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 Slaymaker.
Good afternoon. Thank you for joining TI's mid-quarter financial update for the second 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 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 description. We have narrowed our expected ranges for TI's revenue and earnings from our previous ranges. We now expect TI revenue between $3.28 billion and $3.42 billion. We expect earnings per share between $0.32 and $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 you. Please press star one on your phone to ask a question. Make sure your mute button is disengaged to allow your signal to reach our equipment. 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. 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 first quarter continues to recover in the second quarter, 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 third quarter of 2011. Probably another major market worthy of mention would be computing, where I would describe that sales into computing applications are somewhat mixed, inside of that, our sales of storage products into hard disk drive customers, we expect to grow again this quarter. Really this quarter, we believe that things have come back into sync in terms of our shipments are really reflecting a fully recovered situation in Thailand from that flooding situation. Do you have a follow-on, Vivek?
Yes. Thanks, Ron. 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 in the two. 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 six and a half weeks, and that, again, is low by our historical standards. What we've noticed is that both distributors and customers are really reluctant to build inventory, given 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. I'd also extend that to we're well-positioned with available manufacturing capacity, really to support whatever demand situation develops.
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, our risk there is low. In short, the upside opportunity really more than justifies the downside risk. Okay, Vivek, thank you for your questions. Operator, we'll move to the next caller.
We'll go next to Tore Svanberg with DNB.
Yes, thank you. Ron, could you talk a little bit about linearity, either by bookings or billings or both?
Tore, I really don't have the month-by-month or, I guess the prior caller was even hitting on week-by-week linearity. Most quarters for TI, the last month of the quarter tends to be our strongest, even so, typically the last month will be still in the upper 30s as a % of revenue in the quarter. 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. Down inside of that, it's really the North American market and deployments of WCDMA infrastructure is what's driving it. 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. We had a little bit of a, what I'll call a glitch back late last year, with some of the operators tapping on the brakes. It seems like we're out of that mode and back into growth again. Okay, Tore, thank you. 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 one distribution contract from NatSemi?
Some of it is consignment. Certainly if you look at, Stacy, back multiple years of history, you would say that we're probably down a good couple of weeks versus where we would've been, say, three years ago, because of the consignment program. Again, we have about 30% or so of our distribution revenue now being supported by consignment inventory programs. When I talk about six and a half weeks is low by historical standards, I'm making the adjustment already to comprehend the consignment program. 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, we're low by those adjusted standards as well. Do you have a follow-on, Stacy?
Yeah, I do. I was wondering if you could give us a little bit of your thoughts on the departure of Gregg Lowe.
Well, Gregg obviously is pursuing an opportunity that he believes will be in his best interest. Gregg is a great manager, a great leader. He was well respected at TI, we wish him the best. We don't wish him too much best, because obviously we're competing with him at Freescale, 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 Danely with J.P. Morgan.
Hey, thanks, Ron. Last quarter you commented, I think, that your book-to-bill was tracking above one so far. Can you just give us the comments on how book-to-bill's tracking so far? Have you seen any changes or fluctuations in bookings for next quarter?
You're right, book-to-bill was positive last quarter. 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 to specifically comment on book-to-bill and maybe just describe more what we're seeing in terms of orders. 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 months of the quarter here. Okay, Chris, do you have a follow-on?
Yeah. Can you give us any progress or update on how the SVA is doing versus your overall Analog business?
We continue to be encouraged with the progress there, I'd really probably rather wait till the end of the quarter to start getting into the various subsets of Analog. Everything that we've seen in terms of the integration of National Semiconductor, the customer response to the acquisition and integration inside of our Analog business continues to be very encouraging to us. Green lights there, 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, let's move to the 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. 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 million to $100 million per quarter in general this year. 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. Do you have follow 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 distis versus your OEM customers?
Not dissimilar on either front. 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 distance anyway. In general, pretty similar. Okay, Ross, thank you, we'll move to the next caller.
We'll go next to C.J. Muse at Barclays.
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, what? Starting third quarter of last year, continuing through first quarter of this year, our customers were going through an inventory correction and therefore, we were under shipping their demand. What we're seeing in second quarter is that we've begun the process of moving back toward their end demand level. The reality is, 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. 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.?
Yeah, real quickly, on the Embedded business, can you share whether that business is tracking in line with your overall guide here in Q2 or above or below? Any color there would be great.
Well, I would say Embedded is growing. In terms of versus the guidance, I'd probably not like to get into all that detail. 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. Embedded overall is doing very well, mostly driven by comms infrastructure, and again, also driven by catalog. Okay, C.J., thank you, we'll move to the next caller.
We'll go next to Jim Covello with Goldman Sachs.
Hey, Ron. 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 to 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 first quarter. I don't know that you probably, and you might assume that trend line is a rough proxy for end demand, but obviously, it's not going to be a perfect proxy. I'll probably hold off on making any extensions on whether we will still be able to benefit just from the movement back toward end demand in third 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 eight weeks. 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. 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. Again, that's what we have not yet seen.
Again, 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, thank you for your questions. We'll move to the next caller.
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 move through this quarter? 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. In terms of our inventory level, I guess probably the best way to describe it would be from a day standpoint. 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. 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? 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? If you did see it, over what timeframe would you see it?
Okay, Joe. I really don't have any specific data on automotive. It's been a market segment that's been driving a lot of growth even over the past few quarters. This quarter, we would expect it to do well. If I look inside Embedded Processing, comms infrastructure, and the catalog product areas are really the ones that are driving the growth this quarter. 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 particular quarter. Okay, Joe, I believe that was your follow-up. We'll move to the next caller.
We'll go next to Ambrish Srivastava with BMO.
Thank you, Ron. Apologize if you already addressed this. Geographically, what are you guys seeing in the business?
We did not address that. What I would say is just based on kind of what we've done in the first 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 a sequential decline in the quarter. 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. Ron, thanks. The business is a little bit different than it has been in the past few years. Normal pattern for 3Q, what should we be looking at? Thanks.
Okay. Sure, that is a good question because our business profile has changed with the inclusion of National, our SVA Analog business. Also, as baseband has declined, obviously, it had pretty strong seasonal patterns on its own. If you adjust out to add in Silicon Valley Analog and take out baseband, I'll give you second quarter on average would be up 9%. I think if you look at our guidance you make the adjustment for the insurance proceeds that were in the revenue line for first quarter, you'll see that this quarter is just above that, right around 10%, I believe, is the middle of our guidance range. We're well-aligned with the seasonal five-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.
Third quarter would be 6% on average. Fourth quarter would decline 8%. I'll have to put an asterisk on that. That includes fourth quarter 2008. If you exclude that quarter, it would be down 4%. Rolling over to first quarter, the five-year average is down 4%, again, highly impacted by first quarter 2009. If you take that one quarter out of that five-year average, first quarter would be flat seasonally to fourth quarter. I believe that was your follow on, Ambrish, we'll move to the next caller.
As a reminder, it is star one for your questions, 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, given that you've hit the midpoint, that you're reaffirming the midpoint of your guidance, was 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?
With the pattern of business through the various months of this quarter, much as you expected, does that mean that each month has been stronger than the last, you expect June to be the strongest month, you exit the quarter significantly higher than you started the quarter in terms of business progress?
Okay, 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. I'll just reiterate what I said before, 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. It is not a disproportionately strong quarter. Part of that even just has to do with when we book royalties and such in the final month of the quarter, as opposed in the earlier two months. We expect this June quarter to be pretty much like every other quarter, which is a strong June relative to April and May, but not stronger than would be typical in a second quarter.
We will come out of the quarter off of the strongest month, but that doesn't imply necessarily anything about going into the third quarter. Do you have a follow-on, David?
Well, just 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. 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 Uche Orji with UBS.
Hi, this is Parag for Uche. Hey, Ron. Just wondering if you could provide any update on your Windows on ARM program. There were a lot of demos in Computex, so any update on that front would be very helpful.
Okay. Thank you, Parag. Sure. I think at Computex last week, many of you may have noted that Toshiba announced their Windows 8 roadmap, including two 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. Again, in both cases, they're working with TI. Separately, we had our own demonstration which showed Windows RT running on an OMAP 4470 at that same show. 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?
Yeah. Parag, 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. I think incrementally, what came out of that show was that, in fact, TI and Toshiba are working together, also that we're pretty far along in terms of porting that technology over to OMAP. I don't really have any forecast to provide separate from what Toshiba might say on their product plans. Okay. 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.