德州儀器 (TXN) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the Texas Instruments first-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS).

Now it will be my pleasure to turn the floor over to your host, Mr. Ron Slaymaker.

Sir, the floor is yours.

Good afternoon and thank you for joining our first-quarter earnings conference call.

With me today is Kevin March, TI's Chief Financial Officer.

This call will last one hour.

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

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

A replay will be available through the Web.

This call will include forward-looking statements that involve 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.

Our mid-quarter update to our outlook is scheduled this quarter for June 7th.

We would expect to narrow or adjust the revenue and earnings guidance ranges as appropriate with this update.

We will observe a quiet period beginning on June 1st until the update.

In today's call, I will review our revenue performance, and then Kevin will discuss profit performance in the second-quarter outlook.

After this review, we will open the lines for your questions.

First-quarter TI revenue grew 6 percent sequentially and 34 percent from the year ago quarter.

Demand was strong across a broad range of products in Semiconductor, Sensors and Controls and E&PS.

Orders remain strong, leading us to believe that robust revenue growth will continue into the second quarter and that the year will be a strong one for TI.

Semiconductor revenue in the first quarter was up 5 percent sequentially -- seasonally strong for the first quarter -- and up 38 percent from the year ago quarter.

Sensors and Controls revenue grew 13 percent sequentially with broad-based growth and grew 12 percent compared with the year ago quarter.

E&PS revenue grew 5 percent sequentially and 4 percent compared with the year ago quarter.

In Semiconductor, sequential growth was particularly strong in DLP and high-performance analog products, which more than offset a decline in our wireless revenue.

DLP had a standout quarter with revenue expanding about 50 percent sequentially as TI's technology continues to penetrate the business projector and high-definition television markets with an increasing array of customer brands and retail presence.

After many years of investment, it is encouraging to see DLP growing rapidly and solidly profitable.

High-performance analog grew 14 percent sequentially and 58 percent compared with the year ago period.

This growth was broad-based across data converters, power management, precision amplifiers and digital audio video products.

We believe TI's results reflect a combination of strength in the high-performance market sector, as well as market share gains by TI.

Primarily driven by the strength in high-performance analog, TI's overall analog revenue grew 9 percent sequentially, although this revenue growth was also broad-based.

Wireless analog revenue grew at double-digit rates sequentially as did revenue for printer and commodity linear products.

Versus the year ago quarter, total analog revenue grew 42 percent.

In addition to the growth in high-performance analog, growth in wireless, server drivers and preamps for storage, wireless LAN, display drivers and commodity linear products were all significant contributors to this performance with growth exceeding 30 percent in each area.

DSP revenue declined 6 percent sequentially and grew 35 percent versus the year ago quarter.

This sequential decrease resulted from a decline in wireless, as well as a seasonal decline in digital consumer products.

This combination more than offset robust growth in DSPs for DSL modems and wireless infrastructure, as well as catalog DSPs, with each of these areas growing more than 20 percent sequentially.

The 35 percent increase in DSP revenue compared with the year ago period was driven primarily by strong wireless growth, as well as growth in DSL modems, digital consumer products, and catalog DSPs.

In total, other Semiconductor revenue was up 16 percent sequentially and 35 percent from the year ago quarter.

Sequential growth was primarily driven by DLP, although microcontrollers and standard logic were also up.

Risk microprocessors declined sequentially.

Compared with the year ago quarter, all of these product areas were up.

Turning to specifics in equipment, the 5 percent decline in TI's wireless revenue reflected a combination of industry seasonal and customer specific factors.

We believe wireless handset shipments seasonally declined about 10 percent or so compared with the fourth quarter.

TI is increasing our support of major customers with consignment inventory programs where we hold TI-owned inventory in our customers' factories, and there is no additional buffer of customer-owned component inventory.

As we saw in the first quarter, these programs should result in our own shipments being more closely aligned with the seasonal trends of these customers and the wireless market.

As TI's largest customer adjusted its production levels down in the first quarter, TI's first-quarter shipments were affected, although some of this loss was offset by increased demand at our other wireless customers in the quarter.

TI's wireless revenue continues to track at healthy growth rates as evidenced by a 35 percent growth from the year ago quarter.

This revenue growth rate is higher than that of wireless handset shipments over this period and we believe reflects continued expansion in TI's average Semiconductor content per handset.

Specifically growth from the year ago quarter was driven by 2.5 G. modem and OMAP application processors.

This growth also underscores the diversity of TI's wireless customer base.

Customers also are continuing the trend to purchase complete chipset solutions from TI. 2.5 G. chipset revenue more than doubled from the year ago quarter, although this has been partially offset by lower levels of 2 G. chipsets.

In total revenue per chipset solutions set a record high in the first quarter, as did revenue for OMAP application processors.

In broadband, TI's revenue grew 15 percent sequentially and more than doubled versus the year ago quarter.

Sequential growth was mostly driven by DSL, although cable modems and voiceover packet also had strong growth.

Growth versus the year ago period was primarily driven by DSL and wireless LAN.

Before I turn it over to Kevin, let me make some quick comments about the market for commodity products, particularly standard logic and linear devices.

Market demand continues to be very strong for these products and exceeds our manufacturing capacity.

As a result and as I described in our mid-quarter update, we have moved to a controlled order entry process or allocation for these products beginning in early March.

This ensures that we are not accepting more orders than we have the capacity to support and improves our delivery performance.

It also allows us to prioritize customer demand to ensure support of those customers that have long-standing relationships with TI and minimize the risk of double orders on our backlog.

When we moved to allocation, leadtimes naturally moved down to more normalized levels since we are no longer entering the full demand into our backlog.

By no means does this leadtime reduction reflect a swirling overall market demand.

In fact, many of TI's competitors have seen their leadtimes continue to stretch since early March.

Price trends are also indicative of the strength of demand relative to industry supply for these products.

Pricing for standard logic and linear products bottomed in the fourth quarter and then began to move up for new orders.

We saw some of the price benefit show up in the first-quarter shipments for standard linear products, although it will be the second quarter before we see the benefit for standard logic products due to the leadtime delay between when we book an order at a higher price and when we ship that order.

Pricing for these commodities has moved up at meaningful levels, and our expectation is that it will continue to move up in the quarters ahead.

At this point, I will ask Kevin to review profitability and our outlook.

Thanks, Ron, and good afternoon everyone.

TI's first-quarter gross profit was 1,322,000,000, or 45 percent of revenue.

Gross margin was up 1.9 percentage points compared with the fourth quarter and up 5.7 percentage points from the year ago quarter.

Gross profit and margin benefited in both comparisons from increased revenue and the resulting higher utilization levels of Semiconductor fixed cost manufacturing assets.

Semiconductor gross profit grew by 105 million sequentially to 1,188,000,000 or 46.2 percent of revenue, up 2 percentage points sequentially.

Gross profit in Sensors and Controls increased to 110 million or 38.8 percent of revenue.

Gross profit in E&PS held about even with the fourth quarter at $37 million or 47 percent of revenue.

In the first quarter, TI began accruals for our TI employee profit-sharing program as I explained in January.

The total accrual was about $70 million in the quarter -- a little higher than we previously expected as our outlook for TI's revenue growth and profitability in 2004 moved up from our prior expectations.

Approximately 40 percent of this amount was allocated to cost of revenue with the remainder about evenly distributed between R&D and SG&A.

Also in the first quarter, TI incurred annual compensation expense increases, including annual merit wage increases that were effective February 1st.

Combined these items made up most of the sequential increase in TI's R&D and SG&A expenses.

As a result, TI's first-quarter operating expenses of $848 million increased $92 million from the fourth quarter.

R&D spending of 494 million increased by 46 million, and SG&A expenses of 354 million increased by 46 million sequentially.

TI's operating profit was 474 million or 16.2 percent of revenue as higher gross profit more than offset the increased R&D and SG&A expense.

Semiconductor operating profit was 465 million or 18.1 percent of revenue.

Sensors and Controls operating profit was 75 million or 26.5 percent of revenue, and E&PS operating profit was 9 million or 11 percent of revenue.

For TI, other income and expense produced income of $50 million in the quarter.

Interest expense on loans was $8 million in the quarter.

The Company's effective tax rate was 29 percent in the quarter.

Net income was $367 million or 21 cents per share.

The quarter's results included $19 million of pre-tax amortization of acquisition-related costs.

The total cash of 5,493,000,000 declined 171 million from the end of the fourth quarter primarily due to higher capital expenditures.

Cash flow from operations was 393 million, down 674 million sequentially mainly due to an increase in working capital resulting primarily from higher receivables and inventory.

Capital expenditures of 401 million in the quarter increased 129 million sequentially and 269 million from the year ago quarter as we increased assembly and test capacity and also established a 90 nanometer production line within DMOS 6, our 300 millimeter wafer fab in Dallas.

Depreciation of 348 million decreased to 22 million sequentially and was about even with the year ago quarter.

Accounts Receivable of 1,678,000,000 increased sequentially by 227 million due to linearity in the quarter.

Specifically we saw more revenue in the final month of the first quarter as compared with the final month of the fourth quarter, a trend which is a seasonal norm.

Days sales outstanding were 51 days at the end of the first quarter compared with 47 at the end of the fourth quarter and 56 at the end of the year ago quarter.

Inventory of 1,148,000,000 in the first quarter increased 164 million sequentially to support anticipated higher shipments in the second quarter.

More than half of this increase was sourced from founders.

Days of inventory increased to 64 days at the end of the quarter, up from 56 days at the end of the fourth quarter and 60 days at the end of the year ago quarter.

TI's orders in the first quarter were 3,231,000,000, up 5 percent sequentially.

Semiconductor orders were 2,810,000,000, up 2 percent sequentially.

Semiconductor's book-to-bill ratio was 1.09 in the first quarter.

Turning to our expectations for the second quarter, we currently expect total TI revenue to be in the range of 3,085,000,000, to 3,325,000,000.

Semiconductor revenue should be in the range of 2,650,000,000 to 2,850,000,000.

Sensors and Controls in the range of 280 to 300 million and E&PS in the range of 160 to 180 million.

Earnings per share are expected to be in the range of 23 to 26 cents.

Earnings per share may be impacted by profit-sharing if our expectations for the year's performance change.

We accrue profit-sharing based on how we expect the Company to perform for the year in total, the combination of our revenue growth rate and operating margin.

For example, if we exceed the high-end of our second-quarter expectations range to an extent that we need to increase our expectations for the year, our profit-sharing accrual would need to be increased.

Any profit-sharing adjustment up or down is made in the quarter our expectations change with the accrual being adjusted on a year-to-date basis.

This means that any prior quarters under or over accrual would need to be caught up in the quarter that our expectations change.

Restructuring charges in the second quarter are expected to be about even with the first quarter's 5 million and should remain at about this level through each of the remaining quarters of 2004.

The effective tax rate for 2004 is expected to be about 29 percent, down slightly from our earlier expectation of 30 percent.

Profit-sharing accruals are expected to remain at about $70 million per quarter for each quarter of 2004.

For 2004 we expect R&D to be about 2.1 billion, up slightly from our prior estimate of 2 billion.

Our estimate for capital expenditures has increased to about 1.3 billion from our previous estimate of 1.1 billion, reflecting our plans for additional assembly and test capacity, as well as our 90 nanometer line in DMOS 6.

Depreciation is now expected to be about 1.5 billion, up a little from our earlier estimate of 1.4 billion.

Note that the level of planned capital expenditures remains below our depreciation level for the year.

In summary, we are increasingly encouraged by the strong momentum in our markets and in our business operations.

We believe that 2004 will be another strong year for Texas Instruments, and we are positioning our operations accordingly.

With that, let me turn it back to Ron.

Thanks, Kevin.

At this time, I will ask the operator to open the lines up for your questions.

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

After our response, we will provide you an opportunity for an additional follow-up.

(OPERATOR INSTRUCTIONS).

Andrew Root, Goldman Sachs.

Just a couple of quick questions.

If you could give a little bit more granularity as to why wireless analog sales were up in the quarter?

It's obviously very strong in light of what is probably going on in the digital (inaudible) side.

And also, your CapEx increase, when that might hit in terms of incremental wafers that would potentially provide a pop to incremental gross margin when your own production comes on and what percent of that you are using right now?

Okay.

I will take the first one and let Kevin respond to your second question.

We had a lot of crosscurrents in our wireless revenue in first quarter as you might imagine.

For example, we talked about chipsets setting at a record high;

OMAP revenues setting a record high.

At the same time, other customer dynamics were taking place.

There is no secret that our largest customer said that they were down, and our results reflect that impact.

But in addition, we had other customers that were up as well.

So with analog being up versus digital base being down, that really just reflects customer-specific dynamics that were taking place in the first quarter.

Kevin?

Andrew, on your question about CapEx, capital expenditures, we expect that that is going to be heavier spending in the front of the year just as it was in the first quarter, and that will continue a little heavier in the front of the year in the second quarter.

The preponderance of that increase that we are going to spend is on our assembly and test operations.

As our utilizations have been going up, we have been producing significantly more actual units to run through our assembly test sites, and we are putting in place the capacity, particularly in the test area to handle that unit increase.

Our wafer plans from a fab standpoint continue as they were in the past where they will incremental increase at a very modest rate through the year.

Your question on percent of foundry, we are outsourcing primarily the 130 nanometer technology to foundries, and that is approaching about 50 percent of our total wafer needs right now.

Adam Parker, Sanford Bernstein.

Just a little more granularity on wireless.

First of all, in the wireless, what percentage of your revenue was in wireless infrastructure versus the handsets and then I have got a follow up on the handset part?

We don't specifically break that out, but it is a small percentage.

If you look at, for example, in year 2003, I believe wireless infrastructure was about 5 percent of TI's total wireless revenue.

Did that grow faster than average during this Q1 or no?

Wireless infrastructure revenue was up; handsets were down, so yes.

Within the digital base band part, do you believe your business was down more than the 10 percent?

You said the overall wireless business was down?

Did OMAP ASPs boost during Q1, or was it units only that drove the record revenue in OMAP?

I am not sure I completely understand your question.

I do not know that we want to specifically breakout what digital base band units did versus revenue.

But suffice to say, DSP was down because of wireless, which means digital base band revenue was down sequentially.

I am just trying to get units versus pricing there.

Right.

In terms of OMAP revenue, same consideration.

OMAP units certainly were up sequentially.

We don't specifically break out OMAP pricing or OMAP pricing trends.

So no extra granularity on units versus pricing within the wireless handsets?

No, that is correct.

John Lao, Bank of America Securities.

Given the tightness in the commodity markets, the first question is, is there any plans to increase the capacity for those products given the pressure that is on the marketplace right now?

And do you believe the tightness in the capacity will continue to spread to the high-performance analog and then finally the capacity outlet into the digital area?

Kevin, would you like to take that?

Sure.

On the commodity capacity question, we are not looking to increase our capacity there in the wafer fab area.

We believe we have as much capacity as we want.

We will modestly adjust our capacity over time, but that is not the area that we will spend most of our money on.

In the wafer fab area, it will be in our advanced technologies, primarily the 90 nanometer and the 65 nanometer.

We do outsource some of that capacity, so there other means available to us besides just committing our own capital to that.

In the area of high-performance analog, we are seeing positive pricing.

The high-performance analog did not and does not by its nature see much in the way of pricing pressure.

The customers care much more in that area about reliability of supply and the quality of the product.

However, we have seen in certain select elements of that area that some pricing increases have actually being reflected in that business area.

On the digital products again, most of those are of custom nature, and so their prices tend not to be responding so much to a market setting as it is just to this normal learning curve pricing slope that we are on.

I would just add that in general on capacity high-performance analog capacity, we are in pretty reasonable position on.

We have run into tightness every now and then where we get surges of demand that we have seen some bottlenecks in the assembly test area, but again we are trying to rectify those as they happen on pretty short order.

The same would be true on the digital side.

I would say in general, capacity is in pretty good position internally as you might expect because we are outsourcing, our utilization is quite high, essentially full on advanced digital logic, but we have been able to get all the capacity that we needed from external sources being the foundries that Kevin mentioned.

So you are able to get to the capacity that you need either through your own or outsourcing at this point?

We have not been constrained at all through our availability of capacity from our foundries to this point.

That is correct, John.

Michael Masdea, Credit Suisse First Boston.

Thanks a lot.

Congratulations on the quarter.

I guess the first question is what are your customers focused on?

Are they more concerned about the matters now that shift to do availability and bottlenecks is the first question?

I would say it depends upon the customer.

Certainly probably the customers are increasingly optimistic about their own outlook, and we are seeing that in terms of the backlog they are putting on us, as well as the forecast that they are providing us independent of that outlook.

And I would say from that same standpoint, they do shift concern at the component level to assurance of supply.

So, for example, there is probably less focus and discussion on pricing these days versus supply assurance.

But beyond that, they are focused on their business, and if they are buying product from us, we are in a pretty good position in terms of getting supply, other than again commodity areas where things are tight.

As we said, if they are a long-standing commodity customer of TI, they are generally getting what they need in that space as well.

On the profitability side, how should we start to think about 300 millimeter impacting profitability?

And to that same effect, how should we think about depreciation in 2005 because it looks like a waterfall model suggests we are going to see a fall off in depreciation?

Michael, right now I will take the last question first.

We are not forecasting 2005 just yet with any precision, but we don't anticipate it to change that much different right now from what we are seeing in our outlook for 2004 at present.

As we are bringing the 300 millimeter capacity online pretty much concurrent with the demand, so we are not trying to get it way out in front of our demand expectation.

So we will see that just kind of incrementally slowly working its way up over the next few quarters and going into next year.

Tom Thornhill, UBS.

I would like to focus on the high-performance analog business for a second.

Great growth, of course.

Can you give us some idea of the relative size of it versus your analog business or what percentage of the analog sector you qualify as high-performance and a follow-up on some of the products?

I can quickly answer that.

High-performance analog is about 35 percent of our total analog revenue based upon 2003 data.

And then did you have a follow-up?

And it is growing faster than the overall analog business?

Yes, it is.

So I forget specifics on 2003 data, but it significantly outpaced the overall analog revenue from TI, even though our total analog revenue outpaced the analog market as a whole.

As a follow-up quickly, to what degree are some of the newer processes, the LDI, Viacom 3, CBC-HP processes having an impact on your ability to provide some unique products in that category?

What I can say is that the new products that we are introducing and certainly not all the new products are based on the advanced process you are referring to, but a number of them are.

New products are the primary driver in TI's differentiated revenue growth versus the rest of the market.

I do not remember the first-quarter number, but, for example, in fourth quarter, half of the revenue or the revenue growth -- let me think about it -- half of the revenue growth that we were experiencing was coming from product that had been introduced in the last three years out of that HPA activity.

So definitely the new products and customer reception of those new products.

Erach Desai, American Technology Research.

Just one clarification and a question if you do not mind please.

In terms of the clarification, the very first question talked about outsourcing.

Ron, was the response of 50 percent at the 130 nanometer node that is being outsourced?

Yes.

Thank you.

And could you perhaps give us some color in terms of monthly bookings momentum?

I think there was a comment as part of the prepared text that bookings remained strong through the quarter.

Could you characterize sort of the sequential monthly momentum?

I do not know that I specifically know on the bookings.

I believe that they gain momentum as we move through the quarter similar to what revenue did, and that, again, is probably pretty seasonally normal for a first quarter.

But I do not have specific numbers for you.

Cody Acree, Legg Mason.

Thanks and congratulations on a great quarter.

Ron and Kevin, you guys talked several quarters ago as we were starting to look at upturn about a different profitability model on the long run for gross and operating margins than maybe you had seen during prior cycles.

You had a lot of changes since different product mixes; you are talking about profit-sharing what not.

How does that look now as you are starting to get some real visibility into what the cycle is going to look like?

We still anticipate being able to expand our margins as we go forward.

What we talked about in the past just to refresh the other folks on the line, is that during the last upturn our profitability peaked before our revenue did.

We anticipate that this time as our revenue keeps expanding, our profitability should be able to pass what our prior peak was.

Our prior peak was about 22 percent PFO on a GAAP basis.

The biggest difference between where we are at at this moment in the cycle and where we were at that prior peak has to do with the commodity pricing that Ron was discussing earlier.

Our pricing in our commodity products are far less than half of what they were during the prior peak, and they are only just now beginning to move back up.

In addition, since the prior peak, we have taken additional market share and are shipping considerably more units into that particular space.

So as that pricing moves back up, we should see some very interesting bottom-line effect to that.

But clearly that will be a process that will happen over multiple quarters, not a single quarter.

In addition, during the last peak, we were going into that peak with our depreciation increasing at a fairly rapid rate.

The difference that we have in this cycle and it is a function of our foundry strategy and our slightly changed business model is that we are now moving on a depreciation dollar level that is fairly flat as we move through this cycle.

So we will not have that buffering where we can go at the upper end.

So we still believe that we should be able to make good progress on our profitability as we continue through this cycle.

With all of that said, it sounds like all of this points definitely in the right direction.

If you are looking at similar utilization rates and whenever we get to that level of demand, any comments on what kind of a delta we could see this peak versus prior peak?

Well, I think ultimately we are going to be a few points above where we were during the prior peak.

I don't know that we have the accuracy to get any closer than saying it that way.

Because we do not know how high the peak is for one, right?

Chris Stanley, J.P. Morgan.

Thanks, guys.

Just a question on bookings.

It sounds like book-to-bill was 1.05, but you're guiding at 5 to 13 percent.

Can we assume that you are expecting anywhere from 0 to 8 percent turns, or is this a result of the new order of software?

It is not -- I am not sure what you mean about when you said new order software.

The new way you guys are incorporating the orders.

You mean for the commodity on the order entry?

Exactly.

I am just wondering where we get the 8 percent side to bookings?

First of all, the number you quoted in terms of book-to-bill, maybe you misunderstood.

We said 1.09.

So it's a little higher than what you were indicating.

But, again, to understand where we are in terms of backlog, you even have to go back to fourth quarter because keep in mind fourth quarter we saw a 20 percent bookings increase sequentially.

So this quarter basically maintained that and built on it with another 2 percent growth in our Semiconductor area.

But maybe the better way to answer your question is just if you look at our level of visibility coming into the second quarter, we had a higher percentage of our quarter in the form of backlog when we came into the quarter -- and again that is based upon what we expect revenue to do in the second quarter -- compared to where we were when we came into the first quarter, and that, of course, was higher than where we were coming into the fourth quarter.

So our visibility has continued to enhance, and with that, yes, our turns trends have been going down, both fourth and first quarter, and we expect second quarter turns to be at a lower-level yet.

That actually makes perfect sense.

I guess if visibility is so much better, why such a wide range for guidance?

The range on guidance is really more just reflective of our historical ability to forecast with a certain precision level or lack thereof.

So when we came up with our new guidance process midyear, we basically just study history to see what our precision was in the first month of the quarter versus the third month when we did our mid-quarter update and set the range based upon that.

I would not read anything specific about our second-quarter outlook in terms of the range that we have established.

Manish Goel, Neuberger.

One thing quickly.

Your CapEx is increasing by 100 million, and depreciation is also increasing by 100 million.

Could you please reconcile that, and I have a follow-up?

Yes.

Actually I think our CapEx is increasing by 200 million from 1.1 to 1.3 is what we are indicating.

The depreciation is expected to increase about 100 million.

It is actually a little bit less than that.

But recall that with our depreciation schedule, roughly 30 percent of the money that we spent in the year is depreciated in the first year.

So you can see the conclusion from that.

The other thing I would add is the CapEx, if you look at what we spent in the first quarter, which was right around $400 million, that says it is more front-end loaded this year, and then the other consideration is a good percentage of what we are spending capital on is for assembly test equipment, which goes online very quickly and, therefore, starts depreciating right away as opposed to putting in place a wafer fab or a wafer production line that would have to go through a process qualification (inaudible).

So, Ron, would you expect a $30, $40 million jump in depreciation in the next quarter, or you think it will be more of a gradual increase?

I actually think the increase is going to be fairly gradual as we go through the quarters because clearly the depreciation is over the course of a year.

So even if we could spend all that that quickly, it has to be divided across the year.

Nimal Vallipuram, DRKW.

Congratulations on a great quarter and even better guidance.

If you look at your numbers, your Semiconductor numbers are up almost 6 percent in the first quarter, and you are giving guidance equally very strong in the second quarter.

Can you give us some granularity, or can you discuss qualitatively what end markets are expected to do well in this second quarter, and when do you expect the handset market as you discussed (inaudible) seasonality and some custom issues expect to come back?

Finally, if you also can tell us any of the end markets that are nonperforming as you had expected or you would expect it to come back later in the year?

Let me just -- first of all, we do not -- in our guidance, we try not to go down below the Semiconductor level.

But I will say our expectation on the second quarter is that the broadbased strength that we saw in first quarter should generally carry into second quarter.

So it is not any particular end market.

What I can tell you in terms of wireless is wireless is typically up probably 2 to 3 percent sequentially for TI in the second quarter, and again that is just kind of a history check.

It is not guidance as to what we might expect second quarter.

The other thing I would say is we do not think in wireless that -- I am not sure if you asked this specifically, but I will address it anyway -- we do not think we have a bolt of inventory or anything like that that we need to move through in the second quarter.

Because we are on the consignment inventory program, our response to the market conditions and the customer dynamics was pretty much immediate as we went through first quarter.

So as we go into second quarter, we will be reflecting the overall market and customer production build rates, not needing to work through excess inventory or anything like that.

Kevin, do you have anything to add?

No, I think you summarized it very well.

Just a follow-up on that.

You mentioned about this new inventory management you are using.

It was not clear whether it was only used for commodity or it was used across the board.

The consignment inventory program is a program that we put in place at major strategic customers.

So it is not -- the program that we have for our commodities is not inventory.

That is just how basically we enter orders and we select which orders we choose to enter onto our backlog.

But the consignment inventory program is typically done for large customers on high-volume type of programs.

As a result of these programs, are you comfortable when you look across the board that there is not risk of excess inventory anywhere downstream from TI in any one of the end markets?

As we said before, we do not have very good visibility into our various customers' channels.

So you would need to talk to them about that.

As far as customer component inventory, what we see taking place is probably some normal build of component inventory that we believe is consistent with our customer's outlook for higher shipments in a seasonally stronger second quarter.

But we do not see anything that concerns us in terms of an excess component inventory build taking place.

Thank you.

Congratulations on a great quarter.

Mark Edelstone, Morgan Stanley.

Good afternoon, guys.

The first question is just relating to the consignment again.

What percentage of wireless revenues and what percentage of your total Semiconductor revenues are on consignment right now?

I do not think we want to specifically break that out.

What I would say is, again, it is not all of our wireless customers.

It is our largest most significant customers that we have those programs with, and it is a -- I would say it is a pretty significant increase in assignment programs that we have in place today than what we had a year ago.

But we probably don't want to be more specific than that.

And then a question on distribution.

What was the change in your distribution revenues in the quarter, and what was the change in point of sale at your distributors in the quarter?

Okay.

Just the revenues were up probably a little higher than our sequential Semiconductor growth rate overall.

The resale, or shipments out of distribution, was a little higher -- I am sorry -- was a little below that, with the end result that distributors are putting in place some inventory.

Again, that is based upon their outlook for higher shipments in the second quarter as well.

So again, both the resales, as well as our shipments into distributors, ran a few points above what our sequential growth rate was for Semiconductor overall.

But obviously a little bit of inventory build nonetheless?

Right.

Distributors proactively built inventory in first quarter.

What I would say is current inventory levels are at a level that we are comfortable with, that we think the distributors are comfortable with, meaning they are within their target ranges.

The other thing is this is something that, of course, we watch closely, especially on the commodity product line, to make sure that we are not seeing any signs of double ordering.

But everything we have seen to date I would say we are comfortable with.

David Wu, Wedbush Morgan.

Excellent quarter, folks.

One question I wanted for clarification very quickly please Kevin, you talked about 70 million profit-sharing for the rest of the year each quarter, right?

So other than salary increases, I should not be seeing any significant jump like we saw in Q1 in terms of OpEx?

On a sequential basis, David, that would be correct.

Any jump there would be because we are doing program investments primarily in R&D.

It would be much more smaller an increment.

In the future, right?

Right.

We did revise our R&D forecast up from 2 to 2.1, so we will spend a little bit more there, but not a great deal more.

The question I have really is on the -- when I look at your business mix in Q1, it looks like -- should I think about other than wireless would be better in Q2 that essentially the business mix should not materially be different from what was strong in Q1 should continue to be strong in Q2?

And if prices go up for your commodity products, should I be looking for better incremental gross margin flow-through?

David, I am presuming you mean by business mix the breadth of the revenue sourcing that we had and the breadth of the growth that we saw.

Yes, which was led by analog.

Right.

So we would expect that sources of those growths will probably change a little bit.

Keep in mind, that wireless seasonally down in first quarter; digital consumer seasonally down in first quarter.

They will begin to change and contribute differently to the revenue profile as we go forward.

I cannot recall what the second (inaudible) to your question was there?

You talked about price increases in your commodity products.

Only standard linear kicked in in Q1, and standard logic would kick in in Q2.

I was thinking about incremental gross margin moving forward.

Should better commodity product pricing give you a high incremental gross margin flow-through?

That is a good question, David, because there is a number of moving parts here.

Clearly the commodity pricing will fall through at a very high rate.

In fact, it should fall through at darn near 100 percent.

However, we need to keep in mind that as we continue to build our revenue out there, our factories are getting quite full.

As Ron commented on earlier, our digital, of course, are pretty much all full.

Especially our advanced technologies we are outsourcing pretty substantially to the foundries.

Our analog factories also are getting fuller, and as Ron pointed out, we've got a few bottlenecks popping up that we are having to do some investment in.

The point of all that dialogue there is that we are coming through the part of the cycle now where the incremental fall-through is going to begin to adjust a little bit as we go forward.

Clearly at the bottom of a cycle when our factories are way under-loaded, we get pretty significant sequential fall-throughs as we incrementally increase loadings into the factory.

We might see upper 70, low 80 percent kind of fall-throughs.

As we have seen over the last three or four quarters, those year-over-year fall-throughs have begun to drop somewhat into the 60s, and as we move forward, it is only reasonable to expect that the fall-throughs are going to begin to merge with our actual GPMs, probably somewhere in the 50s.

That is just natural to this part of the cycle as we begin to reach capacity utilization numbers that are quite high.

So the fall-through going forward on the ongoing noncommodity business will begin to see -- continue to contract slightly as we have seen over the last throughout this cycle so far as you look at each of the quarters.

However, the fall-through on the commodity itself will be at 100 percent as you pointed out.

So it is a bit of a mix as you take a look going forward.

David, the only thing I would add on commodities that complicates it is, is because pricing is still at historically low levels, profitability on those products is still low.

So the price increase is all 100 percent fall-through, but in terms of what you are blending in is blending in from a lower base of profitability.

So it is complicated.

So what you are saying, Kevin, on incremental margin is, it is a pretty good trade-off, lower incremental margin but higher absolute gross margin.

Is that it?

Okay.

David, did we answer your question?

Yes.

Thank you.

Tim Luke, Lehman Brothers. (technical difficulty)--

Joseph Osha, Merrill Lynch.

For starters, Ron, can you help us maybe size the DLP business a little more, seeing as how it is becoming so significant, and I have a quick follow-up?

Based upon 2003 revenue, it was about 5 percent of Semiconductor.

But it is growing rapidly, so it will likely increase from that.

But that is the only granularity I have at this point.

Did we hit double digits as a percentage of revenue in the first quarter?

The only thing we have at this point is what I gave you for 2003.

Okay.

And secondly, just back to the Semiconductor target for the second quarter a little bit.

Clearly the consignment inventory has helped, but there has to be -- if Nokia backed up on you, there has to be a backup somewhere within your operations either in terms of your producing less in the second quarter to absorb some of that inventory or you are on balance sheet or something.

Are you saying that wireless end market revenue in the second quarter is going to the seasonal or not?

Let me try addressing the concern you had about whether we are absorbing our capacity.

A lot of that product is on our most advanced nodes, and again as I mentioned earlier, we outsource about 50 percent of that advanced node.

So that is our fluctuation point is on the foundry side, not on the internal capacity side.

So there is not an absorption issue that we are anticipating associated with demand change on that customer.

I think we would be looking to 2Q beginning to show signs of its seasonal growth again for the wireless business.

So you are saying you have absorbed that wireless delta from your large customer already?

We don't see any (technical difficulty)-- from an inventory standpoint on that customer.

You cut out there for a second.

I am sorry.

We are not concerned about any inventory or profit impact as associated with that change in customer demand for that customer, no.

Okay.

Thank you, gentleman.

See you in Dallas.

Tim Luke, Lehman Brothers.

With respect to moving forward on the inventory turns, could you just clarify how should we view that going forward with the inventory turns moving from 6.4 to 5.6 in the quarter?

Maybe some clarity on how that is going to develop going forward given the metrics you described in the first quarter?

Well, I will start.

Kevin, feel free to jump in.

Again, as we said, our inventory growth in the first quarter is done proactively in anticipation of higher shipments going forward, and I would just ask you to recall going back to the second quarter last year where we did very similar.

We build inventory probably at higher levels than many of you guys were comfortable at, and that is exactly what allowed us to outgrow the market in second half of last year.

So you should read nothing more into our inventory growth other than an increasingly optimistic outlook that management has on the year overall.

Kevin, do you have anything to add?

I could not say it any better.

Tim, I know you are on a wire phone now.

Was that your complication before?

I know your a wireless carrier, right?

We should assume then in the second quarter the terms would go up then -- that the revenue is up?

Tim, I don't think I would make anything -- we are not forecasting our inventory -- (multiple speakers),

Okay.

Just one other follow-up if I may.

If you have any further progress reports in the CDMA and WCDMA arena in terms of important milestones for those product areas?

I don't really have a lot to say of significance in CDMA. 1X, we have that chipset that we began sampling in fourth quarter of last year.

We do have customer engagements underway, and things are continuing to progress.

I do not have any customer names to throw out or specific announcements as we will allow our customers to announce their products as opposed to us doing that for them.

But I would just say that everything seems to be proceeding well.

WCDMA, we have a UMTS chipset that we are sampling.

We believe we will have it be basically production ready second half of this year, in production in second half of this year, and then beyond that, the normal suspects of OEM engagements where we have custom product that will be participating in that 3G market.

And you know even above that, 3G today is the biggest driver in TI's OMAP applications process revenue with the programs that are taking place in Japan.

So pretty much across the board we feel good about our position in 3G, specifically WCDMA, UMTS, as well as everything is still on track for our entry into the CDMA market.

Again, that is beyond the work that we are currently doing with the production business we have with Nokia on their 1X CDMA product.

Jack Romaine, SG Cowen.

Could you guys talk a little bit about DMOS 6?

What is your wafer output right now, and how do you see that trending throughout the year, and I have a follow-up?

DMOS 6, we currently have the 130 nanometer line in full production.

That, if I remember the number, is 12,000 wafers per month of output.

The nine nanometer line that we're putting in place will be in production by the end of the year at 7000 wafers per month of capacity.

But again, that line is not operational today.

It is going through qualification.

We expect the 90 nanometer to process to Qual in DMOS 6 in third quarter, and then we will be in production in that same quarter.

I think that is -- the only other thing I would add is probably the cleanroom space is capable of being equipped at somewhere 25,000 to 30,000 wafers per month of capacity.

So we still have plenty of room to grow inside of that fab.

And what is the timing difference between the fixed costs for that hitting the P&L versus wafers coming out?

(multiple speakers).

From a call standpoint, there are probably going to be a couple of quarters of timing difference on that.

From the time we put the equipment in, before we actually have a Qual processed (inaudible) equipment.

And that would be from equipment in, and then typically we start depreciation at about that same time period. (multiple speakers).

Is that equipment in now?

Are we seeing fixed costs from that right now?

The equipment is in installation.

As Ron mentioned, we are going to be in a position to start at the end of the year with about 7000 wafer level.

So there is some in.

It is not all in.

It is still coming in.

To the extent that there is equipment only for that process node, it will start depreciating until we are in a Qual position which will be later in the year, much later in the year.

If there any equipment that has dual use with other processes, then that starts equipment depreciating almost immediately.

But certainly a good part of our $400 million that we extended in first quarter was for that 90 nanometer equipment, Jack.

How about labor costs associated with that?

I am sorry.

What was your question?

Labor costs associated with that that would be in the P&L right now?

In any labor that is in that factory today is in the P&L.

Is that --?

Correct.

We are just installing the equipment now.

So to the extent the equipment has to be operated, it will not be a full complement of operators on that until we are running it for production purposes.

John Barton, Wachovia Securities.

On the topic of consignment, one of the typical downsides in the supplier side of consignment agreements is you end up building more inventory on your balance sheet as you have this distributed inventories at multiple customers as opposed to one consolidated site.

Is that something we should be looking for as we go forward, or are the consignment products that you focused on proprietary anyway and hence you do not have to have extra redundant buffers as you look at the various customers?

John, I will take that one.

It is the latter.

They tend to be the proprietary products that we are building, and the turns on our consignment inventory are extremely fast.

It is not like we are putting a lot of -- recall, this is just finished goods, and we're repopulating the finished goods as it gets pulled.

And that is the signal (ph) back into our factories.

They actually start the wafers.

We watch the pulls at the customer's location that way.

So with the consignment inventory, again this is just a finished goods product, and it turns extremely fast, as a result.

So if you actually looked at the finished goods level supporting consignment inventory, and looked at the revenue tied to it, there's an awful lot of revenue that's being supported by those turns.

And certainly, the benefit is what we just described for first quarter.

We do not have an extra buffer of inventory between TI and our customers' production lines.

There is a huge benefit associated with that.

And just one quick follow-up if I could, Ron -- the second-biggest downfall of consignment is when you're making that transition, and where you were billing a month ahead of consumption, you go to instantaneous.

Are there any big consignment customers coming online over the next several months that could potentially put a hiccup in that "revenue recognition"?

John, we have been doing this for a while now, and given the overall size of our inventories, as we bring customers up on consignment, it is frankly kind of at the noise level.

You are exactly right that there tends to be a little bit of a buffer as you're bringing them on and you get your systems working together and so on.

But frankly, that period is very brief, and the actual dollars tied up in inventory are very small as a portion of the total inventory that we carry on our books.

Okay, so very low probability of any surprises?

John, come on.

Next caller, please.

Igor Rybakov, Thornburg.

Can you clarify DMOS 6?

Is it 300 millimeter mostly?

DMOS 6 is all 300 millimeter.

In terms of your relationship with new potential customers, any big news on signing up large Korean wireless companies?

Probably no.

Certainly, we are engaged with LG, I believe is -- well, it is public already.

We have (multiple speakers) talked before about various (inaudible) applications that we are engaged with them in on the handset.

Samsung is certainly the other one that you are probably referring to, and I would say I don't have anything to announce.

I think you can assume it is a priority at TI that given Samsung's success in the market we would certainly like to be engaged with them, and we have a lot of activity focused on trying to make that happen.

But I do not have anything to announce in this call specifically.

Did you at least see more (inaudible) from Samsung at this point?

I don't believe we can answer that question at this point.

Hans Mosesmann, Schwab SoundView.

Thanks.

All my questions have been answered.

Good quarter, guys.

Clark Westmont, Smith Barney.

Two short ones.

One is, is there any way to quantify the gross margin benefit from the increasing inventories?

I would think it would be fairly small since you outsource so much of the advanced stuff?

And the follow-up question is, can you give us any color on the mix of DLPs between TVs and business projectors at this point?

I will take the second question first.

DLP is probably somewhere -- current revenue mix is probably 60 to 70 percent data projectors.

Probably 25 to 30 would be the high-definition television space, and then the remainder would be large venue or cinema type of applications.

The data projector space is a very fast-growing but certainly TV just because of the coming off a much lower base is growing most rapidly.

Sounds good.

Kevin, did you have a --?

Yes.

Clark, on the GPM benefit you are alluding to, you are exactly right.

The expensive wafers are being sourced from our foundries.

I am sorry -- the most advanced wafers are being sourced from our foundries.

That was clearly more than half of our inventory growth.

The balance of the inventory growth is such that the (inaudible) did not really see any material list or change in our GPM as a result of that.

Clark Hughes, Fulcrum Global Partners.

The other Clark.

What was the year-over-year growth in BLP?

Year-on-year was 63 percent.

Great and what was the overall catalog sales?

I saw the line about DSP catalog sales.

But what was the overall catalog sales in the quarter?

I am sorry.

I do not answer the question.

The catalog group that we have historically talked about, we have now broken that down for you into its components.

So if you take what we said about high-performance analog and what we said about catalog DSP, that fully accounts for the catalog numbers we have talked about.

So I will just refresh.

Sequentially catalog DSP up 33 percent, 49 percent compared to a year ago.

High-performance analog was up 14 percent sequentially and up 58 percent from a year ago. (multiple speakers) -- revenue is high-performance analog.

Thanks for the clarity there.

During the commentary, there was a reference on the profit-sharing accruals or annual compensation to a February 1st date.

I was a little spastic and missed the commentary there.

What was the reference to the February 1st date?

That was the annual merit wage increases.

So I guess you could read that as not the full quarter impact was felt in first quarter.

There is probably a little more to come in second quarter before you have that happening in full.

Ben Lynch, Deutsche Bank.

Thanks for fitting me.

Assuming that it did, when specifically did the wireless business trajectory in the first quarter change versus what you had expected?

We are probably not prepared or willing to get into month by month dissection of the trend.

Is it true -- is it right to assume that it did change versus what you expected?

Certainly versus coming into the quarter.

Yes, you bet.

And even at the mid-quarter?

Mid-quarter rollout had been comprehended, but again, we are not going to break it out into detail.

Did you have a follow-up?

Yes.

I am assuming fortunately around the same time the other businesses kicked in to make up the difference?

I am sorry.

Was that a question?

Yes.

I will leave it.

Just an assumption.

I guess a more concrete question is, could you remind us how much of the DLP high-performance analog and catalog DSP products are sold through the channel versus directly?

I am sorry.

The catalog DSP and high-performance analog?

Probably two-thirds or thereabouts of that revenue moves through distribution.

And again, DSP is about 25, 30 percent of TI's Semiconductor revenue overall moves, so the catalog product would be a much higher percentage.

I think we have time for -- we are running over, so one more caller.

Operator?

William Conroy, Sanders Morris.

Good afternoon.

Ron, can you tell us what the trend in average content per handset where you have content would look like, say, from the December quarter to the March quarter?

I cannot get into it on a quarter by quarter basis.

I can say, for example, if you look at the year-on-year trends, our revenue was up 35 percent in wireless.

I believe it is generally believed by most of our customers and analysts that first quarter to first quarter handset units in the market grew by something like 25 percent.

So from there, you should be able to see relatively we believe where the impact of the higher content per handset.

Just to closeout, Ron, can you give us any sense of how we should think about the seasonality in the DLP business as the amount of PDs (ph) starts to grow?

That is a good question.

I would suggest that probably near-term we are not going to see the seasonal effect because of the rapid penetration that DLP is having into that product category.

And in fact, just the high-definition category and large screen category overall is growing rapidly.

So I don't think you are going to see the seasonal effect for awhile on DLP.

That being said, I think 50 percent sequential growth in first quarter is probably not going to happen every quarter.

That probably reflected some pent-up demand from shortages of those televisions.

Again, it was not shortages of the DLP device, but shortages of DLP televisions that were in the market late in the year.

So part of it is a recovery from that pent-up demand, but we certainly expect that revenue to keep growing robustly.

(multiple speakers).

With that, we are going to end the call.

Let me remind you that the replay is available on our Website.

Thank you and good evening.

Thank you.

This does conclude this afternoon's teleconference.

You may disconnect your lines and enjoy your day.