德州儀器 (TXN) 2002 Q4 法說會逐字稿

Good afternoon and welcome to the Texas Instruments fourth-quarter earnings 2002 conference call.

At this time, all participants have been placed on a listen-only mode followed by a question and answer session.

At this time, I'd like to turn the floor over to your host, Mr. Ron Slaymaker.

Sir, you may begin.

Good afternoon, and thank you for joining our fourth quarter 2002 earnings conference call.

With me is Bill Aylesworth, TI's CFO.

In a moment, Bill will provide his perspective on TI's quarter.

This call will last one hour.

You can find the release on our website www.ti.com/ir.

This call is being broadcast over the web and can be accessed through TI' website.

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 S.E.C. 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.

As mentioned in our release, beginning with the first quarter 2003 results, we will no longer provide -- include pro forma information as a supplement to the company's GAAP financial reports.

The outlook statements provided today will describe the company's expectations in accordance with GAAP.

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

Bill.

Thank you, Ron, and good afternoon everyone.

Fourth quarter revenue exceeded our expectations, reflecting better than expected demand for TI's summit semi-conductor products.

TI revenue declined 5% from the third quarter, reflecting the seasonal decline in calculator shipments following the back-to-school retail period.

TI revenue grew 20% from the year ago quarter.

Semi-conductor revenue in the fourth quarter was even with the third quarter and grew 22% from the year ago quarter.

Sensors and controls revenue was about even with the third quarter and grew 10% compared to the year ago quarter.

Educational and Productivity Solutions or E&PS revenue seasonally declined 57% sequentially but grew 3% from the year ago quarter.

For the year TI revenue grew 2%.

Semi-conductor revenue also grew 2% while sensors and controls was even with 2001 and E&PS grew 6%.

In semi-conductor, DSP revenue in the fourth quarter grew 33% compared to the year ago quarter, and analog revenue grew 30% over that same time period.

Both of these product areas benefited from continued strong growth in wireless, where revenue was up 57%.

Strong growth in chip set sales contributed to wireless growth in the quarter.

Chip sets are sold to a diversified set of customers, primarily original design manufacturers or ODM's.

Chip set sales result in high content of TI DSP and analog for phones.

Each chip set generally includes the analog base bans, caller Management, RF and protocol stacked software often leading only commodity memory and the power amplifier for the customer to purchase from other semiconductor vendors.

Shift set revenue in the fourth quarter grew 50% sequentially and more than doubled from the year ago quarter.

TI's chip set revenue is a good mix of both 2G and 2.5 G products.

For 2002, chip sets were about 20% of TI's wireless revenue.

In addition, wireless revenue also benefited from a richer mix of 2.5 generation products.

Fourth-quarter revenue from 2.5G products at about 45% of wireless revenue didn't quite reach the 50% level that we had projected, but the difference was mostly due to better than expected growth of 2G products in the quarter.

Although prices on 2.5G products continue to decline, the relative premium between 2G and 2.5G digital base bands continues to hold at about the same level as earlier in the year.

Also in the fourth quarter, we began the first significant production shipments of O map processors for both advanced handsets and PDAs.

For the year, wireless revenue grew 45% compared to 2001.

Wireless was about 30% of semi-conductor revenue for the year, compared to about 20% in 2001.

A big reason for TI's success in wireless is our strong relationship with the world's largest handset manufacturer, Nokia.

During 2002, Nokia was TI's largest customer, contributing 12% of TI's overall revenue.

Beyond the contribution from wireless.

DSP revenue growth in the fourth quarter was supported by broadband, specifically DSL modems which grew both sequentially and compared with the year ago quarter.

Although DSL revenue is growing most rapidly on the customer premise side, we're also seeing good demand from central office equipment.

Compared to the year ago quarter, fourth-quarter catalog DSP revenue grew at double-digit rates and DSP revenue from digital consumer imaging products including still cameras more than doubled.

DSP revenue grew 30% for the year with growth more than twice that of the DSP market overall, TI gained significant DSP market share in 2002.

DSP was about 30% of TI's semi-conductor revenue for the year compared with 25% in 2001.

Analog revenue in the fourth quarter declined 2% sequentially but grew 30% compared with the year ago quarter.

This year on year growth was well ahead of the market growth rate.

The sequential comparison was affected by [priter] component revenue that dropped by more than 30% as a result of channel inventory reduction in the quarter.

This offset double-digit sequential growth in high-performance analog power management components for portable electronics such as various battery powered consumer electronics products and notebook computers.

TI's data acquisition products also grew at a double digit rate sequentially in the fourth quarter.

Compared with a year ago quarter, analog was stronger in most areas, most notably wireless as well as printers, power management, display systems, hard disks drives, products for consumer digital AV systems, broadband and data acquisition products.

Although revenue from printer components was down significantly on a sequential basis thinks the fourth quarter, this revenue was almost doubled the year ago level, as TI has made significant penetration gains in this market.

For the year, analog revenue grew 3% and was 40% of TI's semi-conductor revenue.

About the same as 2001.

TI's remaining semi-conductor revenue decreased 4% sequentially in the fourth quarter due to declines in microcontrollers, risk processors and ASIC products.

Compared with a year ago quarter, this revenue grew 3% as digital light processor or DLT revenue more than doubled, and standard logic revenue grew 30%.

For the year, this revenue decreased 17% as declines in ASIC and other products more than offset growth in DLP.

Each of these areas, risk processors, ASIC, microcontrollers standard logic, DLT and royalties are about 5% of TI's semi-conductor revenue for the year.

TI's gross profit was $790m in the fourth quarter, or 36.8% of revenue.

The sequential decline was due to the seasonally lower revenue in E&PS

Semi-conductor gross margin of 6.4% in the fourth quarter was about even with the third quarter as higher manufacturing yields on the 130-nanometer process offset the effect of lower factory utilization levels.

Average semi-conductor factory utilization declined about 5 points to 67% in the fourth quarter.

Sensors and controls' gross profit margin was 36.7%, and E&PS gross profit margin was 49.1% in the fourth quarter.

Operating expenses in the fourth quarter for the company declined $28m compared to the third quarter.

R&D was about even, and SG&A expenses were reduced by about 8% sequentially reflecting tightening of overhead spending across the board.

Operating profit was $112m, or 5.2% of revenue in the fourth quarter.

For the year, operating profit was also 5.2% of revenue.

Fourth quarter operating margin in semi-conductor was 3.7%.

Sensors and controls, 22.2%, and E&PS was 31.2% of revenue.

Both sensors and controls and E&PS set records in the year for gross profit and operating profit levels.

Both businesses have increased their operating margin every year for each of the last six years, more than doubling it in the process.

The gains were the result of these management teams focusing on improving product mix as well as I aggressively reducing manufacturing costs.

For TI, other income and expense including interest income, investment gains or losses or other items was a gain of $18m in the fourth quarter on a pro forma basis.

This was down from $57m in the third quarter due to non-cash write downs of certain stockholdings in the company's investment portfolio.

Although excluded from our pro forma information, TI recorded a $638m write down of its Micron technology common stock in the fourth quarter.

TI received this stock in connection with the sale of its memory business unit to Micron in 1998.

Consistent with TI's treatment of gains from prior sales of this micron stock, the company has not included this write down in its pro forma results.

Since the company did not record a tax benefit associated with this action, the write down reduced gap earnings by 37 cents.

Separately, interest expense paid on loans was $14m in the fourth quarter, about the same as the prior quarter.

Net income was $100m in the fourth quarter, or 6 cents per share pro forma.

Total cash increased by $498m in the fourth quarter to $4,142m.

Cash flow from operations increased sequentially by $179m to $744m.

Free cash flow increased sequentially by $212m to $508m after capital expenditures of $236m.

For the year, total cash increased by $791m.

Cash flow from operations was $1,992m.

Free cash flow increased by $1,161m to $1,190m due to lower capital expenditures.

Inventory in the fourth quarter decreased by $33m sequentially to $790m due to reductions in semi-conductor and the seasonal decline in E&PS inventory.

Days of inventory were 52 days, down from 53 days at the end of the prior quarter.

Days of inventory declined by 2 for semi-conductor compared to the end of the third quarter.

Accounts receivable decreased sequentially by $211m in the fourth quarter to $1,217m due to improved semi-conductor shipment linearity and seasonally lower E&PS shipments.

Base sales outstanding were 51 days at the end of the fourth quarter, compared with 57 days at the end of the third quarter.

TI's orders in the fourth quarter were $2,086m, down 2% from the third quarter.

Semi-conductor orders were $1,763m, about the same as the third quarter.

The book-to-bill ratio for our semi-conductor business was .96, about the same as the third quarter.

The following outlook statements describe our expectations in corners with generally expected accounting principals or GAAP.

For the first quarter we expect total revenue to be about even with the third quarter of 2002.

Semi-conductor revenues should be about even, sensors and controls revenue should be about even, and E&PS revenue is expected to increase about 10%.

Operating margin is expected to be about 6% of revenue compared to 3.1% on a GAAP basis in the fourth quarter.

The improvement is expected to come from higher gross margin.

Other income and expense is expected to be about $15m of income, and interest expense on loans should decline slightly to about $13m.

Earnings per share are expected to be about 6 cents plus or minus a few cents.

In the fourth quarter, GAAP EPS was a loss of 34 cents, including the 37-cent negative impact of the Micron write down.

First quarter's results are expected to include $27m of amortization of acquisition-related costs and a $10m charge associated with the redemption of $250m in convertible notes that we announced in the release.

For 2003, we expect R&D to be about $1.7b compared to $1.6b in 2002.

Capital expenditures to be about $800m, about the same as in 2002, and depreciation to decline to about $1.4b, compared with $1.6b in 2002.

In summary, we believe TI's competitive position strengthened considerably in 2002.

We enter 2003 with strong product positions, solid customer relationships, and leading edge manufacturing technology that very few companies in the world can claim.

Our inventory is in good shape, and for the first time in several years, our depreciation expense will decline in this year, 2003, contributing to margin expansion.

Our marginal costs are low so higher revenue levels should fall through to the bottom line at high rates.

With that let me turn it back to Ron.

Thank you, Bill.

At this time I 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, we will provide you with an opportunity for an additional follow-up.

Operator.

Thank you.

The line is open for questions and comments.

If you do have a question or comment you may press the numbers one followed by four on your touch tone telephone at this time.

If at any point your question has been answered, remove yourself from the queue by pressing the pound key.

Please hold for questions.

Thank you.

Our first question is coming from John Barton with Wachovia Securities.

Yes, good afternoon.

You made comment about the mix between 2.5G and 2G phones not quite meeting the very aggressive goals you had for the year because the 2G grew faster than expected based on recent order rates, backlog, etc., can you comment on how you expect that to trend to the beginning of this year.

Yes, John.

There's every reason to expect that the percentage of our wireless revenues in 2.5G and beyond will continue to increase.

The fourth quarter of last year, in fact, Mark, you know, the first production shipments of our O map processors, for example, that go into 2.5G handsets and advanced PDAs, that will continue that trend in that direction as well as our continued progress in other areas with 2.5G.

So there's every reason to expect that we will continue to benefit from a richer mix of 2.5G products in our wireless revenues, and that will continue to benefit our blended ASPs as well.

And that should affect the portions of our wireless revenues that are in chip set form, as well.

That is we already have a pretty good mix in chip set.

The majority of our chip set revenues are still in 2G, but there's a substantial amount of our chip set revenues in 2.5G, and that will likely to increase as well.

Do you care to set a goal for percentage of revenues from 2.5G for either the first half of the year or this calendar year.

No, we don't think that's as useful this year, John.

Certainly, the trend will continue to increase in the direction we've established.

That was a very important metric for us last year because we were really just beginning that roll out over time.

So we don't intend to include that metric going forward, but the trend is we think very well established and will continue.

Thank you.

Thank you John.

Operator next caller, please.

Thank you.

Our next question is coming from Adam Parker with Sanford Bernstein.

Hi.

I'm struggling with how to match up your guidance of flat semi-conductor revenue with the fact that more than 50% of your semi revenue comes from PC and peripheral products plus wireless handsets, and those markets are seasonally down at Q1.

So can you help me with what your forecast for sequential wireless handsets units are and also what your assumption of PC unit growth is.

Sure, Adam.

I would say first that PC units are not a very good predictor for us.

We sell into chips in the various peripheral parts of the PC market and the notebook computers, but it's a fairly imperfect correlation there, I would say.

Sure.

But specifically for the first quarter, we think our wireless revenues will, in fact, be down a few points, so therefore, down slightly sequentially.

Units probably down a little bit more than that.

Blended ASPs will probably continue to trend up slightly.

And that will be offset by some growth in a pretty broad portfolio of our other semi-conductor products.

Part of which we think will continue to be PC based from the point of view that our power management high performance analog products, for example, continue to do very well in the notebook computer space, probably gaining share there, and will continue to grow on our digital imaging, digital light processing chips will continue to have growth sequentially in the markets that they serve in projectors and consumer television.

One part of our analog market and custom analog that serves the printer market was down sequentially third and fourth quarter because of an inventory buildup that had occurred in that particular market sector.

That looks like it has worked through, and, so, growth should resume for us in the printer market in the first quarter as well, which is really a particular inventory issue within that sector rather than in demand.

So when we integrate all that, we see that growth across a range of our other semi-conductor products will offset the slight decline we anticipate in wireless leading our revenues to be flat.

It's also relevant to know, I think, in response to your question, that we think our customers' inventories are really in pretty good shape generally and specifically in wireless and PC and in notebook computer.

So we don't see our customers dealing with any particular inventory excesses or overhangs at this point.

Great.

You didn't mention the risk business or the ASIC sequentially in Q1, do you expect those to grow faster than your overall revenue in Q1.

Probably not.

ASIC was down sequentially third to fourth quarter as that business unit is facing pretty weak markets in the area of telecom equipment and I'd say flat to down slightly if anything fourth to first.

Our risk microprocessor business unit was also down somewhat third to fourth and it would be pretty flattish fourth to first, I would say.

Okay, sir one more question.

You said your average utilization was 67% in the quarter.

What was utilization exiting the quarter or what is it right now, roughly.

Well, it will trend up during the first quarter.

We think overall first to first quarter it will be up several points so that the average in the first quarter will be about 70%, something just over 70%.

So, you know, we think that trend will be pretty clear, and all the data points we have so far would support that trend.

Thanks a lot.

Adam mentioned the percentage of our revenue from computing or PC's.

Let me provide everyone our estimate for how 2002 revenue broke out by end market.

We believe 43% of our revenue came from communications.

About 36% came from computer including peripherals.

Consumer represented about 6% of our revenue.

Automotive about 6%.

And then industrial and other would be 9%.

Operator next caller, please.

Thank you.

Our next question is coming from Jon Joseph with Solomon Smith Barney. .

Hi, can you hear me okay?

Yes, Jon, go ahead.

Good solid quarter.

I want to ask you with regard to the chip set business in the wireless handset market.

It sounded like that may have presented some pretty significant growth in the quarterly and may have also contributed some to the upside relative to your expectations.

Was that chip set mostly GSM, and is that mostly going into the ODM market in Asia-pacific?

John, that chip set business for us in wireless is really pretty diversified both in terms of which generation and what the channels are.

I would say, in the fourth quarter, the majority was 2G or GSM, but an increasing part of it did was GPRS as well.

And there's every reason to think the trend towards GPRS will continue since TI offers a full solution for both GSM and GPRS.

The customers really vary.

I think it's also true that a majority of the customers for chip sets would be called -- truly called original design manufacturers, but there's an important minority of that customer base that are more in either -- what I would call a contract manufacturer or EMSI category; that is, they do the purchasing but they get designs from a customer and build to the customer's design.

And then in some other cases, really, we're selling to some OEM's where we're selling a full chip set.

These would not be thought of as top tier OEM's, but other OEM's that are certainly relevant in the marketplace are also bought from us on a full chip set basis.

So it's not just Asia and the China market, essentially.

That's correct, not just Asia, OEM, very low-featured phones, that's correct, it's much more than that today.

Just as a quick follow on, the 50% sequential growth now representing 20% of total wireless, was this because of new design wins or new products out on the market?

I notice you're talking about including a radio, now, which I think you did not include too much before.

But why the very, very strong growth, you know, unusually strong growth, even in markets that aren't growing nearly that rapidly?

Was it a seasonal issue or new products, new customers?

I'd say it's some combination of all that, Jon.

The RF direct conversion chips that you note are increasingly important to TI.

An important meaningful percentage of those total chip sets now from TI include an RF chip in them as well where is whereas, a year ago, that was a very small number as well as the fact that there's more and more GPRS content as well.

So all of that contributed some to the upside.

And you're right.

All of that helped us with the upside and our 13% sequential growth in wireless was you, you know, somewhat above even our most previous estimate.

A year ago for the whole year in 2001, our chip set revenue was probably somewhat under 15% of our total wireless revenues, so we think this is a, you know, relevant trend that will -- the important part to us is that it gives us more content per handset for those customers and, therefore, higher blended ASPs as well.

But, John, you're also correct that there were new design wins that were part of that sequential revenue growth.

Not necessarily newly design wins but ones that moved into production.

I'd assume, given your guidance of sequentially down slightly in the wireless area, you don't expect this level of chip set strength, per se, in Q1.

I would think it would stay about the same.

As a percentage.

Bill Aylesworth It would grow a lot more in a fairly seasonally weak first quarter, but would stay about the same.

Okay, thank you.

Next caller, please.

Thank you, our next question is coming from Mark Edelstone with Morgan Stanley.

Yes, good afternoon, guys.

Nice quarter overall.

First question relates to visibility, and I had a second one on the manufacturing comment.

When you look at the backlog that you have here at the moment, Bill, and just look at the overall environment, can you give us a sense as to what your overall ability in Q1 as to confidence in the revenue guidance versus what you had seen in the business when you entered the fourth quarter?

Mark, I would say that visibility, you know, isn't really too bad at this point.

Our custom product areas continue to, you know, give us the kind of planning information that they always give us.

Certainly in the -- in our standard product areas, we are continuing in an environment of short lead times, four-week kind of lead times.

But we are, you know, maintaining the kind of die stock that, you know, we can respond to those orders a very high percentage of the time and turn those for both our high-performance analog and our standard logic.

And I guess the distinction I might make to, you know, the end of the September into early October time period was one where we saw a weakness in orders, a weakness in factory loadings that was reflected in our initial outlook for the fourth quarter, and then for whatever, all the market reasons relating to back-to-school, transitioning into the holidays and so on, that got markedly better as we went through the quarter.

At this time, I'd say we don't have those kinds of issues.

We're looking at, you know, reasonable views of backlogs and we're probably just getting more accustomed to dealing with short-lead times in our standard products business areas.

So I would say that our visibility is pretty normal at this point for the first quarter.

Mark, I would add, although we don't specifically break out our turns percentage, our assumption on first quarter is not -- we're not banking on turns going up or anything like that.

We're assuming turns will be at or below what we saw in the fourth quarter level.

And, Mark, I think we commented before, but we have, you know, a few areas that are a little unusual but contribute to growth as well.

I mentioned the custom analog chips for printers where we're pretty confident that that business is returning in the first quarter.

It went through a noticeable inventory build in the third quarter with lower revenues in the fourth quarter.

Our digital light processing business continues to grow with -- in projectors and consumer television and so, those areas are examples of others where we have, we think, reasonable visibility and, therefore, you know, the appropriate degree of confidence in our forecast.

Just a related follow on the [capacity utilization] comments that you expected it to increase in Q1, should we assume that increase is just basically throttling the fabs back up to support expectation for second quarter revenues.

Yes, that's basically right.

While we're not ready to, you know, talk in detail about the second quarter, certainly, that's the normal seasonal direction for most of our businesses.

And we think it will be appropriately reflected in fab loadings as we go through the quarter.

Thanks a lot guys.

Thank you, Mark.

Operator, next caller.

Thank you.

Our next question is coming from Chris Danley with J. P. Morgan.

Just a questions on the margins.

I'm wondering what factors for Q1 you're assuming as far as pricing Q4 versus Q1 in utilization rates.

Sure.

Chris, we think that utilization rates will increase a few points fourth quarter over first quarter.

Fourth quarter averaged 67%.

First quarter, we think, will average just over 70%.

So that will help us.

Along with that, continuing yield improvements in our advanced logic process areas, 300-millimeter, 130-nanometer, will continue to help.

Depreciation will be lower in the first quarter than the fourth quarter as depreciation drops on a year-to-year basis as well.

Our pricing assumptions are really not anything unusual in the first quarter.

We don't to be in an environment where pricing for commodity products and standard logic and also in broadband product areas is really very I aggressive, and we assume that will continue.

In our customary areas, though, most of the DSP products and high-performance analog products and other customary areas, pricing is, by and large, stable.

That is price declines on existing devices are predictable and RF set by the trends of more content per at device so that the next new device in each product family comes out at a higher price.

And, so, really don't see any change many that.

But we're also not expecting any relief in the first quarter from the aggressive pricing pressures that are out there in commodities and in broadband.

I guess on the commodity and standard products, do you expect pricing to, I guess, worsen in Q1 than Q4 or basically stay the same.

We're not expecting it to worsen.

I would think stay the same is about the right description for us.

Okay.

And last question --

See, I might differentiate.

That's really in our commodity areas we have some standard products the high-performance analog products where pricing is much less of a factor.

So it's really in the standard products for us.

Chris, let me also add, on depreciation, because we're on a declining balance depreciation approach or formula, the assets -- the depreciation won't tend to trend down gradually through the year.

It will actually step down by about $50m sequentially from Q4 into Q1 and then stay there or gradually move up as we move through the year.

The big step down is Q4 versus Q1.

That's correct.

And then the last question relates to the utilization rates.

If you guys look at just the inventories, in terms of your customers, are they telling you that they want to take inventories up or down, or do you think it's [over main flap] this quarter.

Distributor inventories are in pretty good shape.

Our revenues to distributors were down slightly third to fourth.

Their re-sales were down just slightly as well, but we think they're in good shape.

In some areas with, you know the short lead times we have, we want to make sure our customers have the right inventories.

We've been gaining share in quite a few areas, we believe, of standard logic, for example.

So our customers, you know, recognize they want to carry the appropriate inventories.

We think they're in good shape and they'll stay pretty flat first to third quarter we believe.

We think distributor inventories will stay flat.

Thanks a lot, guys.

Thank you, Chris.

Operator next caller.

Thank you your next question is from Scott Randall from SoundView.

Scott Randall Thank you.

Back on the wireless side for a second, I'm assuming wireless being up 13%, that the handset revenue was up faster than that, I'd like to confirm that.

And secondly, if you could comment on the unit growth, I assume that lagged a bit.

I wonder if you could quantify that, please.

Yes, Scott.

You know, handsets are over 95%, now, of what we call wireless revenues.

So they're the big driver.

The fact is, our wireless infrastructure revenues did increase sequentially as well.

Really, in that same ballpark.

But at less than 5% of the total, it doesn't change the map very much.

But they increased.

In fact, we're seeing a little more interest and demand in the wireless infrastructure chips now as well, especially with some 3G trials primarily outside the U.S. where our chips are going as well.

So it was pretty comparable between handsets and infrastructure.

Third to fourth quarter for us on the handset side was somewhat of anomaly generally from what we've been seeing quarter to quarter in that units grew somewhat above that 13% and our blended ASPs trended down somewhat third to fourth quarter.

There's an awful lot of mix issues when you go through that, since we're selling everything from a digital base panned to a chip set to some an analog products and power management products and so on.

So as much as anything, that has to do with the particular timing of when we have particular price decreases on devices and then the volume of those devices versus other devices.

So we think that trend, in fact, will reverse again in the first quarter and our blended ASP will go up some as units decline fourth to first.

And if I could just a follow-up.

The agreement announced with ST back in December, may be too early, but how would you gauge customer reaction to date on that.

I think it's quite positive.

In fact, you know, certainly both companies had our large OEM customers in mind when we announced the standards for hardware interfaces to application processors.

And, so, I would say that it's been very well received, in particular by our large OEM customers.

Yeah, the customers are aggressively trying on their own to work through all the inter- offerability issues between handsets, service providers, et cetera.

So what we can do at the chip level to help facilitate that type of inter- operatability effort is very welcome by these players.

Scott, thank you very much.

Operator, next caller, please.

Thank you our next question is coming from Tim Mahon from Credit Suisse First Boston.

Just a quick question on the wireless, also.

Can you comment on wireless LAN, how the growth was in the fourth quarter and your expectations for Q1, and I have a follow-up.

Yes, Tim, wireless LAN which we would put in our broadband category continued to grow strongly in the fourth quarter for us.

You know, that's a business we just really entered in the first quarter of the year.

We think we, you know, averaged probably 15% or so market share for the year with continued sequential growth and strong growth in every quarter of the year.

Certainly plenty of competition and pricing pressure pressures there but with our chip set approach, that's an area of continued growth for us.

So the sequential growth number was close to 50% on wireless LAN.

Tim Mahon And how about Q1?

Thinking about it, looking forward.

I think that growth will clearly continue for us in the first quarter.

Tim Mahon Okay.

I don't have a specific number there.

Just a quick follow up, Bill.

Can you help me reconcile the difference of cost to revenues on a GAAP versus a pro forma basis?

Thank you.

Yes.

Right now, it's just some of the amortization of acquisition costs that are deemed to be manufacturing costs.

It should be about the only difference now.

Early last year and for the total year 2002, we had some small differences in depreciation because we were including in GAAP but excluding from pro forma the depreciation on some run-out of the facilities that we had closed as we were required to do under GAAP.

Those are, really, the two areas.

All right.

Thanks, Bill.

Thank you, Tim.

Operator, next caller.

The next question is coming from Nimal Vallipuram with Dresdner Kleinwort Wasserstein.

Hi, Bill.

This is a question for you.

First of all, let me congratulate you on a good fourth quarter.

But if you look at what TI has said, what it has done in the fourth quarter and the guidance going forward compared to most of the other large semi-conductor companies, you seem to be a bit more optimistic about the outlook going forward.

That might be one of the reasons is that you have a much higher [unintelligible] in the higher market which has been doing reasonably well.

Is it possible you are gaining market share in a number of these markets, or can you help us reconcile that to some extent?

Yes, Nimal.

I think we're clearly gaining market share in several markets.

That's been an objective of ours for some time, and I think we can see the results of that.

We believe that's true in broadband, including the [Wi-Fi] we were just talking about.

We think the data for 2,002 says that's clearly true in wireless as well.

And for total DSP.

And we think that's a trend that we intend to continue.

We think it's true, now, in our standard logic area as well where we have a lot of traction on near term and are gaining share.

Also as we noted in this area of custom analog for printers, we've been gaining share there.

We've been gaining analog share in the hard disk drive, mass storage area as well.

So all of that gets played in, as does a new business area for us such as digital light processor as well.

So all of that, we think, gets factored in.

And even when we have other transitions, for example, in our micro controller business for automotive, that business has been down sequentially for a couple of quarters as certain programs have played out, but we have new design wins that are resulting in sequential growth, we believe, again, in the first quarter there.

So when you integrate the combination of the markets that we're in, wireless in particular and other DSP markets, and the share gains, that's where we come out for the first quarter.

Yeah, just a follow-up on that.

If that's the case, is it possible -- I know that you don't give out the guidance for the second quarter right now -- if you look at what your distributors have been doing is that you indicated that some of the distributors have brought down their inventory.

And I think you are probably the fifth of the semi-conductor company who have indicated in this season that electronic distributors are bringing down inventory.

Is that because they know something more about the end market or is that because of the lack of strength in the balance sheet that they are forcing the semi-conductor companies to bring down their inventories?

Well, Nimal, our distributor inventories really stayed pretty flat over the last couple of quarters.

But to the extent that our distributors are certainly cautious about building inventories, I think it's much more of the latter point you made that they have to think about their balance sheets and working capital and what they can afford and what sells through.

What we're seeing in TI's case is that our standard logic products and high-performance analog products and catalog DSP are fast sellers for our distributors, and, so, they will stock the inventory as they know it moves.

And, so, we haven't seen anything unusual there.

We'd say inventories with our distributors are really pretty stable and project that will continue in the first quarter.

So I would not think that there's any particular forward-looking information in that fact.

Thank you Nimal.

Thank you, Bill.

Operator, next caller, please.

Thank you our next question is coming from Dan Niles with Lehman Brothers.

I'm not trying to beat this wireless thing to death, but let me ask this question.

When I look at your wireless revenues they were up 13% sequentially, and Motorola, when they went through their perception of what happened on a global business in terms of handset sales, that was up about the same amount handset units Q3 to Q4.

But looking forward, what they said is they saw weeks of inventory for the industry up at around 10 weeks versus a more normalized level of 6 to 7 weeks with inventory build in terms of handsets in the channel leading to units down about 20% in terms of sell true as they look forward to Q1.

I know they're not a big customer of yours, but they were talking about the industry at large.

How does that reconcile back to your statement in terms of you feeling pretty good in regards to inventories.

Or is it where Nokia or Erickson may say completely different stuff later, which is possible.

Our comments are based on trying to integrate, you know, inputs from all of our customers and demand from and, therefore, backlogs from all of our customers as well, including Motorola.

You know, as I indicated, the 13% sequential growth in wireless revenues was -- you know, that was unit growth, a few points higher than that, in fact, for us.

But based on and all the other trends we talked wasn't with chip sets and so on, for the first quarter, you know, our expectation of wireless revenues being down a few points would actually have units being down sequentially a little more than that with our blended ASPs trending upward some.

And we think that's the right view based on all of the customer information that we have across the board.

So, you know, as we integrate that, we think that's the plan that we think we have reasonable visibility on today.

And that wireless revenue outlook for us is pretty normal for a fourth-to-first quarter transition.

Usually, the handset makers themselves will see more of a decline Q4 to Q1 just because of the timing of our shipments to them versus what their revenue is doing of the but that's pretty normal for us.

And maybe tied into that, some more clarity around the printer stuff, which I guess you're looking at growth sequentially in part of that's because Q4 was artificially depressed to some degree.

Can you give us any quantitative stuff around how much that declined in Q4?

Because normally, printer business, you know, does decline sequentially in Q1 for the guys that ship printers like Hewlett. so that's why I'm trying to sort through that a little bit.

I think the component inventory bulge that occurred late in the third quarter seems to be fairly independent of end demand.

It happened in that particular set of component inventories.

And, you know, these are not new products, and they're with a fairly small number of customers, so you had like to think that could be, you know, controlled more closely, But the fact is we ended up with inventory bulge there in that, you know, declined third to fourth quarter was, you know, meaningful for us.

It made a point or so of revenue difference for us in third quarter compared to fourth quarter, and we think it will come back, you know, to normal levels in the first quarter.

So there's every reason to think that those customers have worked through that excess component inventory and that, therefore, from our revenue point of view, we'll have growth the first, even though you're exactly right, that's not the seasonal pattern for the end product.

Okay.

Well, next quarter, guys.

Thank you, Dan.

Your next question is coming from Charles Boucher with Bear Stearns.

I'm thinking about the wireless chip sets, do you have any trouble getting those to customers?

Are lead times particularly short there and how much sense do you have of the overseas distribution inventory situation on those products?

Charles, we're not having any particular problems.

There are -- you know, for custom products, our lead times are eight to twelve weeks or so.

Although we try to get and we generally do get good planning information from our customers in terms of how we can position our work in process and then make changes as necessary through the production lines, and so on.

And we think we are, you know, really very up-to-date with our customers.

Our information is clearly after the U.S. holiday season takes into account the Chinese New Year.

And based on all that, we think our customers are in pretty good shape in aisles wireless.

Thank you, your next question is coming from [Mahneesh Goyle with Neuberger Berman].

Can you talk about what your operating model will look like if you were to achieve $2.5b type of quarterly revenue.

Sure, Mahneesh.

I think our views are largely unchanged there that we think that our semi-conductor revenues at that kind of level based on optimal utilization of the kind of manufacturing equipment and capacity that we have now will generate gross margins above 50%, you know, a couple of points or so above 50%.

We think that in that kind of stronger market, our R&D for the company should be, you know, 13 to 14% of revenue as opposed to the 19% or so that it's running today, and that our SG&A, you know, gets down to around 10% or so.

That gives us the opportunity for operating margins 25 to 30%, and, you know, we think we can see, you know T credibility of getting there with the product mix and the potential for the higher capacity utilization.

And, you know, if you look -- if you look at our semi-conductor revenues, fourth quarter of '02 compared to fourth quarter of '01, just as an example, our revenues are up $300m, or so, and profit is up almost that same amount; that is, we have experienced a very high percentage fall-through because of the fixed cost and effects that we've had of higher revenue on a fixed-cost base, and we think that will continue to be an important part of our operating leverage.

Just a couple more short questions.

If you were to gain confidence of 15% type revenue growth in 2004, do you think you will have to change your capital spending plans or do you think the capital spending number is pretty good.

I'd say it's pretty good at this point.

It's based on the fact that, you know, we have a lot of capacity leverage in analog with 200-millimeter, a lot of capacity leverage with the learning and yield enhancement that will continue to get on 130-nanometer.

The fact we're just bringing our foundry partners up at 130-nanometer as well says I think we're pretty well positioned.

So, you know, our track record for 2002, for what it's worth, was pretty good.

We predicted $800m, and that was what we needed and what we spent for the year.

And our objective is that 800m is the right number for us for this year.

We clearly review that as we go along, but I'd say it's pretty solid.

One final question: How many options will be under -- how many options after your share count under $24, or how many options are out there for $24 or under strike price.

I don't know the answer to that.

We summarize that in our proxy reports that come out in about a month.

And until then, I'm not able to answer that.

That's okay.

Thank you.

Thank you.

Next caller please.

Thank you your next question is coming from Joseph Osha from Merrill Lynch.

To follow up on that question if we look at that $2.5b run rate, how much of your capacity, at that point, is that business absorbing?

Let's assume you're not building inventories at that point.

At $10b a year, are you full?

And if not, what does it take, given the way you look now to fill your capacity up?

Joe, I would say that, yeah, we're certainly approaching kind of optimal capacity at that point from the point of view that, you know, already, today, if you look at our advance logic areas, our 300-millimeter capacity is about 30% of the total; and, so -- and, you know, that's really full, already, today in effect with new products.

And analog, over a period of time, will continue to fill up our 200-millimeter, but those get depreciated down as well.

So I'd say that's the right ballpark.

Okay.

That makes sense.

And secondly, as we look at the outsourcing strategy, just to double-check, you said sort of a, quote, unquote, peak volume, you would expect to see up to 40%, I believe, of your [CMOSS] volume external.

Is that when you are at a $2.5b run rate?

Or help me understand how the outsourcing fits into that business plan.

Yes, Joe, that's consistent and it's consistent with the plans we have in place right now.

That is, at that point like that, probably something like 20% of our total capacity, total volume would be from outsourced from foundry, but that's concentrated in our advanced logic areas.

So that's exactly the effect that we get that way.

And that's consistent with the actions we're taking right now.

We have two foundries, UMC and PSMC, that are qualified in the 130-nanometer process and shipping wafers to us to supplement our 130-nanometer production.

That's exactly where we said we would be if you look back about a year ago.

And, so, we're right on target for that.

Okay.

And one follow-up.

Just on the back of that, it seems -- I remember hearing your engineers talk about how the DSP business and the spark business were sort of the two major high-end process drivers.

It seems as if you're perhaps reducing your dependence on spark as a high-end process driver.

Is this true.

Not really, Joe.

In some different designs they tend to be for the processors, where the transistor performance is the most important things, some of the DSPs power consumption, trading off with performance is as important.

But frankly, continuing to drive spark from a product now at 1200 megahertz and all is important as well.

So they both continue to be important.

I guess what really is a difference there that in DSP for portable applications, it's the combination, it's the process technologies, for example T130-nanometer and 90-nanometer where you can really get the combination of performance and low power superiority that makes a big difference there.

I might refer you also that we sent out a release today on the 90-nanometer and inside that release is some detail about how we use the various process variations to support high-performance versus low-power versus mix signal.

So that may be an additional source of information.

Thank you, Ron.

Thank you, Joe.

Operator, next caller, please.

Thank you.

Our next question is coming from Doug Lee with Banc of America Securities.

Hi, guys.

I got most of the questions answered, but just quickly on the distribution comments.

I understand you want to keep inventories low.

Is it your expectation that your d c sales into the channel will be flatter or actually up?

Secondly if you could comment on the linearity of orders of the quarters.

A couple of companies are commented it was slow.

Sounds like it stayed strong, I want to make sure that's the case.

Doug, I want to say our revenues to distribution would be flat to up slightly fourth to first.

That's based on the expectation that we've got, you know, really good traction in our standard logic - commodity difficult logic business right now, and that we see that momentum continuing, you know, gaining share there and adding to that as well as continuing to do well on high-performance analog.

So that would say that our revenues in [DIST] this would be flat to up slightly.

As far as fourth quarter, I think we've commented to the effect that our balance sheet that linearity was sort of better than usual.

If you look at various times in history, and that says that each month in the quarter was, you know, fairly equal to the other months.

And, so, we had very good linearity from that point of view.

At the same time, we certainly didn't see our revenues, you know, drop off significantly at the end of the year.

They don't to hold up quite well.

So a good really steady fourth quarter in terms of month-to-month linearity.

That's terrific.

And let me throw in my congratulations on the good quarter quarter.

Thanks Doug.

Our next question is coming from Alex Berman with Pangea.

Alex Berman A quick question for you.

You mentioned something about Micron and I guess taking a write down on that ownership and it brings up an issue that I think I mentioned to you guys before a long time ago and just, again, obviously, hindsight, not trying to debate the relative merits of Micron or not.

But from a strategic standpoint, I don't really understand what you've chosen to -- you know, you got out of the D RAM business, and then you are sort of not out of it because you're really very much in it because you have 15m shares of Micron.

So strategically why you want to be involved in the business still.

Alex, I would not characterize owning Micron stock as being involved in the D RAM business in terms of our experience in the past in that business.

But the fact is, our strategy all along with our ownership of Micron shares has been to monetize that stock base over a time in a way that is the greatest benefit to our stockholders.

So we did that with appropriate sales in the year 2000 as stock prices dropped, we didn't have, you know, a crystal ball, but we decided not to chase that with further sales at that time based on the belief that there will be a better time to complete the monetization of those shares, and that seems to be our view.

You know, in the year 2000, we achieved pretax proceeds from our sales of Micron shares at that time of over $2b.

And, so, certainly, the remaining shares have dropped in value at this time, but, you know, our view is that they continue to represent value, and we intend to monetize them in our best judgment of what that right time is.

You're right, this involves, you know, an accounting charge.

It's a non-cash charge to the company.

It does not impact our cash position, and, you know, so, we'll just continue to try to make the best judgments about when to complete that monetization.

Do you have a follow-up, Alex?

Yeah, real quick. (inaudible) depreciation through quarters, I didn't understand, I didn't quite get that explanation.

Yeah, Alex, it's really saying that our depreciation which we estimate to be about a 1.4b for the year in 2,003 will be pretty flat quarter by quarter.

And, so, that says it drops from a level of almost $400m in the quarter that it ran in the fourth quarter to a new level that's roughly a quarter of the 1400 -- of the 1.4b in the first quarter, and stays at about that level, maybe drifts up just slightly throughout the year.

Thank you, Alex.

Thank you.

We'll be able to take one last question.

Operator?

Thank you.

Our last question for the evening will be coming from William Conley with Sanders Morris .

Good afternoon, and thanks.

Most of my questions have been answered.

Can you just give us an update, Bill, on DMOSS 6 in terms of where you are?

You talked about some numbers earlier in the year.

And how you're seeing the economics coming out of that facility.

Bill Aylesworth Yes, Bill, we are said where we said we would be.

We're at a capacity now of 10,000 wafer starts per month in DMOSS 6 in 130-nanometer 300-millimeter technology.

That really gives us as close as we can come to our optimally-balanced line.

That is, all of the equipment is well utilized at that point.

So our current plan is to hold 130 than [nanometer lithography] at the 10,000 wafer starts per month and put our next new equipment into the next production module at 90-nanometer where we already have enough equipment to will manufacture some of these first chips that are already fully functional, as we noted.

I'd say, again, also as we predicted, while yields continue to improve, they are still, you know, well off where they're going to be on a fully learned and mature process, and it's going to be the middle of this year before we can say that DMOSS 6 is really contributing to a a lower cost.

And I think that's consistent with what we've been saying for some time, that it takes that period of time of learning and yield enhancement to get to a point where that investment begins to pay off.

From a financial substance in terms of cost, we think that payoff will be about the middle of this year.

But I think it's important to note that the payoff in the marketplace is already being achieved.

That is, the kind of designs that we've turned into products for our customers at 130 nanometer, something like 10m chips now that we've already produced, 15 products -- 50 to 60 products, really, in the queue, is really the payoff of offering our customers -- providing our customers higher performance, lower power than they could get in any other technology by being early at 130-nanometer.

Do you have a follow-up, Bill?

No, that will do it.

Thanks Bill.

At this point, we'll need to stop the questions.

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

Thank you and good evening.

Thank you for your participation.

This concludes this evening's teleconference.

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