Good day, everyone, and welcome to the Texas Instruments second quarter 2011 mid-quarter update conference call. At this time, I'll turn the call over to Ron Slaymaker. Please go ahead, sir.
Good afternoon, and thank you for joining TI's mid-quarter financial update for the second quarter of 2011. 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 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 and lowered our expected ranges for TI's revenue and earnings from our previous ranges. We now expect TI revenue between $3.36 and $3.50 billion. We expect earnings per share between $0.51 and $0.55. The reductions are due to lower demand from a single wireless customer, where most of our sales are baseband products. 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?
Ladies and gentlemen, if you'd like to ask a question today, you may signal by pressing the star key followed by the digit one on your telephone keypad. That's star one for questions. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take our first question today from Uche Orji with UBS.
Thank you very much. Ron, the impact from this single customer last quarter, you also had one customer that created an inventory issue for you. Should we expect this to be a problem also this quarter, and will that entail you having to take a write-down?
Okay, Uche, what I would say is we do expect to build inventory this quarter, with most of it associated with the significant demand that we're seeing from our largest customer here. Similar to last quarter, where I think we said at that point, if I recall right, about a third of the inventory build was baseband product associated with a forecast revision from this customer. We'll see similar. I think we, as you understand, are in an end-of-life process with this customer on the product. Although, as we've talked about before, this is more a customer performance in the market issue. This is not a competitor coming on board to displace Texas Instruments in these handsets. Our expectation is we have another probably six quarters, basically through the end of 2012, as we've described before, of support to provide for this customer on these products.
The risk of obsolescence or write-down is not there. We fully expect to be able to ship this product, although clearly we'll be shipping it later than what we'd expected when we build it.
Jeff, on Uche? Yes, I do. I don't know how much you can tell us about what's happening in other areas of the business, with things like the ISM rolling over, which tends to be a problem for the rest of the industrial product and business. Any kind of update you can give us as to what's happening within the industrial product and business right now?
Okay. In fact, why don't I just kind of walk through some of the end markets overall if I can. I think I've commented on handsets already. In communications outside of handset, communications infrastructure revenue is doing well this quarter, with demand continuing to be driven, as we've seen in the past, by data capacity expansion, in this case specifically in North America. In computing markets, I would say most of our PC-related revenue is tracking flattish compared with the first quarter. I think that's pretty much similar to what you're hearing from others in our industry and is probably also similar to what the market overall is tracking. Tablets continue to experience strong growth, and we're participating in that. From a consumer end market, I would describe it as mixed. Products like e-readers are strong.
Product areas like televisions and game consoles, where we have exposure, I would describe as relatively slow. To the root of your question, which was industrial, I would describe that market as continuing mostly strong. Areas such as solar, motor drives, e-metering are solid. Related there is automotive. Automotive, I would say, is mixed and very manufacturer or customer dependent. The Japanese automotive manufacturers continue to be impacted by the earthquake. I would say there are many other automotive manufacturers that are seeing supply chain disruptions in the quarter. Again, some customers doing better than other customers depending upon, you know, are they in Japan or outside of Japan and depending upon who is in their supply chain. Okay, Uche, thank you for your questions, and let's move to the next caller.
Our next question today comes from Stacy Rasgon with Sanford Bernstein.
Hi, Ron. Thanks for taking my question. Regarding the shortfall related to Nokia, can you give us some feeling? It's a $120 million step down at the midpoint of your prior guidance versus now. Is it correct to say that the bulk of that's coming from Nokia, I think you said? Can you give us some feeling for whether the bulk of that $120 million actually is baseband? Is there some of it OMAP connectivity? Can you give us some feeling for how much of it might be wireless revenue that's going to Nokia that may not be baseband?
Okay. In fact, I would say, you know, characterizing it as the bulk of it being Nokia is probably understating. You'd probably be closer to say all of the change in our, call it the middle of the range update versus what we were previously was associated with that customer. That's not to say there aren't other pluses and minuses. There always are in a quarter, but you know, this quarter those would have netted to neutral. In fact, we would have been narrowing to our prior midpoint had we not seen the adjustments in demand from that one customer. You're right that it goes beyond baseband. In fact, probably the best way to describe it is that the adjustments we're seeing from them really reflect broadly lower demand across the various products that we sell to that customer.
Certainly, as baseband is the largest part of our sales there, it was the most affected, although areas such as connectivity, OMAP, and even analog to some degree were all affected, but clearly to a lesser extent. The majority clearly is baseband. In fact, probably the strong majority would be baseband, but some of those other areas were affected as well. I guess, you know, Stacy, what I would say on that is, you know, the silver lining is that, as you probably noted, baseband is rapidly falling as a percentage of TI's revenue. As baseband declines, you know, our customer base continues to diversify and becomes a better balance. In fact, for our non-baseband products, no single end customer will make up more than 5% of our revenue in the first half of this year.
Clearly, the quality not only of our portfolio is improving, but also the quality of our customer base from a diversity perspective and a balance perspective is improving as well. Jeff, on Stacy?
I do. I do. If I look at now your new, I guess, EPS guidance in light of your new revenue guidance, it doesn't feel like you've made any significant changes to your margin assumptions based on where you're coming out in the revenue range. Given the significant weakness that you're seeing in wireless, I might have expected your overall gross margins to be a little stronger than you might have seen before. Are you seeing any sort of change in your margin, your gross margin structure, either from the wireless rollout at Nokia or any sort of changes in terms of your assumptions from the cost impact from Japan, which I think was about $0.05 or about $80 million that you guided to last quarter?
I think you're right in your assumption that there's always the kind of moving pieces associated with margins, but not enough to really significantly impact the assumptions we've made as we've moved through the quarter. Your comment on the Japan impact is correct in that it's unchanged. I think we came into the quarter describing that we would expect to have about $0.05 of earthquake-related costs in the quarter. That estimate is still approximately correct. Those costs include things such as the underutilization expense that we would incur from having our manufacturing assets only partially loaded, various repair costs over there, the cost of the recovery teams that we've assembled from across the world, and other miscellaneous one-time costs as well. Okay, Stacy, thank you for your questions, and we'll move to the next caller.
We'll take our next question from Shawn Webster with Macquarie.
Thank you. I was wondering if you could share your view on channel inventories, and to the extent that you can, where you think that they're too low or too high right now?
Okay. Let me just kind of provide some more general comments on distribution, and then I'll specifically hit inventory. From a resale perspective or sales out of the channel, out of the distribution channel, we expect resales to be up probably in the mid-single-digit range on a sequential basis. With that, we really expect little change in distribution inventory levels. That comment is on absolute inventories from a days or weeks perspective. There's probably a few days reduction relative to the first quarter, but absolute inventory levels should hold steady on resale growth in the mid-single digits. Jeff, on Sean?
Yeah, I was wondering if you could share with us, like, what might be happening with your lead times, and to the extent you can, what's going on with your book-to-bill ratio? Thank you.
Okay. Lead times I would describe overall as at normal levels, although, you know, clearly there's the exception for those products that were sourced from Miho, which is our Japan factory, which is, you know, still in recovery process over in Japan. Clearly those lead times are extended. Pricing, I think, was your second question. I'm sorry, it was a book-to-bill question. As usual on that one, Sean, we'll just wait until the end of the quarter. Any metric that has a numerator and a denominator that are both variable gets too tricky to call it at this point in the quarter, so we'll wait until the end of the quarter to give you that data. Okay, Shawn, thank you. Let's move to the next caller.
Our next question comes from Chris Caso with Susquehanna Financial Group.
Hi, thanks, Ron. I just wonder if you could address one of the concerns I think some folks have had after the earthquake in Japan was the prospect of customers ordering ahead, just being worried about not getting enough product and seeing some of those order rates potentially slip off later on. I just wonder if you could weigh in on that and give us your perspective of what you guys have seen so far.
If you look at just order trends, orders are, I guess I would say they're solid. They're not exceptionally strong. We expect they'll be up from last quarter, where we did have strong growth, but I would say just a solid increase in orders. I think customers clearly are concerned about getting product, but at the same time, I believe most would say that TI has done a pretty good job communicating our status. The alternatives such as factory, for customer, most of the product that we had manufactured in Miho, we now have in production at other TI factories, such as RFAB, and the customers will need to requalify that product on their end. They clearly understand our status in Miho recovery, and they also understand the various alternatives that they have in terms of qualifying, for example, product out of RFAB.
I believe we are getting a reasonable perspective on their demand. Customers understand if they communicate reasonably with us on their demand, then things go a lot better in terms of the two-way dialogue in terms of our status to be able to support that demand. I can't say it's non-zero risk, but it's a risk that we believe we have well understood and comprehended here. Do you have a follow-on, Chris?
Sure. I realize it's early at this point, but whatever kind of color you can give with respect to your customers' feelings on, say, going into the back-to-school season now, just to get a sense of general tone from customers. We're obviously all worried about what may be going on with the macro situation right now and just wondering what customers are telling you.
I think we came into the quarter describing that, had it not been for Japan, we had some pretty robust expectations for second quarter demand. We gave that a haircut, both based on our expectations for the Japan impact on demand, as well as, frankly, our ability to supply with some of the disruptions that we saw with our Japan factories. I would say outside of the one wireless customer that I discussed, demand is generally tracking very closely to what we expected when we came into the quarter. If I just kind of walk through things by segment, analog and embedded processing, we expect both of those areas to grow this quarter compared with the first quarter. I think if you look at the wireless, wireless overall should decline. Frankly, core wireless, so excluding the baseband, will decline.
If you were to remove the impact of that one customer that we discussed, core wireless would have been up in the quarter. If you go into our other segment, our expectation is that it will grow. Although, at the same time, I have to quickly remind you that our calculated revenue typically grows more than $80 million in the current quarter or the second quarter as our various retailers prepare for back-to-school. Generally, I would say with the exception of, frankly, one customer, things are tracking very closely to our expectations. Your point on back-to-school, I think we said coming into this quarter in our April call that we had strong expectations for second half. We continue to expect a strong second half. We look at underlying consumer corporate demand. We think they're strong.
Maybe on top of that, and certainly, we would believe that by the time we get into second half, most of our Japan supply constraints will be resolved. The impact on our customers in Japan and customers outside of Japan from a supply chain perspective, that whole Japan event will be largely behind us at that point. Finally, I would say, by the time we get into second half, our baseband revenues, you might guess, will be smaller and therefore should be less disruptive as well. Things going well with the exception of that one handset customer. Chris, thank you for your questions, and we'll move to the next caller.
We will go next to Tore Svanberg with Stifel Nicolaus.
Yes, thank you. Ron, could you talk a little bit about linearity in the quarter? Were April and May sort of consistent with what you usually see from a seasonal perspective?
Tory, I will plead ignorance. I believe linearity has... Actually, I don't even want to comment because I don't know April versus May and kind of the month-by-month or week-to-week buildout. Let me just hold off on that. I will say that we will have some output from our Miho factory that will be translating to revenue shipments in the second half of June and then continuing through third quarter. That would cause, you know, some nonlinear strength, I guess, is the best way to describe it. Other than that, that's the only real item of note that I would make. Jeff, on Tory?
Yeah, the follow-up that you've commented on product line and in market, but just can you also add all the color on regions, just so we understand where there's relative strengths and weaknesses, please?
Okay, you bet. I think as you might expect, we expect Japan will be down and down at a double-digit level. There clearly is the weaker demand in that particular region. Outside of Japan, I would describe the U.S., we would expect to be up solidly and then both Asia and Europe probably more flattish to the last quarter. U.S. up solidly, Asia, Europe flattish, and Japan down double-digit levels.
Okay, Tory, thanks for your questions, and we'll move to the next caller.
Our next question comes from Jim Cavello with Goldman Sachs.
Great. Thanks so much for taking the question, Ron. If I could just follow up on that question about linearity, I know you said you didn't have all the data, but I guess one of the distributors commented that April was very strong and May was a lot weaker from an orders perspective for them. What I'm trying to get a sense of, if orders are okay so far quarter to date, was that a real strong April and a real weak May, or was it okay in both months and how does that fend so far in June? I know you sort of said you didn't have the data, but any incremental color you can give there?
Let me be more direct. I don't have the data. I have not looked at linearity as we progress through the quarter. That's not trying to hide because we don't like the data. I just haven't looked at it.
Maybe for my follow-up, if I could ask you, would it surprise you that one of the big distributors kind of has that linearity in their business, the real strong April and real weak May?
I've only looked at the total. As I said, I think distribution, you know, we would say mid-single digits is a pretty good quarter rolling forward for them. You know, their linearity, if I haven't looked at it for us, I haven't looked at it for the distributors either, Jim.
Okay, Jim, thank you. I think that's kind of, that was your follow-on. We'll move to the next caller. Thank you, Jim.
Our next question comes from Cody Acree with Williams Financial.
Thanks. Hey, Ron, can you give a little update on the progress of repairs in Japan and maybe some of the transition product outside of Japan?
Cody, I'm sorry, you were kind of breaking up there. Something about transition outside of Japan.
Yeah, I wanted to tell speakers just some of the repairs in Japan, and then also the transition of product outside of Japan.
Okay. I'll answer a question that, so basically you're saying what's the status of our recovery of those factories in Japan? Okay. If that wasn't your question, that's the one I'm going to be answering here. Basically, Aizu is back to full production, and we really ramped that during the month of April. I would say there's probably some lost output there early in the quarter, although now that's behind us. We also began to ramp Miho mid-April. Its production ramp is proceeding well. In fact, I would describe that as ahead of our earlier expectations. At this point, we expect to have Miho essentially at full production by the end of this quarter, although there will be some residual production ramp that will carry over into the third quarter, really tied to some specific equipment that we're still waiting for delivery on.
Please remember, Cody, that I'm talking about production starts, and there's some lag time, probably of, oh, probably on average a few months between when we start a wafer and when that product then ships for revenue. For the most part, Miho's ramp through the second quarter implies a revenue ramp in the third quarter more so than an impact in the current quarter. As I said before, we have alternate wafer fab, including RFAB. I think one of the last I saw is something like 80% of the product at Miho we had now sourcing at alternative fab. That process continues to ramp. It will be a combination of recovery both at Miho as well as these alternative factories. Okay, Cody, do you have a follow-on question?
Yeah, real quick. Nokia down as much as they've been here recently. I guess it was pronged at the end of 2012. I guess, when can we expect that revenue to fall to the point that it really gets to be a negligible impact to revenue on any volatility quarters?
That is an interesting question. I think what we would expect this quarter is probably, you know, if you go back even to the fourth quarter, we were, and in 2010 overall, baseband was 12% of our total revenue. The fourth quarter level was 12%. We expect the second quarter is probably going to be about half of that level. I'll let you define for yourself what is negligible, but clearly it has fallen off quickly and is getting to a pretty small number, I would say, even today. Okay, Cody, thank you. We'll move to the next caller.
We'll take our last caller.
This will be our last caller, please.
Okay, great. We'll go now to Christopher Caso with JPMorgan.
Hi, yes, this is Venk. Ron, thanks for taking my question. I think earlier you alluded to some strength in the second half of the year, driven by both corporate demand as well as some back-to-school demand. If you look at the specific end markets, do you see, for example, in wireless infrastructure or industrial being pretty strong throughout the rest of the year? Any color you can add on that would be very helpful.
Okay, Venk. I don't think we probably want to start narrowing down the more general statements that we've said by particular end equipment. I would say that we're not, when we talk about strength in the second half, we're not saying a particular market segment. The nature of analog and embedded processing, as you would ascertain even from what I said when I described that no single end customer will make up more than 5% of our non-baseband revenue in the first half of the year. Clearly, these are very broad-based, diverse businesses.
Our ability to grow in those markets at rates that go beyond just the rate of the market, which, by the way, we think the market will be doing well based on our views that enterprise spending and consumer spending that, to some degree, has been masked this quarter in our results based on Japan and the wireless customer. As those come through, and maybe even some catch-up from Japan falling out as we move into the second half, it's those types of things that will be able to drive our growth. We absolutely view this market overall as entering into a stronger period. As we've said numerous times to you before, our expectation of our own results is that we will be tracking well above the market in our core businesses. Do you have a follow-on, Venk?
Yes, thanks for the color on that. Any update on the National Semiconductor acquisition?
Sure. I guess I would say that we continue to make good progress. We expect, as we did initially when we announced the deal, that the transaction will close before the end of the year. I think, as you saw from a press release back in late May from Texas Instruments, we have now cleared the U.S. antitrust review in May, which was an important step. We still need regulatory clearance from, I believe it's seven non-U.S. jurisdictions. National Semiconductor still needs approval from its shareholders. I believe they have that meeting and vote scheduled for June 21, 2023, so another couple of weeks here. In both of those cases, the regulatory clearances and the shareholder votes, we certainly expect a successful outcome from all of those.
I would also note that a few weeks back, we issued $3.5 billion of debt at what we consider to be attractive interest rates. In fact, I think the weighted average of all the fixed-rate notes that we have is currently about 1.5%. Those were for terms ranging from two to five years. The point being, our financing for the transaction is also in order. Everything is proceeding very well. As I said, we expect that to close here before the end of the quarter. Okay, Venk, thank you for your questions. Before we end the call, let me remind you that the replay is available on our website. Thanks.