德州儀器 (TXN) 2002 Q3 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Texas Instruments third quarter earnings conference call.

At this time, all participants have been placed on listen-only mode and the floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Ron Slaymaker.

Sir, the floor is yours.

Good afternoon, and thank you for joining our third quarter conference call.

With me today is Bill Aylesworth, CFO (inaudible).

In a moment Bill will provide his perspective on TI's results for the quarter.

This call will last one hour.

For any of you who missed the release you can find it on our Web site at www.ti.com/ir.

This call is also being broadcast live over the Web and can be accessed through TI's web site.

A replay will be available through the web.

Before I turn it over to Bill, let me remind you that this call will include forward-looking statements that involve risk factors 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 earnings release published today, as well as TI's most recent SEC filings for a complete description.

In our prepared remarks today we will focus on pro forma results that are intended to present the company's operating results for the periods discussed and therefore exclude acquisition-related costs and intangibles and other items.

In our release, both GAAP and pro forma results are fully covered.

After Bill reviews the quarter, we will open the lines for your questions - Bill.

Thank you, Ron, and good afternoon, everyone.

Third quarter revenue generally met our expectations, although orders declined, leading us to expect revenue to decline in the fourth quarter for our semiconductor business, as well as for TI overall.

As we expected, our third quarter shipments generally tracked those of our customers, as most customers have now completed their inventory corrections.

Revenue grew 4 percent compared to the second quarter, close to the 5 percent that we had expected.

Semiconductor revenue grew 4 percent as expected and was up 26 percent compared to the year-ago quarter.

Educational and productivity solutions, E&PS, grew 21 percent sequentially due to higher shipments of graphing calculators in the peak back to school period.

We had expected about 25 percent sequential growth with the shortfall caused by a weaker than expected month of September as retailers responded to excess inventory.

Sensors and controls revenue declined 6 percent sequentially, a little more than our expectations.

Most of the decline was due to the normal seasonal pattern associated with control product shipments for air conditioning systems, but there were also weaker than expected control product shipments in other areas tied to general economic conditions such as sales to the aircraft industry.

In semiconductor, wireless revenue grew above our expectations earlier in the quarter, while revenue associated with PCs fell below our earlier expectations.

By product area, DSP revenue was up 8 percent sequentially and 38 percent compared to the year ago quarter.

Wireless was the most significant factor in this growth, although catalog DSP products also contributed solid growth.

Analog revenue was up 6 percent sequentially, and up 31 percent over the year-ago quarter.

Wireless was also the most significant factor in our analog growth.

In addition, sequential analog growth came from increased sales to the consumer electronics market, especially for DVD players, as well as for digital audio and video products that use TI's high performance data converters.

TI's power management products for portable electronics also provided good revenue growth in the quarter.

Revenue for PC interface products was down in the quarter, as was revenue for products for the lower end of the printer market.

These areas are expected to continue to be weak in the fourth quarter.

Combined, DSP and analog represented about 70 percent of our year to date semiconductor revenue, with DSP at about 30 percent of SC revenue and analog about 40 percent.

In addition to DSP and analog, other semiconductor revenue declined 3 percent sequentially due to lower royalties, and grew 10 percent over the year-ago quarter.

The decline in royalties was primarily due to the absence of the $30 million in catch-up royalties in the second quarter from the new cross license agreement.

Other semiconductor product revenue increased, both sequentially and year over year.

Royalties were about even with the year-ago level.

Digital light processing revenue increased significantly, more than doubling versus a year ago and increasing over 20 percent sequentially as a result of increased demand from portable business projector customers as well as penetration into the digital television market due to recent DLP product introductions by Samsung, Panasonic and LG.

Risk processor revenue increase by a double digit percentage sequentially and was about flat with the year-ago level.

Standard Logic increased almost 30 percent year over year and was about even on a sequential basis.

ASIC (ph) revenue and micro controller revenue were both down in the quarter versus a year ago and sequentially.

Each of these areas remains about 5 percent of our semiconductor revenue.

By (ph) end equipment market, wireless revenue was up 9 percent compared to the second quarter and was up 52 percent compared to the year-ago period.

In both comparisons, revenue from products sold into handsets more than offset declines associated with base stations.

TI continues to benefit from a richer mix of higher ASP products sold into new full-featured phones, many with color displays.

Revenue resulting from chip sales for 2.5 G phones was about 40 percent of the wireless revenue mix, consistent with our expectations.

We are also benefiting from higher TI content in phones manufactured by ODMs (ph).

The ODMs (ph) typically purchase complete chip sets or even reference designs, including the digital base band chip, analog base band chip, power management, RF, and software.

Revenue from these chip sets now represents about 20 percent of our wireless revenue.

Overall, wireless revenue is about 30 percent of our total semiconductor revenue year to date.

Broadband (inaudible)revenue continues to recover, growing 17 percent sequentially, although it was still 6 percent below the year-ago level.

The sequential growth was primarily due to voice over packet product sales into IP phones, as well as higher wireless LAN revenue.

Broadband revenue remains below 5 percent of our total semiconductor revenue.

The combination of catalog DSP and high performance analog revenue was up 6 percent sequentially and up 16 percent compared to the year-ago quarter.

Catalog DSP was the most significant contributor in this growth.

TI's gross profit declined by $16 million sequentially, primarily due to lower royalties as well as reduced factory utilization levels late in the third quarter.

As a result, gross profit margin declined by 2.3 percentage points on a sequential basis to 37.6 percent of revenue.

Operating expenses increased sequentially by $32 million.

R&D increased $13 million as a result of higher product development expenditures in semiconductor.

SG&A increased by $19 million compared to the second quarter.

We had built our spending plans around an outlook for a small growth recovery and have been managing our costs accordingly.

With the current outlook, we are aggressively tightening all costs and aligning resources to market demand.

Operating profit declined by $48 million compared to the second quarter, and operating margin declined by 2.5 percentage points to 6.2 percent of revenue.

Operating profit is $292 million higher than in the year-ago quarter.

Our semiconductor wafer fab utilization declined in the quarter as loadings were reduced consistent with the decline in backlog.

Total capacity also increased in the quarter as DMOSS (ph) (inaudible)6 began its first quarter of qualified 300-millimeter production.

Average utilization during the quarter was just over 70 percent, compared to about 75 percent in the second quarter.

We had expected utilization to hold steady at about 75 percent in the third quarter.

However, we ended the quarter with utilization down about 10 percentage points compared to the July level.

DMOSS(inaudible) 6 (ph) capacity, currently at 5,700 wafers per month, will expand somewhat during the fourth quarter and is expected to reach 10,000 wafers per month going out of the year.

We expect that average utilization will decline to about the mid-60s level in the fourth quarter, which is about the level at which we're currently operating.

Semiconductor gross profit was 36.5 percent of revenue and operating margin was 3.7 percent.

Revenue in the sensors and controls business was $237 million, down 6 percent sequentially, but up 7 percent from the year ago period.

Gross profit was 34.5 percent of revenue and operating profit of $52 million was 21.7 percent of revenue.

Revenue in the E&PS business was $181 million, an increase of 21 percent from the second quarter and about the same as the year ago quarter.

The sequential revenue gain was due to seasonally stronger sales of graphing calculators in the peak third quarter.

This revenue will seasonally decline in the fourth quarter as the back to school season ends.

Gross profit was 56.1 percent of revenue and operating margin was 39.9 percent.

For TI, other income and expense, OI&E including interest income, investment gains and losses, and other items, was a gain of $57 million in the quarter.

This was up from the second quarter OI&E expense due to the second quarter's non-cash charge of $96 million on certain equity holdings in our investment portfolio.

Third quarter OI&E included a reversal of interest expense due to the resolution of open tax items.

Interest income declined in the third quarter compared with the second quarter and the year-ago period as lower interest rates more than offset higher cash balances.

Separately, interest expense paid on loans was $14 million in the third quarter, about the same as the second and year-ago quarters.

Earnings per share were 9 cents in the third quarter.

EPS reflects an $11 million tax benefit that also resulted from resolution of open tax items in the third quarter.

On the balance sheet, inventory sequentially increased by $3 million, but decreased by $77 million from the year-ago quarter.

Days of inventory declined to 53 days at the end of the third quarter from 57 days at the end of the second quarter, and 58 days in the year-ago quarter.

Accounts receivable decreased sequentially by $32 million, but increased by $54 million from the year ago period.

Days sales outstanding were 60 days at the end of the third quarter, down from 64 days in the prior quarter and 71 days in the year-ago quarter.

Cash flow from operations increased sequentially by $178 million to $565 million in the third quarter.

Although capital expenditures increased to $269 million in the quarter, free cash flow increased by $86 million to $296 million.

The company's total cash now exceeds $3.6 billion.

During the quarter we also took actions with regards to our retirement plans.

First we made the maximum tax deductible contribution to our U.S. retirement plans of $114 million.

In addition, the long-term return on asset assumption for our U.S. pension plan was reduced from 9 percent to 8 percent effective January 1st, 2002.

For the year 2002, the net expense from these two actions is expected to be $4 million.

At the end of the third quarter, TI's minimum pension liability was $155 million for its U.S. pension plans.

TI's orders in the quarter were $2.120 billion, up 29 percent from the year ago level, but down 7 percent from the second quarter.

Semiconductor orders were up 36 percent from the year-ago quarter, but declined 5 percent sequentially.

Orders for most product areas declined except wireless, which grew sequentially.

The book to bill ratio for our semiconductor business declined to .97 in the third quarter, down from 1.06 in the second quarter.

For the fourth quarter, we expect total revenue to decline about 10 percent compared to the third quarter.

Revenue in semiconductor is expected to decline about 5 percent sequentially.

Wireless should continue to contribute solid growth in the fourth quarter, but this growth is expected to be more than offset by weakness in the PC and PC peripherals markets.

Sensors and controls revenue is expected to remain about even with the third quarter, and E&PS revenue is expected to seasonally decline about 60 percent.

We expect operating margins to decline to about break even.

As a result, pro forma EPS should be about 2 cents, plus or minus a few cents.

For modeling purposes, OI&E is expected to be about $25 million of income, and interest expense on loans should remain at about the current level of $14 million.

Our forecast for capital expenditures in 2002 remains $800 million.

Most of this is going towards DMOSS 6 (ph) 300 millimeter capacity.

Our 2002 R&D forecast remains $1.6 billion.

Depreciation should be $1.6 billion for the year, unchanged from our prior estimate.

We have limited visibility in the current environment, with historically short product lead times.

As a result, we believe it is prudent to plan cautiously, yet retain flexibility to respond quickly should customer demand increase.

I mentioned previously that we are aggressively tightening our expense control and aligning resources with market demand.

This will include the reduction of about 500 jobs in the coming months, with most of the reductions in manufacturing and support functions.

In conclusion, we continue to believe TI's competitive position is strong and getting stronger in terms of technology, manufacturing, products, and financial position.

With that, let me turn it back to Ron.

Thank you, Bill.

At this time I'll ask the operator to open the lines up for your questions.

In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question.

After our response, I will provide you an opportunity for an additional follow-up - operator?

Thank you, sir.

Ladies and gentlemen, the floor is now open for questions and comments.

If you have a question or a comment, please press numbers one followed by four on your keypad.

If your question has already been asked and you would like to remove yourself from the queue, please press the pound key.

Please note questions will be taken knelt order which they are received and we do ask that while you pose your question to please pick up the handset to provide optimum sound quality.

And our first question of the evening comes from Scott Randall (ph) with Soundview technology.

Scott Randall, Soundview Technology (ph): Great.

Good afternoon.

I wonder if you can provide a little bit more color on where you saw the order shortfall and also thinking a little bit about the beginning of 2003, what are you hearing from customers currently?

Scott, the order shortfall was primarily in the market areas of PC and PC peripheral.

That would include low end printers, the standard logic for the blue logic for PC mother board, storage generally about flat, although for us the logic part of storage will be down and there's order weakness there as well, as well as some of the interconnect circuits for notebook computers which also weakened in the fourth quarter.

I think it's too early to really comment about the first quarter, although of course seasonally that is generally flat to down in any kind of normal market conditions and most of the markets we serve.

Thank you.

Do you have a follow-up, Scott?

Scott Randall (ph): No.

Thank you.

The next question of the evening comes from Adam Parker with Sanford Bernstein.

Hi. the you said catalog DSP (inaudible)(inaudible) was up 6 percent sequentially.

In your guidance for 5 percent down semi to Q4, do you anticipate these categories to be sort of stronger than average in Q4 or what's your anticipation of those two products?

Adam, the high performance analog, we would expect to decline in line with many of the markets that we're seeing as they relate to some of the power management, some of - that's related to notebook computer for example.

In those areas we would generally expect some flat to decline, and pretty much the same in the catalog DSP area.

The growth we saw in catalog DSP in the third quarter reflects, we think to some degree, the fact that prior to that there really had been inventory in that market that was circulating from, you know, the previous weak market conditions.

As that inventory got consumed, there was a strength in the third quarter sequentially in catalog DSP, but we don't think it's sustainable at the kind of levels that we saw in the third quarter.

At least not in the near term.

Well, you mentioned that you had increased sales in some of your high performance converters.

Is that also an area with power management you think is going to be down in Q4?

No, that should hang on pretty well, Adam.

Most of that is targeted for consumer high performance audio, for example, which has been an area of strength for us.

That is seasonally oriented, though, so that will be strong, we would think, through a good portion of the fourth quarter, but there is certainly an important seasonal part to that part of the consumer market.

OK, great.

Thank you, Adam.

It had next caller please.

Tim Mahone with Credit Suisse First Boston.

Tim Mahone, Credit Suisse First Boston: Hi, Bill.

What is your expectation for inventories in Q4?

I know you're changing your kind of stated guidelines that you gave us before that you were still building logic products to service your customers on short lead times.

We had done that to what we think is prudent levels in the third quarter, while our overall inventories were essentially flat in the third quarter, that really was draining finished goods and some building in semiconductor to get die stock to the levels that we think is prudent to maintain very short lead times for our customers.

Looking into the fourth quarter, I really think that our semiconductor inventory will be flat to down some because we just don't see the market demands to justify any further build of width there.

So we're being conservative in that regard.

We're going to be very careful that we don't build excess inventories.

We don't have any at this point and we don't think that's prudent.

So we think we've really completed a build of a prudent level of buffer inventory and die stock inventory in our standard products.

Did you have a follow-up, Tim?

I did, Ron.

Just curious on your auto business, I'm wondering are you seeing any changes in forecast from some of your auto customers and looking into your crystal ball can you give us any kind of ball park growth rates(inaudible) you're thinking about over the next few quarters?

Thank you very much.

Tim we've really seen some transition there.

Our micro controller business which is one of the businesses that serves automotive, in fact, has been down some as some of the older products are transitioning out.

But over a longer period of time, both our DSP and analog products have been very successful in new sockets in the automotive market.

Particular in fact in the European market where the applications are advanced in electronics it seems using our products in the U.S. market.

So I would expect automotive to be an important part of our overall DSP and analog growth, and really good steady growth as these new sockets begin to generate revenue over the next several quarters.

Thank you.

Thanks - thanks, Tim.

Operator next call.

Christine Chin (ph) with American century.

Christine Chin (ph): I didn't press one question.

Thank you.

Christine (ph).

Our next question comes from John Barton (ph)(inaudible) with Wachovia Securities.

John Barton, Wachovia Securities (ph): With respect to the head count reduction of 500 heads, you mentioned at the end that it's(inaudible) primarily for manufacturing and support personnel kind of a two part question.

First off, any R&D projects being cut, secondly how should we look at a rather sizeable head count reduction in manufacturing?

Is it efficiency being gained through D16 (ph), or an expected predictions for a lower production rate ... (inaudible)(inaudible)

John, in answer to the first part, I would not expect cuts in R&D to come from this.

We think very few engineers will be affected.

It will be manufacturing and support people in the areas of weakest market demand and also in manufacturing we would expect it to be the areas that are most significantly under loaded at this point which will tend to be for us some of the mixed signal analog areas in particular which have been hit by weakness in these PC and peripheral markets.

So that's not a direct displacement from D1 6 (ph) because that's our most advanced logic.

Manufacturing will probably target to mixed signal analog will be affected.

John Barton (ph): Just as a follow-up, that you had commented about the continued strength in wireless.

Could you just break that out with respect to ASP's, shift towards a higher generations bone versus units?

Yes, John.

Sequentially in the third quarter most of the growth, in fact, really did come from units.

Units were up more or less in line with the growth in revenues in the second to third quarter when in fact our blended ASP continued to go up in the third quarter as it has sequentially all year, in fact.

And that's primarily the result that we continue to see, that more of our revenue is coming from GPRS (ph), where the digital base band has a significantly higher price than the digital base band for a 2G, GSM handset (ph) would have.

But the fact is there's other - there's always other cross current going on, too.

In fact right now we're also selling more analog base band products which in fact have lower ASP than the digital base band, but very good business for us.

We're beginning to sell more R F chips, direct conversion chips which again have a lower ASP, so they tend to bring the mix down some, but there again a new business win for us.

So in conclusion, in summary of that, most of the growth is coming from unit growth, but blended ASP continues to increase for us in wireless as well.

John Barton (ph): Expect comparable trends going up for the fourth quarter?

Yes, and especially to the extent we think we're on the track we've been on all year of an increasing percentage of our revenue mix coming from GPRS (ph), that was about 40 percent in the third quarter of our wireless revenues and we're on track to think it'll be about(inaudible) 50 percent going out of the year.

John, let me add also, just having blended ASP's on the DSP products going up because of wireless is also significant difference from the trend.

I mean typically what we would expect on any given function in a high volume wireless handset would be something like 15 percent per year ASP defines.

So the normal trend would be downward trends on ASP's.

We're actually seeing them move up because of the 2.5 G blending. [decline]

Thanks, John.

Operator, next caller please.

Our next question comes from Doug Lee (ph)(inaudible) with Bank of America.

Doug Lee, Bank of America (ph): Hi guys, actually a follow-up on that last comment.

Bill or Ron, could you comment, what would happen to say your cellular phone business on the chip set side if the cell phone market was flat just because of the mix change, how would you see your - that business growing next year?

That's pretty hard to say going forward, Doug.

Certainly several reasons, though, that we think our wireless revenues can grow faster than the end market out there for. for one thing, we think the mix towards GPRS (ph) will continue to be a factor for us and over time will have GPRS (ph) replacing 2 G digital base bands at a much higher ASP.

You know, on a strictly chip for chip basis, that's a multiple literally two or three times ASP from a GSM digital base band to a G PR S digital base band.

In addition to the extent that there is a trend that we've seen of increasing ability to sell chip sets to O D M's, or OEMs for that matter, that chip set revenue for us is again much more revenue per handset than a single product, and we're being successful in both.

So our outlook would be a degree of confidence that we can continue to grow wireless - our wireless revenues faster than the end market and units grows over time.

There's probably one other factor that I would add, too, Doug, which is just next year, starting to to have the impact of O map (ph) in those wireless revenues also.

What I mean by that is today when we're talking about 2.5 G, we're really talking about a higher performance digital base band on which, you know, some applications are running.

Next year for the first time we'll really start seeing phones with a separate applications processor in addition to the digital base band adding incremental revenue to us as well.

Doug Lee (ph): We'll look forward to seeing how that goes.

Just quickly to follow-up, any update on capex for next year, Bill?

Doug, with running about 800 million year and we still haven't put together a formal annual plan, but at this point it's hard to see why capex would need to be higher in '03 than it is going to end up in '02. with our capex still tightly focused on 300-millimeter equipment and in fact in '03 that will be as much as anything on the kind of equipment necessary in the transition to 90-nanometer and 65-nanometer on those road maps.

Doug Lee (ph): Terrific.

Thank you so much.

Thank you, Doug.

Operator next caller please.

Your next question of the evening comes from Cody Acree (ph) with Legg Mason.

Your line is live, sir.

Cody Acree, Legg Mason (ph): Thanks.

Maybe you can talk a little bit about that PC channel Ben again.

There's been a lot of mixed reports during this earning season about what to expect out of the PC market into the fourth quarter.

We've seen some that are flat, some that are expecting some growth.

I think it's dependant on what's going on in that channel.

Can you talk about what you're seeing there from the component (inaudible) side is it a matter (ph) in unit demand?

It could differ on the types of peripherals that channel the market.

Low end printers, for example, we have seen weaken and we think will continue to be weak into the fourth quarter. the glue logic for the mother board we've seen continued very aggressive pricing in that area, and so likely to be flat to down as any unit growth is offset by price declines there.

Hard drives and storage generally are pretty flat on the unit basis and for TI pretty flat on the analog side. the serve owe (ph) and motor driver and pre amp, but on the logic side we're running out as we would expected to the logic part, as that gets integrated into a re-channel.

The inter connect and other products relating to notebook computers had held up pretty well for us for us through a good portion of the third quarter, but we have seen weakness in that market now as wellwhich we believe will continue, because continuing on will continue through the fourth quarter.

So that's the blend that we see overall as it affects PC.

So I guess the mix there, the only one that you talked about really being a little better sequentially on units was the glue logic and the mother boards and therefore pricing.

Is that the bigger issue is that you're seeing pricing there?

Is it more just simply sequential units and outside of the glue logic on the mother boards?

Right.

It isn't the biggest issue by far for our semiconductor results, Cody (ph), because that standard logic business now is well under 10 percent, between 5 and 10 percent of our semi revenues.

It's just the place whereas a commodity product the commodity pricing has the most impact.

In the other areas, including low end printer interconnect and so on, it really is an issue of units more than price.

Cody Acree (ph): OK.

Lastly, then, on the head count cuts, you talked about where they're going to be.

Can you talk about how you expect that to impact your opex) lines over the next couple quarters?

Can't be specific yet about that, Cody, until we really literally go through product area by product area and by person by person, but the intention is that both with these people reductions and with cuts in discretionary spending, we need to get SG&A down below the levels it is now.

I think at this point we'd be looking for SG&A to stay pretty flat for the fourth quarter, but these reductions in place to see it flat to down beyond that, and while this won't directly affect R&D we expect relatively few engineers to be impacted.

We don't expect R&D to be growing either in this environment.

And then the other effects will be on lowering our - both our fixed and variable costs in manufacturing overhead and manufacturing direct labor.

Cody, I think on the guidance that we gave for break even operating margin, if you generally assume that reduction will be pretty much evenly divided across gross margin and the opex (ph) line, you probably would come up with R&D and SG&A generally flattish to third quarter.

So that's probably a good first half expectation anyway.

Thank you, Cody.

Next caller please.

Dan Nase (ph)(inaudible) with Lehman Brothers.

Dan Nase, Lehman Brothers (ph): Great, thanks.

Bill, I guess the first one is you said wireless revenues(inaudible) were up 9 percent sequentially I think for third quarter.

What were you thinking it was going to be up?

You had made some comment earlier about it had been strong earlier in the quarter and sort of - I'm guessing it kind of got weaker a little bit later. and then what are you thinking for the fourth quarter tied to your down 5 percent for semiconductor revenues?

The comments that you made sort of earlier discussions about Q3 and Q4 are roughly equivalent in terms of growth.

I'm trying to get some idea if that's changed.

Right.

I hope I didn't misstate something earlier.

What I meant to say is as the quarter progressed wireless was better for us in terms of third quarter growth, than we had expected at the beginning of the quarter.

So that nine percent sequential growth in wireless that we experienced in the third quarter was somewhat above our beginning of the quarter expectation. and third to fourth, we expect, I'd say, strong or high single digit growth again in wireless sequentially.

Probably hard to call - can't call the difference between what we did in third quarter or what could happen in fourth quarter, but certainly that ballpark again of high single digit sequential growth in wireless third to fourth for us.

Dan Nase (ph): OK. with regards to the upcoming Q1 - or not the upcoming, but Q1, obviously the normal seasonality is revenues decline a little bit.

You're obviously going through some cost cutting at the same time, but is it safe to assume that if revenues decline in Q1 in '04 the gross margins will decline as well in terms of percent?

Well, it's pretty early to try to call that, Dan, but it's certainly true that, you know, wireless generally is flat to down some in most years sequentially fourth to first, as are most of the consumer markets.

But we're not going to try to make that call quite yet. and we ought to be holding capex pretty flat through here in terms of any effects on depreciation as well.

Dan Nase (ph): OK.

Great, thanks a lot, Bill.

Thank you, Dan.

Operator next caller, please.

Joseph (inaudible) with Merrill Lynch.

Joseph, Merrill Lynch: Hi, just to follow-up a bit on the previous question.

If you've got wireless revenues up the high single digit sequentially in the fourth quarter, seems like there's got to be something more than just weak demand.

Some kind of inventory driven phenomenon here affecting your non-wireless DSP and analog businesses in Q4.

Can you maybe address that in a bit more detail?

Yes, Joe. for one thing, even within wireless, the handset revenues will probably be up at least that high single digit because bay station which is in there as well is continuing to be pretty flat to down.

That was true in the third quarter.

It will probably be true again in the fourth quarter.

And, you know, with wireless at about 30 percent of our semi revenues and we think royalties about five percent of semi revenues will be pretty flat third to fourth quarter, that really says all the other product areas, as you've noted, are going to be down, ballpark close to 10 percent.

That's consistent with the weakness in these markets that we're seeing.

Certainly part of it is that some of our customers have built inventories, for example, in low end printers.

We would say that there's excess inventories that are going to be worked through, that's why the demand is softer.

In PC mother board I don't think it's an inventory issue as much as the fact we're seeing a continued weakness in that kind of market.

So it's really that combination.

I think in general called PC and peripherals market, seeing a weaker back to school and probably now weaker expectations on the holiday season, yeah, there was some inventory in some areas.

Bill already mentioned the low end printers.

Maybe on some of the (inaudible) activity products that are influencing what we're seeing going into fourth quarter.

OK.

Thank you.

May I ask a follow-up?

Sure.

You're shifting gears.

Given that perhaps low slower pace of the recovery, would you care to comment about what revenue levels now given the cost cutting you might need to achieve to get back to the sort of the target operating margin that you've discussed in the past which was I believe 25 percent?

Don't see that that's really going to be affected here, Joe. the people reductions that we're making and holding expenses down are really necessary in the near term by the fact that we're, you know, holding R&D at these levels and the fact that we're really meeting all of our expectations in terms of the benefits that we're going to get from advanced logic and 300-millimeter and our manufacturing road map.

We have every expectation that as we get back to, you know, third quarter 2000 revenues, we can be at or above the kinds of operating margin that we turned in at that time.

And the fact is, I mean, we're committed to taking some of these actions near term to make sure that our SG&A and our manufacturing support costs don't get out ahead of us in heading towards that - along that road map.

But there has not been any major shift in that road map; is that correct?

That is correct.

Thank you, bill.

Thank you Joe.

Next caller please.

Our next question of the evening comes from Mark Edelstone (ph) with Morgan Stanley.

Mark Edelstone, Morgan Stanley (ph): Good afternoon, guys.

I had a couple questions related to wireless.

Bill, I wonder if you could give us what the sequential increase was in wireless orders in the quarter and what the book to bill ratio might have been in the wireless group?

And then finally on seasonality there, when do you typically begin to see the order pattern slow down for the first quarter in the wireless group?

Mark, orders were up sequentially in wireless for us in the third quarter, book to bill was above one, and that gives us confidence in our forecast for sequential growth continuing third to fourth quarter.

Seasonally in terms of - depending on when customers take product, product that we ship as late as third week of November or so can get turned into holiday orders literally on the shelves. and so that's about the time as well, I would think, in the middle of the fourth quarter that orders start to reflect first quarter shipments then pass past the holiday season.

Because really up until pretty close to that time, we can package products and still get it to customers.

So current order rates for today are still indicative of the - of solid fourth quarter holiday season that we're expecting and that we think our customers are experiencing to date.

Mark Edelstone (ph): ... the customers are on (inaudible) with us, so those orders, even though they're cyclical (ph)in the fourth quarter and the customer gives us visibility via forecast, those orders would not actually be booked until the fourth quarter period.

Mark Edelstone (ph): Great.

Are you able to actually quantify what the sequential increase was in orders in wireless in the third quarter?

Well, it's about consistent with the revenue growth slightly above that giving us a positive book to bill there, Mark.

So because of the just in time that Ron mentioned, orders in wireless (inaudible) get a little bit ragged in times.

Sometimes with new products our customers with tier one customers, book orders in kind of a conventional sense.

As that product gets going, they'll give us planning factors and the next orders are somewhat delayed because we're making the product and then they have a window, as Ron noted, for shipment.

So to be more precise, wouldn't add any value, frankly, but the combination of the orders and the planning factors, the planning information including committed plans that we get from tier one customers plus orders from the O D M's are entirely consistent with the continuing growth that we see into the fourth quarter for wireless for us right now.

Since you re-asked the same question, Mark, I'll give you one more if you have another one.

Mark Edelstone (ph): Yes, actually, if you could just talk about distribution inventories and the trends you're seeing there, that would be great.

Thanks, Mark.

Sure.

Distribution inventories generally in the world, especially in the U.S., has come down some.

It really improved, we would say for our products including the mix probably has improved in the quarter.

Distribution re-sales on a worldwide basis, we think, were about eight percent growth sequentially.

Our revenue in distribution was about seven percent growth sequentially, so they did plenty better on resale than we did on our revenue recognized in the distributors.

Now, I think certainly our distributors are cautious about holding inventories and so we think that caution is going to continue, but the inventories there are in good shape and really improved in terms of being lower and in better mix than they were going into the quarter.

Mark Edelstone (ph): Great.

Thank you.

Great.

Thank you Mark.

Operator, next caller please.

Our next question of the evening comes from Jonathan Joseph with Salomon Smith Barney.

Jonathan Joseph, Salomon Smith Barney: Good morning, bill - good afternoon.

I want to just confirm the EPS up side from interest income and tax benefit.

I get about 42 million relative to my model outside the interest income were about two cents per share and tax benefit 83 million relative to my model or benefit about four cents per share.

So rather than 11 cents, if we back out that six cents you reported about five cents pro forma, is that one way to look at it?

Well, John, let me take it in stages, I guess.

Our combination of other income and expense and interest income, instead of being about $10 million of income, was around $40 million of income.

So that was 30 million higher than we would have thought.

That's basically about a penny.

And then the additional tax benefit that we took for pro forma was the $11 million.

Otherwise, we did pro forma the way we would have expected, taking 35 percent plus the $25 million benefit, the additional 11 million is because it really has to get accounted for, we believe, and now the $11 million is almost half a penny, Iguess, .5, .6 (ph) million per share for us right now.

So that would be in combination of about a penny and a half, I would say.

On the benefits on those lines, John.

John, I think the difference in the tax number that you're looking at is probably the tax on a gap basis, which included a come (ph) catch up in the quarter reflecting our revised GAAP tax rate, but we did not include that in our pro forma earnings that we're reporting.

In fact, that's why our GAAP EPS is two cents higher than our pro forma EPS.

I gotcha.

OK.

Thanks. with regard to linearity in the quarter, it did seem like you had good visibility up until really a couple weeks before the end of the quarter.

Now, I know that your revenues came in about in line, but I think there's a sense that maybe the quarter was a little bit lighter than you thought.

How was momentum as you ended the quarter, and how is it going into the new fourth quarter?

Well, John, except for wireless, momentum certainly deteriorated late knelt in the third quarter, and that is continuing now.

We have been operating now at this sort of mid 60s utilization rate from late in the third quarter and continuing now, so that's been, you know, three or four weeks at this kind of level. and it's really because late in the third quarter N S E, again excluding wireless or rather orders - excuse me, net sales entered or orders, are really leveled off, and became quite weak in these areas that we've identified.

So in the third quarter basically the linearity of orders was poor or got poor during the quarter, even though the linearity of revenue was really OK. and for semiconductor, we really came right in on our revenue expectations.

A quick follow on to that, Bill. with regards to your guidance, usually you folks are pretty realistic.

You guide to the number that you think you can hit.

What happens' the upside down side to the down five percent on semiconductors, or did you give that a little bit of a haircut?

No, John, I think that's realistically the mid point of where we think we can be.

Now, the fact is that with lead times as short as they are in many of our areas for standard products and high performance analog products, catalog products, it's harder to call right now. and we have the die stock in inventory.

We can take care of our customers with higher orders, but really lead times for many of our products are literally at historically low levels where we have product in stock or we can package in a couple weeks.

So it is harder to call from that point of view, but I think what we're trying to call minus five percent in semi, quarter to quarter is about a midpoint of where we can see it.

OK.

Thank you.

Thank you, John.

Next caller, please.

Our next question of the evening comes from Ben Lynch with Deutsche Bank.

Ben Lynch, Deutsche Bank: Hi.

I think a lot of people spent time trying to determine which of the real areas of weakness compensating for flat royalties and up wireless, etc.

Could you give us a feel for the actual proportion of semi revenues in Q3 which did come from PC's and peripherals and also what your expectation is for broadband segment in Q4?

And I have a follow-up question, please.

Sure, Ben.

Generally for us PC and PC peripheral is 25 percent of semiconductor revenues. and then there's another five percent or so of semi revenues coming from our risk microprocessors in addition to that, but the about 25 percent includes really all the areas we've been talking about.

Within that storage is probably 10 percent or so of semi revenues by itself.

Printers about five percent or so of semi revenues. the glue logic as I mentioned under 10 percent, between 5 and 10 percent of semi revenues, and then other of the analog parts for connectivity and power management remaining parts to get to about 25 percent.

OK.

Excuse me.

You want to be more - do you have a specific question --

No, I just wanted - yeah, I want to do the math quickly here, but those are the weak areas so we can sort of guess how much, how bad they're going to be in Q4 over Q3. and then the broadband, had good sequential in Q3.

Is that going to be flattish now in Q4 or down again?

I would say pretty flat. the growth area for us in broad band, Ben, will continue to be wireless LAN where we continue to gain a lot of momentum there.

Also our continued good momentum in voice over Internet protocol phones, but primarily wireless LAN will be the near term growth.

We like our position in both DSL and cable modem, but those markets are still pretty weak at this point so they'll be pretty flat.

Great.

Just the other question, please, Bill. with some comments from you on pricing in wireless and also pricing for mother board glue logic, could you just speak more generally about pricing environment, how it is Q and Q and whether given the low utilization rates you have currently whether there's much chance of it really improving in the next two or even three quarters?

Ben, except for the standard logic or glue logic, pricing is really we think pretty predictable, pretty stable.

Essentially all the rest of our portfolio is proprietary products, as we noted before, those with volume over time and with maturity would be expected to decline, but that's on a predictable basis, contractual commitments with volume over time, and often as is the case in wireless, if the follow on product has greater complexity, then the price goes up for that.

So really throughout the DSP areas as we have noted, not only in wireless, but in catalog DSP, the blended unit price trend over this past year has been up, in fact, and with the higher end DSP's if they are we would expect that to continue in other of the high performance analog areas, pricing does tend to come down over time, but the proprietary nature of many of those products means that's really pretty stable and is we can manage that as we make cost improvements in the products as well.

So it's really only the commodity products where we've continued to see very aggressive pricing.

Great.

Thank you Ben.

Operator next caller please.

Our next question comes from Hans Mosesman with Prudential security.

Thanks.

Bill, you talked to us about sell through wireless, in terms of inventory accumulation.

How do you know, what's your feeling on how GPS handsets are selling and for that matter handsets in general?

Thanks.

Hans, I think one indication is I think we literally get at least weekly input from our tier one customers where they can adjust it if we have it just in time program with them, they can adjust within windows or when they want products, and they continue to take that product fully meeting our expectations and we think fully meeting their expectations.

So we think that means that the product is getting out there in the marketplace.

And the general reports we hear back of the attractiveness of phones with color screens, of phones with cameras, that that is really the, you know, can be one of the hot products in the holiday season as well, all seems to support that.

On the ODM side, again, our customers there can be pretty quick to make changes based on their view of their channel and that is all going very well also at this point, indicating that new subscribers in the lower priced phones in Asian markets are that that sell through is continuing as well.

Our orders in the third quarter continued to strengthen as we moved through the quarter.

So, you know, at least our customers believed the sell through will be strong through the holiday season.

Now, we are dealing with basically a two-month quarter during the December quarter because once we get into the month of December it's not going to make it on the retailer sales for holiday, but all the signs point to wireless running very strong.

Did you have a follow-up Hans?

Yes, I do.

Are you capacity constrained for some of the newer technology?

If so, when do you expect to catch up?

Yes, Hans.

As we really had planned, we are fully utilizing our 300-millimeter capacity.

We're fully utilizing really all of our 130-nanometer capacity at this point, and we have - and that's in line with our expectations of our foundry usage.

We have one of our advance logic foundries qualified and providing us product in the third quarter and the other expected to qualify in the fourth. and with the step that we're planning in the fourth quarter for some additional capacity in 300-millimeter to go out of the year at about 10,000 wafers, we see that all full utilized as well because of what is it, Ron, close to 50, 40 to 50 parts that are Pged (ph) and will be committed to 130 nanometer over the next several months.

Now, the one thing I would say this is not necessarily constraining revenue. for example, many of the wireless customers would prefer a 130-nanometer product because of lower power consumption, better performance.

But we have the same product also manufactured in a 180-nanometer so we can always support the demand at this point with 180-nanometer even though we're constrained on 130.

Thank you, Hans.

Next caller, please.

Our next question comes from Anish Goya with Neuberger Berman (ph) beer man.

Anish Goya (ph): Hi.

Two questions.

You said that your capital spending will be flat to down next year.

What does that translate into distribution for '03?

Anish (ph), depreciation ought to stay pretty flat, I would think, at about the billion 6 level.

Based on the fact that capex would be, I think as I had indicated, it's hard to make a case, we think, for capex going up year to year at this point.

But even so, I would think depreciation will stay about flat, which says it would be well above capex for another year in terms of the favorable effect on cash flow.

Do you have a follow-up Anish (ph)?

Anish Goya (ph): Yes.

Given that the revenue that are likely to be about $2 million with break even revenues, what gives us confidence in keeping the business at such a high - low utilization and low margins, why would you not resize the business to a lower revenue number where you have better margins at about 2.3 or $2. 5 billion?

Anish (ph) that's something we continue to spend a lot of time on, and we'll try to make the right decisions over time.

Frankly, any decision to take a fab out of production is a big decision in that it takes away our ability to respond to customers in these kind of volatile markets and in areas where we have spent the capital. and to the extent that it really economically and from a cash point of view makes more sense to continue to transition those over fabs, as we're doing from logic to mixed signal analog and eventually to standard logic, that's really the way we would prefer some of the actions we're taking right now. for example, we'll further take the labor and associated overhead out of the fab so it isn't - the people resources aren't to that full equipment capacity, but that would seem to be preferable to us as opposed to any further fab consolidation at this time, although it's something that we will, you know, we have a responsibility to continue to look at this point.

We don't see a basis for making one of those decisions.

We clearly are prepared to.

When we close two fabs in 2001 so it doesn't say we wouldn't do that, but we have not made any further of those decisions at this time.

Thank you, Anish (ph).

Next caller please.

Our next question of the evening comes from Namal Zelaprume (ph) with (inaudible)

Manal Zelaprume (ph): Just two questions. the first one is Bill, that since you have given the end market numbers for wireless 30 percent and wire line to be less than 5 percent and PC related market, that includes PC's (inaudible) 25 percent, can you fill in the blanks for the other markets as well, the automotive industry as well as the sun business?

Yes, Namal (ph).

Each of those consumer for us, while it's getting to be in several different pieces, should be running about five percent of our semi revenues at this point.

Automotive, which is primarily micro controller, but also some other DSP and analog, about five percent.

Our risk microprocessors for sun also in fact very close to that, about five percent of our semi revenues.

Do you have a follow-up Namal (ph)?

Manal Zelaprume (ph): Yes. the second question is the improvement you are seeing in the wireless market on the fourth quarter, what are you expecting close to the single - high single digit from third quarter?

Again, is that supposed to come from the unit number, so can you just put that number between units and ASP improvement?

Should be both again, Namal (ph), there is every reason to think our blended ASP will continue to go up some and we'll continue to get the benefit of GPRS (ph) moving we think from 40 percent to 50 percent of revenues, and then unit growth as well, we think, is certainly what's indicated for us in wireless third and fourth.

Namal Zelaprume (ph): Is improved ASP from the GPRS (ph), is that coming from just the digital base band side or do you expect a higher ASP for the other chips if you're selling in terms of in a power management or any other analog code exor anything like that?

We're seeing that benefit, Namal (ph), primarily today in the what are primarily 2 G chip sets sold more into the O D M markets where we're selling several chips in the chip set plus reference design rather than the digital base band chip.

But, in fact, point that Ron made earlier, we have further benefit to come, we think, in ASP.

We're just getting our first revenues now from product that had an O map processor plus a digital base band and we'll begin to see more of those in combination with PDA phone products as well, which should give us a potentially another step or certainly will be favorable for ASP's as well.

So again, the non DSP or non base band digital base band is more of a higher content story versus a higher ASP story on individual devices.

Thank you Namal (ph).

Next caller, please. we'll have time for two more callers we'll take then we'll wrap it up.

Next question from Quinn Bolton (ph) with CIBC markets.

Quinn Bolton, CIBC World Markets: Quick one for Bill.

You mentioned the lower risk margin here in the third quarter came from both lower cash utilization as well as the lower royalty revenues.

Was wondering if you might be able to give us a little bit more detail sort of what percent came from which category then I've got a follow-up.

Yes, Quinn. a couple of comments there.

One are royalties we had $30 million of catch up royalties in the third quarter and in fact our overall royalty decline was somewhat more than that.

So we had somewhat more than a $30 million shift quarter to quarter in lower royalties, and that meant that our overall increase in semi revenue second to third quarter was about $100 million or so in product revenue and that by itself carries additional variable costs.

So our cost of revenues went up in part because of the variable component, and then the balance of the lower margin in fact was the impact of utilization that went from the mid 70 percent to about 70 percent and ended the quarter even at less than that.

So those are really the three factors that caused the margin deterioration and with that kind of quantification.

Keep in mind all revenue dollars aren't equal.

Roy royalty dollar basically falls through at 100 percent to the bottom line.

So it's takes more product revenue to offset (Mark) the decline in royalty revenue.

Did you have a follow-up Quinn (ph)?

Quinn Bolton (ph): I did.

Just looking at the balance sheet, looks like you've bought about 1.2 billion deferred tax assets splitting between current assets and long term assets.

How secure are those assets or what would the risk be of having to write those down at some point in the future?

I don't really see a risk at all there, Quinn (ph).

Those are essentially all in the U.S. where we have both carry back and carry forward.

We have I'm saying none of those at risk anyplace else in the world which usually are much more restrictive on utilizing any kind of NOL's (ph) or areas where we end up with in effect having paid tax or then having to earn it out.

So I don't see any valuation issues on that asset.

Thank you, Quinn (ph).

Next caller please.

Our final question of the evening comes from Tom Thornhill with UBS Warburg.

Tom Thornhill, UBS Warburg: Thank you. the question has to do with gross margin and cast pass capacity utilization.

Given the comments about the capacity utilization is about 65 and likely to hold that level into Q4, and your follow on comments to other questions about not taking actions to reduce capacity to size it to the business level, and that revenue levels in the early part of next year, Q1, Q2 are probably not going to be strong growth, what prospects are there for improving gross margins as we go into - go into beyond the fourth quarter as we go into the first half of next year?

Tom, I'd say we are taking some actions to the extent that half of the people actions we've announced we expect to be in the manufacturing areas.

What I meant to say is that we have not reached any decisions at this point to actually close any particular fab or take it out of commission in terms of a manufacturing site, but in terms of both the control of capital expenditures and the people actions that we're taking, we see a benefit that both of those will provide the margin.

In addition, the fact is as we, you know, the third quarter was literally the first quarter of production in our D months (ph) 600-millimeter (ph).

A lot of that, in fact went into web, some of it was actually into revenues.

So as all of these new products move from their initial pattern generation into revenue, we have a lot of opportunities there with our advance logic to take advantage of that capability that's been sitting there and available now for some time.

So I'd say that's the other area that we think we can have some meaningful improvements and is realizing the benefits of 300-millimeter and of 130-nanometer processes which have been largely unrealized and untapped so far.

So leading products there's opportunity GPRS mix is an opportunity for improvement, adding O map (ph) is an opportunity for improvement and D months 6 (ph) lower cost production.

But on these other businesses are, there other actions you can take short of shutting down facilities that would help improve capacity utilization and therefore contributory gross margins on those sectors?

Yes, Tom.

In fact, for example, the more we push our high performance analog area for growth, as we're doing, the better that mix will be.

We're literally - we'll have doubled the design win points as we assign them based on revenue prospects.

Again, this year for the second year in a row in our high performance analog business, we're seeing some of the benefits of the data converters, for example, that we mentioned in pro audio.

There's a market that has really been untapped for us.

That power management and others.

So pushing the high performance analog area is one more example of an area that will increase (ph) our margin mix over time and we think we're well positioned to take advantage of that.

Catalog DSP is another area where we've had revenues to be very weak because of inventory correction and the last couple of quarters we've actually seen some sequential growth there again.

So as that starts to move back up to maybe the end shipment level, we can see support from that higher margin business as well. paragraph OK.

We're going to have to stop the Q and A at this point and thank you for joining.

Before we end the call, let me remind you that the replay is available on our Web site.

Thank you and good evening.

Ladies and gentlemen, we thank you for your participation in today's audio teleconference.

You may disconnect your lines at this time and have a pleasant evening