Good day and welcome to the Texas Instruments' First 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 and thank you for joining TI's Mid-Quarter Financial Update for the first 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 segment or in-market, and I will not address details of profit margin. 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 and 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 and lowered our expected ranges for TI's revenue and earnings from our previous ranges. We now expect TI revenue between $2.99 and $3.11 billion. We expect earnings per share between $0.15 and $0.19 on a GAAP basis. The revenue and EPS reductions are due to lower demand for wireless products. Our estimates for acquisition-related charges and restructuring charges are unchanged and are expected to total about $0.10 per share.
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. Lisa?
Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your touchtone telephone. If you're using a speakerphone, please make sure that your mute function is off to allow your signal to reach our equipment. In the interest of time, as a reminder, please limit yourself to one question and one follow-up. Once again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for a question. We'll now take our first question from Stacy Rasgon with Bernstein.
Hi guys, thanks for taking my question. For my first question, you took revenue guidance down about $100 million on wireless weakness, but baseband in the quarter was only supposed to be about $75 million anyway. This suggests either that baseband essentially went to zero or that you saw a significant amount of unexpected weakness in wireless outside of baseband, namely OMAP and connectivity. Can you give me some feelings for how the weakness within wireless broke out and what may be driving the weakness, particularly in the areas outside of baseband?
Okay, sure Stacy. As I said, there really is only one area that is weaker than we'd expected, which is wireless. That includes both the weakness in OMAP application processors and connectivity products. Outside of our wireless segment, our revenue is tracking consistent with our initial expectation, which is for that revenue to be about flat with what we saw in the fourth quarter. Back to wireless, as you will recall from our January release, we had strong growth in OMAP in the fourth quarter. That was really as we benefited from new product introductions across multiple customers. You know, whenever there's a new product introduction by a customer, there's also an associated one-time surge of revenue as those customers fill their channels with product.
Although we had anticipated lower sequential revenue associated with that non-recurrence of the fourth quarter channel fill, the demand for OMAP is lower than what we had originally expected, as our customers are now rationalizing both their expectations for ongoing demand as well as their associated inventory. The result is that we now expect our wireless revenue to be about $100 million lower than what we'd expected back in January. We continue to expect our baseband revenue to decline about $200 million sequentially. This adjustment is not taking place in baseband. That baseband estimate is the same as what we talked about in January. The adjustment really is across OMAP and connectivity. What's your follow-up, Stacy?
Got it. Just on bookings, last quarter you had said that you saw bookings strengthening in December, and that strength had continued to move into January. Can you give us some feeling what the trajectory has looked like through February and now into March? Does that still give you confidence that you think, I guess, the rest of your broader business is still either at or close to a bottoming?
Sure. Let me just directly on your order question, order trends are good. In fact, we expect both orders and backlog to grow sequentially. To the point of how do we feel about it, is the business still bottoming in first quarter as we talked about in January, we do believe that first quarter is the bottom. Again, we looked at it from a standpoint of the area responsible for this lower guidance is a single market segment, that being wireless. Outside of wireless, we're seeing results that are consistent with our expectations and results that are typical at the bottom of a downturn. For example, we've seen our revenue stabilize. Outside of wireless, revenue flat fourth quarter to first quarter. We've also seen growth in orders returning. Backlog and visibility are improving. Lead times are shorter. We continue to believe that inventory at customers and distributors remain low.
We're planning for sequential growth to resume starting in the second quarter. Okay, Stacy, thanks for your questions. We'll move to the next caller.
We will take the next question from David Wong with Wells Fargo.
Thank you very much. The weakness in connectivity, is it broad-based or is it specific to a small number of customers or devices?
The latter. In fact, what I would say in connectivity is really the same that you've heard us talk about for the last couple of quarters, which is that business, it's come a lot of self-correcting. It's much more diversified now than it was, say, a year, year and a half ago. We do have a couple of customers that make up a significant amount of our connectivity business that have seen their business decline. From an absolute design-win standpoint, where our position is, is secure, I guess I would say, is more stable, maybe is a better word. Some of those programs where we were designed into, we've seen declining business levels over the last few quarters. We're seeing more of that continue. I should also point out the decline in connectivity in the first quarter is less than what we're seeing in OMAP.
The decline is more weighted toward OMAP than connectivity. Okay, do you have a follow-on, David?
No, that's good. Thank you very much.
Okay, thank you. Operator, next caller, please.
We'll now go to Ross Seymore with Deutsche Bank .
Hey, Ron, just a question following up on the OMAP side. Is it specific to just a handful of customers? Is it across the board? I guess, is it really just that their products aren't selling through? Any more color you can provide would be helpful.
I think it's probably on the, let me not talk about how many customers because I'll let those customers report their own business when they report. I'll stay focused more on what we're seeing directly in combination as opposed to breaking out customer by customer. That being said, I think it's probably a combination. It's very typical for coming out of the holiday season that you see inventory adjustments based upon those absolute results during that holiday season compared to those customers' expectations. It's probably amplified a bit in terms of that adjustment when you have a lot of new products that are being introduced by those customers because they don't have a real clear record or history of what sales will look like. They build inventory, they hope for the best, and then in the first quarter, they make the adjustment based on actual results.
That's certainly part of it. I think part of it also is based upon that small amount of history now, they're making some assessment of what demand for those products will look like on an ongoing basis and how much inventory they need to support that level of demand. All of that is blending together to result in the adjustment that we're seeing. It's not, to your question, it's not a specific customer, but let me just leave it at that if I can. Oh, do you have a follow-on, Ross?
Yeah, really quickly, kind of a bigger picture question. You guys historically have done as good a job as any and better than most at forecasting, not only cycles but quarter to quarter. If I look back over the last, I think, three quarters now, you guys have lowered the bar in the mid-quarter update. You found out you actually beat it when you report your results. It seems like the difficulty in forecasting is a little bit higher than it has been before. Is there something that's changed in either the environment or at TI that's made the forecasting a little bit more difficult? What do you attribute that sort of volatility to?
I think it's the market. We've gone through a downturn over the last few quarters. When you have the market going through rapid change, it's more difficult to forecast. There's not a change at this end in terms of the process or anything like that we've gone through for forecasting. I hope what you described is the outcome again this quarter. We're calling it to the best that we can at this point. I'll also point out, if you just go back to the fourth quarter and what took place there, I think everybody in the industry was describing strength in the back half of December. I don't think anybody had that well forecast. The good news is that that's kind of the way upturns will happen, right? You don't necessarily get a lot of notice they're coming. They happen, and then they can happen pretty robustly.
They will also happen somewhat in a distant start. We'll see where we land, but we're giving you our best estimate of where it'll be. Okay, Ross, thank you. We'll move to the next caller, please.
We will now go to Sanjay Devgan with Morgan Stanley.
Hello, Sanjay.
Hey, guys, thanks for taking my question. You know, you guys were talking about the weakness in wireless, but if we back out the wireless business, you talked about the rest of the business being largely in line. Can you talk about the puts and takes across the other end markets? Any end markets that are giving you outside strength relative to what you initially anticipated? Any color there would be really appreciated.
Okay, sure, Sanjay. Let me start with some areas that are, I'll just kind of hit a few that are doing well. Also, maybe touch on the PC market as well, just given its size. Just in terms of some areas that are noteworthy on the, I'll call strengthening side versus, especially what we saw in the fourth quarter. Automotive is one that's doing what I would call exceptionally well. That's probably not news to anybody because the strength in U.S. automotive sales, I think, has been widely reported. As those automotive sales increase and the electronics content in these cars continue to go up, we certainly benefit. If you look at where TI is positioned, we're very well positioned with both our analog and our embedded processing products in products that make cars safer, such as rearview cameras, blind spot detection, and also collision avoidance systems.
We're also well positioned in the navigational and entertainment systems for cars. Both those areas, if you're aware, are seeing rapid penetration and semiconductor content increases. Probably another area that deserves mention is communications infrastructure. You'll recall from our January call that in the fourth quarter, our comms infrastructure revenues declined 40% sequentially that quarter, really as a result of reduced capital spending by North American operators. Although that revenue is not back to where it was in the third quarter of last year, we do expect solid sequential growth this quarter in comms infrastructure. Clearly, it seems like it's declined, but it's turned and it's doing better. Probably a final point that I would mention in terms of areas of strength is our sales of storage products that go into hard disk drives. Customers will grow this quarter as those customers continue the recovery from the floods in Thailand.
I also said I would just mention the PC market. This kind of ties to what we were saying, what I just said about storage. With storage up this quarter, that obviously is reflective of the overall PC market. The other thing I would say, though, is that encouragingly, we've also seen recent demand increases for some analog power products that we ship into manufacturers of PC battery packs. Why that matters is these battery packs have historically been a leading indicator for other products that will ship into PCs on a somewhat delayed basis versus the products going into battery packs. We find that encouraging as well.
That's helpful. Thank you very much.
Did you have a follow-up, Sanjay?
No, I'm good. Thank you, Ron.
Okay, thank you. Let's move to the next caller, please.
I'm going to now go to Chris Danely with JP Morgan.
Hey, thanks, Ron. Just a clarification. Can you just give us your approximate percentage of revenue from the wireless market? When you say wireless weakness, is that handsets or tablets too?
When we talk about wireless, we really are talking the combination of, especially in the context of OMAP, smartphones as well as tablets. The percentage of revenue, if you, let me do it this way. First quarter, I think we've told you everything else is flat. Therefore, the difference between fourth quarter and first quarter is wireless, which should amount to about $350 million. You'll have to check me on that math, but I am pretty confident in that number. We just gave you guidance of what, something like $3.05 at the midpoint. A little over 10% of our revenue in the first quarter will come from wireless.
Do you have a follow-on, Chris?
Yeah. Does this change the TI belief in terms of the slope or the timing of the recovery at all in incentives this year?
Not at all, because again, the adjustment we're seeing is very specific to what I'll describe as a periphery narrow segment of the market. The much broader businesses that we're seeing, whether it's industrial, whether it's the catalog products that go across such a diverse array of applications, whether it's other vertical segments, as I said, revenue is bottoming and profiling as we had expected. Even more encouraging in what we're seeing on the order front and in growing backlogs. There's really no change to our view of the timing or the profile of the recovery. We look at it as we've got an adjustment taking place in a narrow, vertical segment of the market being handsets. Thank you, Chris. We'll move to the next caller.
I will now go to Ambrish Srivastava with BMO Financial Group.
Hi, thanks. Ron, just to follow up on your comments. Is that just to bounce back from the deep sequential decline, or do you think that there's a sustained pattern that you're seeing there?
There was a sustained pattern underway, which is before the decline, which was North American, especially driven by North American consumers consuming incredible amounts of data and the various service operators really just scrambling to try to keep up with consumer demand. For those of you that have gotten emails from service providers talking about throttling data and such, I'm sure you understand exactly what that's about. As that consumer demand has not slowed at all, that's just a very sustained trend going on. Now, outside of the U.S., we do expect to see China, to see India, start adding data capacity as well. Although I will also say that has not yet begun. What we then saw in the fourth quarter was some of those U.S. carriers that had been adding capacity slowed down that capital spending, and we're seeing that now start to resume again.
There absolutely was a soft spot in the fourth quarter just when the carrier stopped spending. It's picking back up, and there's no reason for us to believe that overall trend of consumers consuming more data and service providers trying to keep up with that in terms of just adding 3G and then soon-to-be LTE capacity will continue as well. Absolutely, we believe it's the same. Do you have a follow-on Ambrish ?
Yes, I do, Ron. Thanks. At the Mobile World, Mr. Talagi had a pretty compelling differentiated view, and this is a long-term question on how TI is approaching embedded with OMAP. My question was, how is the mix going to look as we exit this year? Today, it's mostly tablets and handsets. Is that going to matter ending this year, exiting this year, or is it more two years out from now that we'll see more non-kind of what we call traditional OMAP applications in the mix?
I think you will see, by the end of this year, we will have a lot of evidence for you in terms of various programs that are using OMAP outside of smartphones and outside of tablets. I think you heard Greg talk about today, we have more than 100 active customer engagements outside of smartphones, outside of tablets underway today. Now, how fast that revenue ramps relative to smartphones and tablets, I'm going to allow that that can take some time. You know, I think you're going to see over the next 12 months clear evidence of success of our penetration into some of these horizontal segments.
Ambrish, I realize that you were at Mobile World Congress presentation, but just for some of the broader audience, there's a big effort underway to take the OMAP technology that has done so well to date in smartphones and tablets to really leverage that into other horizontal markets. That's completely, and we leverage in multiple ways. We leverage the technology investment that is already in place. Then secondly, whereas smartphones and tablets, you tend to have a pretty narrow customer base. The horizontal market really leverages the breadth and scale of TI's sales force with 2,500 sales and field applications people. We can identify a lot of opportunities just as we do in analog, just as we do in embedded processing. A lot of those customers outside of smartphones, outside of tablets need a lot of the capabilities that are inherent inside of our OMAP technology.
What we especially like about that is, Ambrish, you mentioned it was a differentiated strategy. If you compare what we're doing there and what we're ramping to our traditional application processors' competitors, most of those competitors, their history is that they are very narrowly focused on a few customers in a very narrow vertical market of handsets and smartphones. For them to go pursue kind of the very broad-based horizontal strategy that we're talking about is a huge infrastructure adjustment. The point being, we have a technology we can leverage, and we have the reach and customer footprint on a global basis in place already to go do it. It absolutely makes sense for us. We're excited about that opportunity, and we think you're going to see those results very clearly in the years ahead. Okay, Ambrish, thank you for your questions, and we'll move to the next caller.
We will now go to John Pitzer with Credit Suisse.
Yeah, thanks, Ron, for letting me ask a question. I guess relative to the $100 million shortfall in the wireless business, any way to help us kind of gauge what percent is coming from OMAP versus connectivity or what percent is coming from handsets versus tablets?
Probably not. I think, other than what I said previously, it's more weighted toward OMAP and connectivity. It crosses both smartphones and tablets where, if you just kind of look at, we've talked about in past quarters, the range of new products that were being introduced across both of those spaces. I think the dynamics that I was discussing are common to both of those submarkets. Do you have a follow-on, John?
Yeah, Ron, when you think about the timing of the revenue shortfall, is there anything you guys can do on the OpEx line? Or as we think of the reduction in profitability on the EPS line, is it all coming out of gross margin this quarter?
You're not going to see an OpEx adjustment because of, you know, a very short-term type of revenue fall. I don't think that would make sense for us to go slash R&D or sales force or anything like that in response to that kind of market dynamic. I think, you know, what I guess what I would say, you know, back in January, we gave you pretty detailed guidance for a lot of the lines on the income statement. I don't have a full, you know, line-by-line update for you, but let me maybe make a couple of comments that will help you out. I think if you go back to our January guidance, we talked about, you know, from the revenue and gross profit numbers we gave you, you would have calculated that gross margin would be about 47% of revenue at the middle of our range.
We still expect gross margin to be about 47% at the middle of our new lower range, although certainly on a lower revenue number. Therefore, the absolute gross profit dollars will be somewhat less. Operating expenses, I think, you should assume they haven't significantly changed, nor have our assumptions on restructuring or acquisition-related charges, as I said before. I should also make the reminder that inside of cost of revenue, we have that $20 million of acquisition-related charges in there. Again, that's unchanged as well. Think about 47% gross margin at the new revenue level, OpEx about the same as what we've told you previously, and I think you can probably get, hopefully, all that aligns with what we just gave you in terms of guidance.
Okay, John, thank you for your questions. We'll move to the next caller.
Operator, we will probably need to make this our last caller.
We'll take our last question from Glen Yeung with Citi.
Thanks, Ron. I guess the first question is, any patterns you can tell us about in terms of geographic demand?
Sure. This is just based on quarter to date, but what we've seen so far is the U.S. and Europe are growing while Asia and Japan are declining. That really has less to do with local consumption and more just where products are manufactured, like handsets or tablets or whatever.
Okay, can I ask maybe a slightly longer-term question?
Sure.
You've talked about the potential for recovery. We're already hearing that the foundries are starting to get filled up. I recognize you don't make a ton at the foundries. You know, not all your business is at the foundries. Any concerns that you look at about the potential for capacity tightness or shortages as we progress throughout the course of the years on the foundries?
I think, Glen, one of the considerations is that our overall attendance on the foundries, even though it's for the advanced logic products, we are doing more and more with the foundries. Our mix of advanced logic versus, you know, the technology that's required for embedded processors, specifically microcontrollers and analog products, is just much lower as 1% . More and more of our production becomes in-house because more and more of our revenue comes from analog, where we do all that in-house. That being said, we don't think TI will have a bottleneck with foundries.
One thing I will say, though, is that we do believe that if we get a, what I'll characterize as a typical rebound off of the bottom and the kind of growth that you might expect over the next couple of quarters, consistent with at least our own views of how far and how far down we are at this point versus call end production rates or production rates by our customers, we do believe we can get to a point where semiconductor revenue hits new highs. If semiconductor revenue hits new highs, then we can test the limits of the capacity that's out there. Again, that's a broader industry statement. Of course, you heard us say in the fourth quarter, our utilization level was in the low 50%.
Given the capacity investments we've made over the last couple of years, we obviously believe we're going to be well positioned in that kind of environment if capacity constraints start to impact the broader industry. Did you have a follow-on, Glen?
Actually, yeah, just a quick one. You talked about the handsets, the $100 million that you said is a shortfall. I heard you say the customers are readjusting their demand expectations. Is it fair to say you do not expect that revenue to rebound back and we should just model forward from this lower level?
No, I don't think, I think it'll come back. I don't know how, it's certainly probably in the very near term not going to bounce back to the fourth quarter level because, you know, at a minimum, that had channel fill in it. It's probably, you know, first quarter also has inventory correction in it impacting it. It should come back, but somewhere probably between where we are at first quarter and where we were in fourth quarter if you look at kind of upcoming quarters. One thing, let me just, nobody asked this question directly, but I'm going to address something. We keep recently, especially, get asked about margins. Especially because in the fourth quarter, we've talked about that, you know, if you take our gross margin and you adjust it for position-related charges and a baseband inventory charge, that gross margin was about 50%.
You'll recall that, in the January call, we discussed that the closest recent utilization comparison is what would have been second quarter when utilization was about five percentage points higher than what we had in the fourth quarter. In second quarter of 2009, gross margin was four to five points below the gross margin that we saw in the fourth quarter. Summarizing that, last quarter, we were operating at a higher gross margin even though utilization was lower. I bring this up because a lot of times people are trying to, you know, I think several years ago, we talked about 55% gross margin, 30% operating margin as goals. In a lot of different meetings, people ask about, are those still valid goals based upon kind of that example we just gave?
Let me just comment that I think going forward, it's clear we're operating at a new level on the margin front. That being said, our focus internally really is to significantly outgrow our markets, not try to, you know, we're not focused on the margin line. We're mostly focused on the revenue line. We're confident that if we grow revenue in analog and embedded processing, we're all going to like the margins that will result. Again, the knob we're focused on turning up and turning up aggressively is revenue growth, revenue growth in some margin-rich areas, those being analog and embedded processing. Again, just based on the number of questions that we've been getting and meetings outside of this call, I wanted to go through that.
I guess another thing I would say is that most of you, I think, have probably received an invitation for our May 3rd Investor Meeting in New York City. If you haven't already responded, please, and I know a lot of you have, but if you haven't, please do so to secure your place. We really hope to see you there. Before we end the call, let me remind you that the replay is available on our website. Thank you and good evening.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.