties versus your OEM customers? Not dissimilar on either front. So we expect that resales from the distribution channel will increase sequentially. It's not exactly the same as what we're expecting overall, but within striking
We'll go next to C. J. Muse of Barclays. J.
Muse:] Yes. Good afternoon, Ron. Thank you for taking my question. I guess curious as you think about your conversations in the last few weeks, how have things changed if at all given what we're seeing in terms of the macro backdrop?
C. J, I probably don't have a lot more to say specific in terms of the last couple of weeks other than what I said previously, which is obviously part of our growth is just tied to us. We believe that over the last just over the last what starting Q3 of last year continuing through Q1 of this year, our customers were going through an inventory correction and therefore we were under shipping their demand. What we're seeing in the Q2 is that we've begun the process of moving back toward their end demand level. So the reality is we could have I mean, the macro matters, end demand matters, but it can wobble a little bit and not affect our near term growth just as we continue to recover from that correction.
Obviously, it can impact the slope, it can impact our customers' motivation to replenish inventory, which again we don't believe has happened at all to this stage. We're just coming out of the correction as opposed to any replenishment. But to date, this quarter is tracking generally consistent with what we had expected back in April when we gave our initial guidance. Jeff, follow on C. J?
J.
Rice:] Yes. Real quickly, on the embedded business, can you share whether that business is tracking in line with the overall guide here in Q2 or above or below? And any color there would be great.
Well, I would say embedded is growing. I don't in terms of versus the guidance, I'd probably not like to get into all that detail. But keep in mind, inside of embedded, a big piece of that is comms infrastructure, which I described as doing very well this quarter. Also growing inside of that is the broader based catalog product line. So embedded overall is doing very well, mostly driven by comms infrastructure and again also driven by catalog.
Okay, C. J, thank you. And we'll move to the next caller.
We'll go next to Jim Covello with Goldman Sachs.
Hey, Rod. Thanks so much for taking the question. You had commented that you don't believe customers are rebuilding any inventory this quarter. Do you think they are going all the way toward ordering back in line with their demand? In other words, do you need demand improvement in the September quarter to drive further revenue growth?
Or could you see some incremental catch up from customers continuing to order back the demand levels?
Boy, that's a tough one. I think even at our analyst meeting, we described that we believe that the industry overall was lagging call it historical trend and the extrapolation of that trend by about 20% coming out of Q1. Now I don't know that you probably and you might assume that that trend line is a rough proxy for end demand, but obviously, it's not going to be a perfect proxy. So I'll probably hold off on making any extensions on whether we will still be able to benefit just from end of movement back toward end demand in 3rd quarter until we finish this quarter and are ready to give guidance for that quarter. Do you have a follow on, Jim?
Sure. I'm assuming the answer is no given your comments about this inventory and capacity, but just wanted to check to see if lead times have stretched out at all yet or kind of have remained stable.
Our lead times are still short with the strong majority below 8 weeks. And I think given what we've done in terms of manufacturing capacity and given what we've done in terms of inventory, we will be able to maintain those lead times at those currently attractive levels. Now I think it's also what typically happens that as we move through an upturn is it doesn't take our lead times extending. All it takes is for anybody in our customer supply chain to start extending lead times for the customers to then move to that next phase of the upturn, which is basically replenishing inventory versus just trying to maintain really low levels of inventory. And again, that's what we have not yet seen.
But again, we're not the fact that our lead times are short and are expected to remain short by no means will limit our ability to benefit from that next phase of the cycle. In fact, it's the exact opposite. The fact that we will have product availability as customers start to replenish inventory and put pressure on other parts of the supply chain, we would actually hope to be able to pick up share as we move through that process. Okay, Jim. Thanks for your questions.
We'll move to next caller.
And we'll go next to Joe Moore with Morgan Stanley.
Hi. Thank you. Can you talk about the direction of your fab utilization as you went through this quarter? And you mentioned being happy with the current level of inventory. Do you think you need to keep that flat?
Or how are you thinking about those things?
Okay. Utilization this quarter will likely be about the same on average as what we had last quarter. And in terms of our inventory level, I guess probably the best way to describe it would be from a day standpoint. And on inventory days, we would expect that we're going to land probably flat, maybe even down a little as our revenue increases this quarter. So obviously, we're keeping our inventory well positioned to support future growth.
Do you have a follow on question?
Sure. Can you talk about what you're seeing in the automotive space? I mean, it's been fairly recent, but we've had some weaker data points on end demand in the U. S. Do you think you'll see that?
And if you did see it, over what time frame would you see it?
Okay, Joe. I really don't have any specific data on automotive. It's been a market segment that we've has been driving a lot of growth even over the past few quarters. This quarter, we would expect it to do well, but it's not if I look inside embedded processing, comms infrastructure and the catalog product areas are really the ones that are driving the growth this quarter. So automotive maintaining the strength that we've seen over the last few quarters, not giving any of that back, but again not the driver of embedded processing growth this quarter.
We'll go next to Ambrish Srivastava with BMO.
Thank you, Ron, and I apologize if you already addressed this. Geographically, what are you guys seeing in the business?
We did not address that. And what I would say is just based on kind of where we've what we've done in the 1st couple of quarters of couple of months of the quarter, growth has been led by the U. S, followed by Asia and Europe. Japan is the only region that we've seen sequential decline in the quarter. So again, U.
S. Followed by Asia and Europe with a small decline in Japan this quarter.
Do you
have a follow on, Ambrish?
Yes, I did, Ram. Thanks. The business is a little bit different than it has been in the past few years. So normal pattern for 2Q, what should we be looking at? Thanks.
Okay. Sure. And that is a good question because our business profile has changed with the inclusion of National, our SVA analog business. And also as baseband has declined and obviously it had pretty strong seasonal patterns on its own. So if you adjust out to add in Silicon Valley analog and take out baseband, I'll give you 2nd quarter on average would be up 9%.
So I think if the if you look at our guidance and you make the adjustment for the insurance proceeds that were in the revenue line for Q1, you'll see that this quarter is just above that, right around 10%, I believe, is the middle of our guidance range. So we're well aligned with the seasonal 5 year average. I'll just go ahead and give you the rest of the year if you would like so we can do this once. 3rd quarter then would be 6% on average. 4th quarter would decline 8% and I'll have to put an asterisk on that.
That includes Q4 'eight. If you exclude that quarter, it would be down 4%. And then rolling over to Q1, the 5 year average is down 4%, again, highly impacted by Q1 of 2019. If you take that 1 quarter out of that 5 year average, Q1 would be flat seasonally to 4th quarter. Okay.
Do you I believe that was your follow on, Ambrish. And we'll move to the next caller.
And we'll go next to David Wong with Wells Fargo.
David, are you there?
Yes. Sorry, Ron. Can you hear me now?
I can hear you now.
Great. Thanks very much. Maybe an obvious question, but given that you hit the midpoint that you're reaffirming the midpoint of your guidance, what's the pattern of your sales through the quarter up to now? How much as you expected? And does that mean that you exit this quarter on a business high?
David, I didn't understand everything you said. Could you repeat your question?
Well, with the Pachnup business through the various months of this quarter, much as you expected, and does that mean that each month has been stronger than the last and you expect June to be strongest month so you exit the quarter significantly higher than you started the quarter in terms of business volume?
Okay. So a question about linearity. Our expectation is that June will be the strongest month of the quarter, which is pretty much the case every quarter. As I'll just reiterate what I said before, so there's no confusion. Typically, the final month of the quarter for TI will run-in the upper 30s as a percentage of the total quarter's revenue.
And so it is not a disproportionately strong quarter. And part of that even just has to do with when we book royalties and such in the final month of the quarter as opposed to in the earlier 2 months. So we expect this June quarter to be pretty much like every other quarter, which is a strong June relative to April May, but not stronger than would be typical in a second quarter. So we will come out of the quarter with off of the strongest month, but that doesn't imply necessarily anything about going into the Q3. Do you have a follow on David?
Well, I guess related to that has order momentum grown through the quarter?
I don't want to talk about momentum per se because that gets into more complex math than I think I'm maybe even capable of doing. But what I will say is orders will be up and we have orders and backlog that are growing sequentially as we did last quarter. Okay, David. And operator, I think we have time for one final question. Caller, if there is one.
We'll go next to Uchi Orji with UBS.
Hi, this is Parag for Uchi. Head on, just wondering if you could provide any update on your Windows and on ARM program, like there were a lot of demos in Computex. So any update on that front would be very helpful.
Okay. Thank you, Parag. And sure, I think at Computex last week, many of you may have noted that Toshiba announced their Windows 8 roadmap including 2 Windows RT devices that they're working with TI's OMAP to develop. They announced a roadmap for a clamshell PC as well as a tablet. And again, in both cases, they're working with TI.
Separately, we demoed our we had our own demonstration which showed Windows RT running on an OMAP 4,470 at that same show. And I think most that saw it had some pretty good things to say in terms of the performance of that operating system on OMAP. Do you have a follow on, Parag?
Sure. As far as the timing and the revenue impact from this effort is concerned, when should we expect any revenue from this program?
Yes. Ian Prahag, I don't want to try to get out ahead of our customers in terms of specific or announcement of specific products and when they might ramp that. But I think incrementally, what came out of that show was that in fact TI and Toshiba are working together and then also that we're pretty far along in terms of porting that technology over to OMAP, but I don't really have any forecast to provide separate from what Toshiba might say on their product plans. Okay. And with that, let's wrap up.
Before we end the call, let me remind you that the replay is available on our website. Thank you and good evening.
This concludes today's call.