Good day, and welcome to the Texas Instruments Third Quarter 2013 Mid Quarter Update Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Ron Slemmaker. Please go ahead.
Good afternoon. Thank you for joining TI's mid quarter financial update for the Q3 of 2013. Dave Paul from our Investor Relations team is also joining me today. 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, we will not provide detailed information on revenue trends by segments or end markets and we will not address details of profit margins.
In our earnings release at the end of this 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 and relevant non GAAP reconciliations 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 around the middle of our previous ranges. We now expect TI revenue between $3,150,000,000 $3,290,000,000 We expect earnings per share between $0.51 dollars and $0.55 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 the opportunity to ask a follow-up question. Operator?
Thank We'll take our first question from James Covello with Goldman Sachs.
Good afternoon and thanks for taking my question. This is Gabriela Borges on behalf of Jim. Understanding that you're narrowing to the midpoint with this update, could you give us any color on what you're seeing in the various end markets in the quarter? And if any verticals are tracking incrementally better or less than 6 weeks ago? Thanks.
Okay. Well, what I would say is as you might guess with narrowing to the middle of the range, the quarter is generally tracking with our expectations. And I would say that's both at the company level as well as within various major product lines and end markets. We had expected and I think we explained this even back in the July call that we had expected that the first half growth that we had seen in the industrial and automotive markets would continue into the 3rd quarter and in fact it has. We also believe that the recovery in the communications infrastructure market that began in the second quarter would continue into the Q3 and it has.
Finally, we expected that some of the areas of weakness in the Q2 that were driven by customers that were reducing channel inventory in that quarter ahead of new product launches, we expected that demand would likely recover as those new product launches occurred. And I think in the July call, we specifically noted that this included customers in the handset market as well as game consoles and notebook computers. And I would just note that all of these areas are growing again this quarter. Do you have a follow on?
That's very helpful. Thank you. As my follow-up, could you comment on linearity of order patterns quarter to date? Thank you.
Okay. It's not our usual practice to discuss linearity at this point in the quarter. So I'll stick with that practice here today and any comments we have on linearity we would make in the October call. Okay. Thanks for your questions and we'll move to the next caller.
We'll go next to Stephen Chen with UBS.
Hi. Thanks for taking my question. Question on the common infrastructure. Can you discuss whether it's primarily your DSP products or is it other product areas within your product portfolio that's seeing the benefits of common infrastructure growth this quarter?
Dave? Yes. Stephen, if you look at our comm infrastructure, we ship really a broad set of products. So we'll see the different businesses inside of analog ship product into comms infrastructure. And if you look inside of embedded processing, we've got a line of processors that sit inside of that as well as our custom ASIC.
So the profile of those products of course will be dependent on the customer, but we are seeing a benefit to revenues across a wide range of product categories.
Do you have a follow on to Steven?
Yes. In terms of your fab utilization rates, the plan that you outlined at your last earnings call, is that tracking the plan? Or are there any changes at this time? Thank you.
Yes. You bet, Stephen. We expect average utilization to be up slightly this quarter as we had expected.
Okay. Thank you for your questions, Stephen. And we'll move to the next caller.
We'll take our next question from Timothy Arcuri with Cowen and Company.
Hi, thanks. Ron, can you talk a little bit about book to bill and order trends throughout the quarter? Thanks.
Okay. I guess Tim what I would say on orders in general they've been solid this quarter. That was solid this quarter. And our backlog has continued to expand quarter to date. So therefore quarter to date book to bill is greater than 1.
That being said, I think as most of you have modeled, our 4th quarter revenue typically seasonally declines due to the post back to school drop in our calculator business. So based on that, we would expect that and it would be typical for the backlog gains to likely diminish somewhat as the quarter winds down. So exactly where we land, we'll have to report at the end of the quarter, but positive quarter to date, but likely to get smaller before the quarter ends because of that. Do you have a follow on Tim?
Sure. And just to sort of go through what is normal seasonal for Q4. So semis are typically flat Q4 and then you subtract off about 300 basis points for the calculator business. Is that the right way to think about what a normal seasonal Q4 would be?
I think that's very consistent with our view. If I just go through the data, usually our calculated revenue declined by about $100,000,000 sequentially following the Q3 back to school period. So as you noted that within that $100,000,000 would then negatively impact the company's growth by about 3 percentage points in the Q4. So if I just look at historical averages on a 5 year basis, the sequential growth for the 4th quarter is a negative 8%, but that also has a range of minus 26% to plus 4%. And I'll also remind you that Q4 2018 really was an outlier period.
So maybe it's more useful just to look at the last 4 years average where the decline is 4% and that's largely explained by our calculator seasonality. So that's a long way of saying the same thing that you said to begin with. All right. Thanks for your questions. And we'll move to the next caller.
We'll go next to Glenn Young with Citi.
Hi. It's Adeline calling in for Glenn Young. Ron, can you talk a little bit about your visibility and sort of like where is the relative source of strength?
And I'm not Adelina, are you talking about when you say where is relative source of strength? Is that an end market question?
It's quite a lot like where is your visibility strongest and in what end market, if you can think about that way.
Okay. I understand. I don't really have that breakout for you. So I know the overall order trends, but I don't have how much backlog in terms of time period by end market. So I can't really help you with that one.
Do you have a follow on, Adelene?
Sure. Relative to your infrastructure comments earlier, can you just sort of break it out between wire and wireless and also by geography? And anything you are seeing different than 6 weeks ago?
Yes. I'll take that one Adelene. I'd say that if you look at our comms infrastructure revenues for the company in the first half that represented about 14% of our revenues overall. I don't have a detail underneath that between wireless and wireline. If I were to make a stab at it, I would say that the majority would be tilted towards the wireless part of the industry.
And the wireline would include things like IP phones and videoconferencing, media gateways as well as the traditional networking and telecom equipment. So and then by geography, from a wireless standpoint, I would just say that we're well positioned across all of the major OEMs that we service and that ship into that industry. So we'll benefit. We're seeing benefit as an example this quarter as China looks like it's picking up. You heard us talk about last quarter that we benefited primarily in the U.
S. As the U. S. Carriers increase their spending.
Okay. Thank you, Adelene. And we'll move to next caller please.
We'll go next to Will Stine with SunTrust.
Thank you for taking my question. I'm hoping you can shed some light on the embedded processing segment. If you can talk about demand trends there in particular relative to your burgeoning microcontroller business? Thank you. Sure Will.
So embedded processing should grow sequentially driven especially by strength in industrial and the automotive markets. And we're encouraged specifically because of the diversity of that growth. And we see that growth really from a wide range of product lines and end markets. So that's inclusive of microcontrollers and we're starting to see some of the benefits of the investments that we had made there. Do you have a follow on Will?
Yes. Actually related to the same segment, if you wouldn't mind commenting you were at a low point you were at a low point a couple of quarters ago. It's recovered a bit in the last quarter. Any commentary either from a short or a long term perspective in terms of your path to these much higher operating margins that you've talked about in that segment? Yes.
Well, I think if you look at the segment and look at where we've come from, a few things were pressuring the operating margins of that business. And the first was obviously as we look back a few quarters, we're operating in a very weak environment and so that was pressuring the operating margins. And additionally, as you heard us talk about before, we've stepped out and made some significant investments in microcontrollers both in R and D increasing the number of design teams that we've had in place as well as field application resources. And what we're beginning to see now in the growth is a result of those investments and we're encouraged by it. So I think that we believe that even last quarter you saw significant increases in operating margin in that business.
We believe that we'll continue to see that type of progress this quarter as we move forward and we're on a path to have that being a good contributor to TI at a company level.
Well, we appreciate your call. Next color please.
We'll go next to Christopher Rolland with FBR.
Hey, guys. How are you? So I wanted to talk a little bit here. You said last quarter notable expansion in gross margins. So given the EPS guidance, I still imagine that holds true, but perhaps you could quantify that a little bit more now that we're a little further through the quarter here?
Chris, there's no change to our view of the breakout. I think we give you revenue. We've talked about operating expense. Our expectation is that it would be a down a couple of percentage points and we continue to believe that. I think we identified that acquisition and restructuringother will be right about $100,000,000 and we continue to expect that.
So and I think somebody in the July call did some quick math and said they were coming up with about a 54% gross margin, which we affirmed was in fact the correct math. So again, no change to our views on any of that. Again, gross margin benefits as lower margin wireless continues to decline as higher margin analog and embedded processing products continue to grow as we hold our capital expenditures stable at low levels of 4% or thereabouts. The depreciation, which I think we said in July for the trailing 12 month period prior was more than 400 basis points above the capital expenditure level as a percentage of revenue. That will continue to decline in the years ahead.
And so again, all of that points to not only a healthy gross margin this quarter, but plenty of runway as long as the economic environment and our industry conditions are conducive to growth. That being said, as we've told you plenty of time, the real benefit, the real consideration there is the free cash flow margin where we've set our objective of 20% to 25%. And I think we said in July the trailing 12 month period was 24% of revenue. That's really the margin objective on which management is focused in running the operations of the company.
Do you
have a follow on, Chris?
Sure. I'm sorry if I missed it. The wireless wind down, are your expectations still the same as they were at the end of the July call?
Okay. No, you did not we haven't addressed that. So in fact, I think what we said in July was that we expect it to decline by about $90,000,000 sequentially this quarter. And in fact that continues to be our expectation. So what that means is that at the middle of our revenue range for this quarter, we would grow about 6% sequentially despite that decline in legacy wireless.
So for the rest of our revenue that would then result in growth of about 9% again at the middle of our range. So as a reminder, legacy wireless revenue in the Q2 was $148,000,000 and we continue to expect that it will be essentially gone by the end of this year. So with that $90,000,000 decline in the Q3, in the Q3, our legacy wireless revenue should be less than 2% of TI's overall revenue this quarter. Okay, Chris. Thanks for your questions.
And we'll move to the next caller.
We'll take our next question from Ambrish Srivastava with BMO.
Hi. This is Gabriel Ho calling in from Ambrish. Thanks for taking my question. You guys have appeared to turn around the Silicon Valley analog sooner than earlier expectation. Can you please help us understand which subsegments are driving that?
And how are you tracking this quarter with other analog segments?
Hey, Gabriel, this is Dave. Maybe I'll address just analog overall and then put Silicon Valley inside of that context and not because SVA is doing well, but so are all of the other analog areas that we have. And we should see sequential growth from the analog segment this quarter. But if you look at this quarter, we'll probably see the strongest growth inside of our power products as it disproportionately benefits from product launches that Ron had mentioned earlier in handsets and gaming consoles as well as just an overall recovery against a weak second compare inside of notebooks. If you look at an end market like automotive that should be a driver in growth specifically inside of H valve as well as benefiting embedded processing.
And then from an industrial market standpoint that's going to continue to benefit Silicon Valley analog as well as HPA.
Thanks. The final question is real.
Yes. That's very helpful. As a follow-up, have you seen any expansion in the lead time at the channel? And what is your expectation on the channel inventory for the quarter?
Yes. Lead times overall have not changed and remain short. So no changes on that front from our standpoint.
And keep in mind, even though it's not the only factor in lead times, we have plenty of open capacity. So we fully would expect to be able to maintain short lead times even as growth might continue going forward. So between the inventory that we have positioned and the capacity that we have available to us, our goal certainly is to keep lead times right in the same range where they are today. Okay. Thank you for your questions.
And let's move to next caller please.
We'll go next to Joseph Moore with Morgan Stanley.
Hi, guys. It's Craig Hettenbach calling in for Joe. Ron, just following up on the strength in Industrial and Automotive, which is above seasonal for Q3. Any color you can provide in terms of the trends you're seeing from an inventory perspective as well as resales?
Okay. I would make a I'll talk about the first part and then I'll let Dave talk about in general what we're seeing with distribution. I don't know that when you talk about inventory, different people have asked me about inventory at industrial customers. And I don't know how anybody directly observes inventory at industrial customers, because they tend to be lots and lots of small customers that purchase their products through distribution. We certainly are aware of what's going on with inventories at distribution.
But in terms of their end customers, I would say generally that's the role those customers play distributors pay distributors for is to carry inventory for them. But to the point they may be carrying some inventory on their own and that inventory growing or depleting? Frankly, we don't have that direct visibility and I would seriously doubt any semiconductor suppliers too. Dave you had some comments on distribution overall?
Yes. I would say that specifically to inventory we don't expect days to change much inside of distribution. And that's in an environment where we expect revenues to increase about the same rate as our sales for the company overall.
Jeff, on Craig?
Yes. Just any color on just trends by geography particularly Europe which seems to from the component perspective picked up a little bit? Any color there?
Well, we pull the quarter to date trends. And so what we've seen so far is growth in Asia and the U. S. And Japan and we've actually seen Europe down slightly. And I'll just remind that's quarter to date.
We'll see where we end up as we finish up the quarter.
Okay, Craig. Thanks for your questions. Let's go to the next caller.
We'll go next to Christopher Danley with JPMorgan. Hi.
This is Amir Khulosha calling in for Chris Danley. Maybe you can provide some perspective on from your vantage point right now. There are some macro headwinds or some things floating around. Anything you see has the potential to maybe derail a seasonal outlook for Q4?
I'm not aware of any was that a statement that there are headwinds or was there a question?
No, some macro concerns hanging on maybe some geopolitical tensions.
Yes. I have no idea how that would translate to semiconductor demand. And so we I don't have any real value to add in terms of any commentary there. Let me I think we talked about what 4th quarter typically is. The only real headwind is our calculator seasonality and beyond that we'll see we'll have more comments probably in October.
Do you have a follow on question?
Follow on is about the China build outs. I mean, you mentioned it's tracking in line with expectations that you had earlier. But in terms of compared with last year, the confidence level is much higher, you would say. Whatever the carriers are saying they'll spend, you think they're on track to do that or is there anything that can change it?
Yes. I think when you compare this year to last year, I think this is maybe the 3rd year in a row that we were hoping to see follow through from comms infrastructure standpoint and the difference in the confidence is we've actually seen it happen in Q3. We'll wait to make comments of what we think will happen in Q4. But I'll point out that inside of our embedded processing, we are benefiting from comps infrastructure and we certainly enjoy a very strong position there. I would also note we're seeing a very broad basis of growth including our microcontroller business as well as our connectivity business.
So we're excited about that broadness and diversity of growth that we're seeing across a lot of different customers that's growing that business. So that's kind of what we're looking to as we look forward.
Okay. Sameer, thanks for your question. And operator, I believe we have time for one final color.
And we'll take our final question from Tore Svanberg with Stifel.
Hi, guys. I just wanted to chime in here. Thanks for getting me in. It's Eric calling for Tore. Real quick, how have customer order patterns changed given where we're at in the current stage of I guess the recovery, if you can comment on that?
I don't know. Well, I mean I think we talked about in Q2, we actually saw some extension, what I'll call extension and visibility meaning customers did a one time transition to give us additional visibility out in time. That is a that tends to be a one time effect that we didn't expect necessarily to carry forward into Q3. So I think Q3 is generally tracking more with demand and demand expectations for the next quarter or so. Do you have a follow on Eric?
Sure. And I know you addressed it a couple of times. Maybe on the China Mobile and the Comm Infrastructure side, how do you see that? I know it's been very slow, the rollouts. Obviously, Obviously the numbers are out there 200,000 TDLT base stations.
But how do you see that tracking for you guys? Is there a certain mechanism or a certain metric you guys are looking at for how it's going to impact your business?
Yes. I'll just add and we've commented a couple of different ways on it, but we are benefiting specifically from LTE deployments. I can say the majority of spend globally still remains on 3 gs. So we're enjoying that as well. But I think our position strengthens as we move into LTE especially longer term and even as look into small cells and things that are happening there.
So I think that both of those trends will favor us in the future.
Okay. Thank you. And as we wrap up here, I'll note it was a good day in the market today. Obviously, the senior analyst took credit and went home early, left their associates working. Before we end the call, let me remind you that a replay is available on our website.
Thank you and good evening.
Thank you everyone. That does conclude today's conference. We thank you for your participation.