德州儀器 (TXN) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Texas Instruments fourth-quarter 2004 earnings results conference call.

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

It is now my pleasure to introduce your host, Mr. Ron Slaymaker.

Sir, the floor is yours.

Good afternoon and thank you for joining our fourth-quarter and year 2004 earnings conference call.

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

This call will last 1 hour.

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

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

A replay will be available to the web.

This call will include forward-looking statements that include 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 March 7th.

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

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

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

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

Fourth quarter TI revenue was $3153 million, slightly exceeding the upper end of our most recent guidance range due to stronger than expected growth in Semiconductor.

TI revenue declined 3 percent from the third quarter due to normal seasonality in our graph and calculator sales associated with the end of the back-to-school period and grew 14 percent from the year-ago quarter due to growth in Semiconductor.

Semiconductor revenue was about even with the third quarter, and grew 14 percent from the year-ago quarter.

As expected, sequential growth was affected by inventory adjustments of standard products through distribution channels that continued in the quarter, although this was offset by strength in wireless as well as higher royalty revenue.

The growth in Semiconductor revenue from the year-ago quarter was driven by strong growth in wireless, as well as growth in DLP revenue.

Sensors and Controls revenue of $277 million was even with the third quarter and grew 10 percent from the year-ago quarter.

E&PS revenue of $80 million declined 58 percent sequentially as expected due to the end of the back-to-school season and grew 5 percent from the year-ago quarter.

In Semiconductor, for the fourth quarter, total analog revenue declined 6 percent sequentially due to weaker demand for standard products, including high-performance analog and commodity linear products reflecting inventory adjustments in distribution.

The sequential decline in high-performance analog was 11 percent, and the decline in commodity linear was over 30 percent.

Although these 2 areas represented almost all of the sequential decline in analog, other analog product areas were mixed.

For example, although revenue from analog products filled into storage applications increased, revenue from printer applications declined.

Analog revenue from connectivity applications, including consumer and computing increased sequentially, while DVD applications declined.

Compared with the year-ago quarter, analog revenue increased 3 percent.

High-performance analog revenue was the biggest factor with 6 percent growth.

Analog revenue from wireless applications was also a strong contributor.

DSP revenue grew 9 percent sequentially and 24 percent from the year-ago quarter due to strong demand in wireless.

In areas outside of wireless, DSP revenue declined sequentially in catalog products due to distributor inventory reductions and also declined in consumer areas such as digital-still cameras and DVD.

TI's remaining Semiconductor revenue declined 2 percent sequentially and grew 18 percent from the year-ago quarter.

DLP revenues declined a little under 10 percent sequentially and grew over 60 percent compared with the year-ago quarter.

We believe the sequential decline in DLP revenue was primarily the result of multiple new DLP HDTV customers that entered the market in 2004 and filled their channels earlier in the year to support product launches.

In total, more than 50 new DLP TV models were introduced in the year.

We believe DLP TV sales were strong in the quarter.

Based on reports through November, DLP TV sales increased 26 percent compared with the third-quarter average.

The big-screen TV peak selling season carries through to the Super Bowl before it seasonally declines.

So we're still a few weeks away from fully understanding software of our results.

In any case, the manufacturing and distribution pipeline between TI and the consumer purchase is about 8 to 12 weeks.

So TI's own results should lead the TV sales.

Standard logic revenue declined about 20 percent in the sequential and year-ago comparisons.

With microprocessors increased about 10 percent sequentially and increased about 5 percent compared with the year-ago quarter.

Microcontrollers were about even sequentially and grew a little over 10 percent compared with the year-ago quarter.

Royalties increased sequentially and compared with the year-ago quarter, mostly due to a $35 million catch-up royalty from a licensee for underpayment of royalties prior to 2004.

For 2004, TI Semiconductor revenue breakout was as follows: Analog was about 40 percent of revenue;

DSP was about 35 percent of revenue;

DLP was more than 5 percent of revenue, while microprocessors, standard logic, microcontrollers and royalties were under 5 percent each.

Turning to specific end equipment, wireless had a strong quarter with revenue topping $1 billion in the quarter for the first time ever.

Wireless revenue grew 12 percent sequentially and was up 28 percent compared with the year-ago quarter.

Higher revenue from the 3D handset market was the biggest factor in both comparisons, growing more than 60 percent sequentially and more than 250 percent from the year-ago quarter.

3D growth was strong for DSPs sold into UMTS modem applications, as well as for OMAP application processors.

Wireless standard product chipsets grew sequentially after declining in the third quarter and declined versus the year-ago comparison.

In broadband communications, revenue increased 7 percent sequentially due to growth in DSL and grew 26 percent compared with the year-ago quarter due to growth in cable modem products, voice over IP and DSL products.

Before I turn it over to Kevin, let me do a quick snapshot of 2004 highlights.

TI revenue grew 28 percent in the year, led by 31 percent growth in Semiconductor.

We believe this performance exceeds growth for the Semiconductor industry overall and other large-gap Semiconductor companies.

While TI's other segments did not grow at the same top-line pace as Semiconductor, Sensors and Controls grew 12 percent in 2004 while maintaining its operating margin at 25 percent for the year.

E&PS revenue grew 7 percent, while operating margin in this business expanded to 34 percent.

Inside Semiconductor, DSP revenue grew 35 percent for the year, driven by total wireless revenue growth of 40 percent.

Once again, we believe the growth rate of TI's wireless business compares very favorably to the performance of our wireless Semiconductor peers.

In fact, for the third consecutive year, we believe TI's wireless revenue growth significantly outpaced the growth of handset units in the industry as our average content per handset continued to grow.

In 2004, the emerging market for 3D handsets was the biggest reason for this, as TI holds the industry's leading position in processors for both the modem function and applications processing, based on our strong relationships with many of the world's most-important manufacturers of UMTS and WCDMA handsets.

While many talk about the future importance of 3G, TI saw its 3D revenue grow by almost $500 million in 2004.

And given the early stage of 3D deployment and our strong belief that TI's UMTS market position in 2005 will be even stronger than it was in 2004, 3G should be an even more important contributor to TI's results in 2005.

High-performance analog was another 2004 highlight, with 40 percent growth, also comparing quite favorably to its peer group.

High-performance analog was a big factor in TI's total analog growth of 28 percent in 2004.

DLP revenue grew 79 percent in the year.

DLP experienced significant share gains in both of its primary markets.

Front projectors and high-definition television.

In the rapidly growing HDTV market, TI's proprietary DLP technology is emerging as a key display technology, gaining industry and consumer recognition for the clarity of its picture, as well as reliability compared with competing technologies.

We continue to be encouraged by the potential of this business.

As we've mentioned before, both high-performance analog and DLP have operating profit margins above the Company's average.

So strong top-line performance in these areas leverages into an even bigger bottom-line effect.

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

Thanks, Ron, and good afternoon, everyone.

TI's fourth-quarter gross profit was 1 billion 334 million or 42.3 percent of revenue, down 155 million sequentially, about equally due to the seasonal decline in E&PS gross profit, which was down 72 million sequentially and the higher expenses associated with underutilization of TI's manufacturing assets as we reduced inventory in the quarter.

In the quarter, we continued to aggressively reduce Semiconductor factory loadings below the level at which we ended the third quarter in order to achieve our objective of lowering inventory in the quarter.

This caused Semiconductor gross profit to decline $81 million in the quarter.

Sensors and Controls gross profit was about even with the third quarter.

As we've discussed previously, TI's manufacturing strategy includes complimenting our internal advance logic capacity with external foundry support.

Once again, in the fourth quarter we saw this strategy yield the positive results for which it was designed.

Operating expenses of $850 million or 27 percent of revenue increased 18 million from the third quarter due to a higher profit-sharing accrual and increased Semiconductor marketing expenses.

Recall that the profit sharing accrual in the third quarter included a cumulative catch-up adjustment benefit as a result of our lowered expectations for 2004.

Sequentially, R&D spending of 487 million increased by 4 million and SG&A expense of 363 million increased by 14 million.

TI's operating profit for the quarter was 484 million, or 15.4 percent of revenue.

Semiconductor operating profit was 478 million, or 17.1 percent of revenue.

Sensors and Controls operating profit was 62 million for 22.5 percent of revenue, and E&PS operating profit was 16 million or 20.5 percent of revenue.

In the fourth quarter, other income and expense produced income of $86 million in the quarter, an increase of $24 million when compared with the third quarter, primarily due to the resolution of an open sales tax item associated with the Company's previously divested defense electronics business, as well as due to higher interest income.

Interest expense on loans continues to decline to $2 million in the fourth quarter compared with 4 million in the third quarter, due to the Company's lower debt level.

The effective annual tax rate for 2004 was 23 percent, lower than the previously anticipated rate of 25 percent.

The difference is primarily attributable to the resolution of several foreign tax items in the fourth quarter.

The Company's quarterly effective tax rate was 14 percent, which includes a cumulative adjustment or catch-up for the resolution of the foreign tax items, as well as the expected reinstatement of the federal research tax credit that was signed into law on October 4th.

Net income was 490 million, or 28 cents per share, down 13 percent compared with the third quarter.

It might help to summarize the EPS transition in the 32 cents we reported in the third quarter.

About 2 cents of higher EPS resulted from the lower quarterly tax rate in the fourth quarter compared with the third quarter.

An additional $0.01 benefit was realized from the higher non-operating income.

These were offset by about a $0.03 decline due to the normal seasonality in our E&PS business and an additional $0.04 related to our inventory reduction in the fourth quarter.

The quarter's results included $16 million of pre-tax amortization of acquisition-related costs.

For 2004, the Company's gross margin expanded by 4.4 points to 44.7 percent of revenue.

Operating expenses as a percent of revenue declined by 3.3 points.

As a result, operating margin grew by 7.7 percentage points to 17.5 percent of revenue for the year.

Net income of 1 billion 861 million or $1.05 per share grew by 55 percent compared with 2003.

Total cash at the end of 2004 of 6 billion 358 million increased 741 million from the end of the third quarter.

Cash flow from operations was 1 billion 297 million in the quarter, up 355 million sequentially.

Capital expenditures of 211 million in the quarter decreased 119 million sequentially.

Capital expenditures in the quarter were primarily for increased assembly and test equipment and 90-nanometer fabrication equipment within DMOS 6, our 300-millimeter wafer fab in Dallas.

Depreciation of $390 million increased 12 million sequentially.

Accounts receivable of 1 billion 696 million decreased sequentially by 269 million, primarily due to lower shipments in the last month of the fourth quarter compared with the last month of the third quarter.

Day sales outstanding were 48 days at the end of the fourth quarter compared with 54 days at the end of the third quarter.

Inventory of 1 billion 256 million at the end of fourth quarter declined $100 million sequentially due to lower factory loadings.

Days of inventory decreased to 62 days at the end of the quarter, down 7 days from the 69 days at the end of third quarter.

TI orders in the fourth quarter were 2 billion 934 million, down 2 percent sequentially, primarily due to seasonally lower E&PS graphing calculator demand.

Semiconductor orders were 2 billion 592 million, about even sequentially.

Semiconductors book-to-bill ratio was 0.93, compared with 0.94 in the third quarter.

Turning to our expectations for the first quarter, we currently expect total TI revenue to be in the range of 2.9 billion to 3.14 billion.

Semiconductor revenue should be in the range of 2.55 billion to 2.75 billion.

Sensors and Controls should be in the range of 280 to 300 million.

And E&PS should be in the range of 70 to 90 million.

Semiconductor revenue is expected to reflect seasonality in various markets, as well as the lower backlog that we had as we entered the year.

Product lead times are short and visibility is currently low.

Earnings per share are expected to be in the range of $0.22 to $0.26 in the first quarter.

As we achieved our desired level for inventory at the end of the year, we expect factory loadings to increase again in the first quarter resulting in less expense associated with factory underutilization in the first quarter when compared with the fourth quarter.

Also as we've discussed for several quarters, next year we will transition to a new formula for our profit-sharing plan that is different from the formula on which the 2004 accrual was based.

The new formula was based only on the Company's operating margin, whereas the formula that drove the 2004 accrual included both revenue growth and operating margin variables.

As a result of this change, we expect the 2005 profit-sharing accrual to be less than the 2004 accrual.

By way of example, if a new formula were the basis for the 2004 accrual, we would have accrued about 100 million in profit sharing in 2004 compared with the 243 million that was actually accrued.

The sequentially lower profit-sharing accrual in the first quarter will be partially offset -- will partially offset other seasonally higher compensation expenses, such as the annual salary and benefit increases that are implemented in the first quarter.

For 2005, we expect R&D to be about 2.1 billion compared with 2 billion in 2004.

We expect capital expenditures to be about 1.3 billion, about the same as in 2004, but the mix of the expenditures will shift to 90-nanometer, 65-nanometer, 45-nanometer and our second 300 millimeter wafer fab in Texas.

Depreciation in 2005 is expected to be about 1.4 billion, down from 1.5 billion in 2004.

Sequentially we expect depreciation to decline about 40 million in the first quarter to about 350 million.

The effective tax rate for 2005 is expected to be about 24 percent compared with 23 percent in 2004.

Our outlook does not include any impact related to the expense in the stock options under the FASB statement 123 R. Nor does it include the impact of any potential repatriation of cash under the American Jobs Creation Act.

In transition from the fourth quarter, we expect the higher quarterly tax rate to have about a $0.03 impact to earnings per share.

In summary, although we are entering 2005 with some uncertainty about the level of market growth, TI is well positioned to respond to whatever the market serves up.

We're entering the year with TI inventories at desired levels and expect factory loadings to increase in the first quarter.

TI's technology position is strong and we are well engaged with markets that are entering strong product cycles, including the 3G wireless market and high-end definition television market.

We like our momentum in high-performance analog before this reflects an overall portfolio shift that continues underway at TI towards higher valued proprietary product mix.

Finally, TI's balance sheet is strong and we are once again stepping up our plans to return value to our shareholders in 2005 in the form of additional stock repurchases.

We announced today that TI's Board has approved an additional $2 billion stock buyback.

This is in addition to previously announced stock repurchase authorizations.

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

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

Operator?

Thank you.

The floor is now open for questions. (Operator instructions).

Our first question is coming from Adam Parker of Sanford Bernstein.

Hi.

I'm just trying to understand some of the variables on the gross margins here.

Not only what you reported, but kind of going forward.

Kevin, maybe you could just sort of -- if you view what is sort of slow-growth economic recovery, can you take me through what you think the corporate margins -- gross margins could look like over the next couple of years?

And then maybe I'll ask a follow-up on just some specific issues.

Yes, Adam, we anticipate that as we get to high-performance levels we would see our gross margins being somewhere around the 50 percent level and our operating margins being somewhere around the 25 percent level as we look out over the next few years providing continued growth, as you indicated.

Well, okay, so both of those numbers, particularly the 25 percent, would represent all-time records in the history of the Company.

And so in thinking about that, do you think you can accomplish that more through improved mix with the businesses that you've outlined growing -- the businesses with higher than average margins growing faster, is it going to be sort of the mix, or can you kind of drill down a little on -- is it going to be less spending, is it going to be -- can you help me a little bit with how you're going to achieve that sort of profitability -- profitability over the next couple years?

Sure, Adam.

I think there's probably 2 elements to that.

One will be the mix, as you point out.

As indicated during this past year, we saw our high-performance analog growing at 40 percent total faster than Semiconductor.

We also saw DLP year-over-year growing 79 percent faster than total Semiconductor.

Those are -- those businesses are still early in their growth phases in our view.

They also produce higher than average corporate margins.

So as we pass into future time periods, those should make up a larger mix of our revenue and consequently be larger contributors to our margins going forward.

So it's primarily improved product mix?

That will be a large contributor.

The second contributor will be the fact that we are enjoying the benefit of the foundry strategy that we've put in place, where by our -- our captive manufacturing and therefore our fixed depreciation is going to be lower moving into the future than what we have been experiencing during the past prior high cycles, as you indicated.

So you -- you'd outline it as first improved mix, second lower capital intensity and you think this is something that we will see -- these 50/25, these are long-term corporate goals, but under a sort of slow growth recovery, is this something you think we could get to in a couple years or how long would your vision be for this to pan out?

Adam, I don't know that I could really say when it's going to happen, but it will be, as you pointed out, it will be a mix of those 2 variables and probably really the mix on -- on a richer mix of products being a slightly stronger contributor as we move forward, expanding those margins.

When that'll happen, I would not attempt to guess.

It used to be you guys would say -- Ron, you maybe you can correct me if I 'm wrong, but it used to be a couple years ago, hey if we get to a 3 billion per quarter run rate we can do X. And it seems now like maybe that's a 4 billion per quarter run rate.

Is there any -- am I remembering wrong or is there any kind of shift in -- what do you think's happened that that revenue run rate on a quarterly basis has gone up so much?

I think you have a good memory, Adam, but, frankly, as the product mix shifts, that's really what's going to make a difference.

It just depends on how fast the product mix shifts.

If we continue to see the growth rates in those 2 businesses I just mentioned, even the slow growth environment going forward, then that'll bring it sooner, lower revenue levels.

If it takes longer, it will take longer and I can't predict when that will be.

So you don't want to comment on my 4 billion number?

I'll decline that opportunity, thank you.

Thanks, guys.

Thank you, Adam.

Next caller please.

Thank you.

Our next question is coming from Michael Masdea of Credit Suisse First Boston.

A lot of semiconductor companies have talked about this weaker fourth quarter and then the stronger order rates early in January, and then using that to sort of call the bottom here.

You guys did say that you think utilization is going up.

Is that you guys calling the bottom or is that just you just saying near term that's what the trends indicate given your internal, external and what you're doing with inventory?

I don't think we're trying to call the bottom with that statement necessarily, Michael.

What we're saying is that we believe the inventory -- with the $100 million of inventory reduction in the fourth quarter, we're now at desired levels of inventory.

And so just the fact that we're no longer reducing inventory means that our factory loadings need to come back up again.

As you see in our outlook, we are expecting a sequential decline in revenue that reflects the mix of seasonality, reflects our backlog, it reflects things like short lead-time and therefore, low levels of visibility.

The inventory adjustments that have pressured our revenues through the second half of the year, we expect will likely continue into the fourth -- into the first quarter, but we believe by the end of the first quarter they will be wrapped up, and that from that point our own shipments will more closely reflect the -- the true end demand.

So that's kind of our perspective here and now but we'll adjust that.

And again I have to put a caveat on that because the lead times are running short; our visibility is running pretty short as well.

Okay.

That makes sense.

And then quickly, you mentioned mix in an answer to the last question, but one piece of it that you didn't seem to spend as much time on is things like content per handsets, for example.

Where are we in the stage of that since that's a fairly big driver for you guys, what are the ASPs kind of per 2.5G and 3G, and can those still go up.

The ASPs on a blended basis are clearly still going up.

And, even just -- I think we noted that 2004 was the third consecutive year now where TI's wireless revenue has grown faster than wireless handset units have grown.

And the reason for that is because our content per handset is growing -- is expanding. 3G's only an accelerant on that.

So what we've seen even as recent as the fourth quarter, I don't want to get so granular as to hand out specific numbers, but our blended ASPs in wireless went up once again because of the 3G factor that's in there now.

And that still seems to have some life to it beyond the kind of 2005.

We think 3G is at a very, very early stage of deployment.

So clearly it's going to be a significant contributor in 2005 and I don't think anybody's forecasting that 3G's topped out by the end of '05, it still has a long way to go.

Thanks so much, guys.

Thank you, Michael.

Next caller, please.

Thank you.

Our next question is coming from Glen Yeung of Smith Barney.

Thanks, good afternoon.

In looking at your inventories, and perhaps more importantly, in your distribution inventories, can you give us a sense as to your level of comfort -- I think I'm really referring to distribution, broadly, but perhaps also on a -- on a product-by-product basis where you think inventories are higher or lower and what that could do for the first-quarter order trend.

Yes, Glen.

Let me partialate [ph] that question into 2 pieces.

From TI's standpoint, we feel very comfortable that we we've got the inventory where we want it at.

And that is as measured by several indices, including our customer performance indices.

When we look out into the channel, we do believe that distribution, for example, did reduce inventory in the fourth quarter.

We know our sell-in to distribution was below their sell-through.

So we believe that is evidence that they continue to produce fairly successfully their inventory.

However, we do believe that there's going to be some continued production going into first quarter and that may include some OEMs that are trying to take a few days out of their inventory as well.

But as Ron indicated earlier, we expect that's probably going to wrap itself up by the end of first quarter and we'll be more in balance.

I can also help put some numbers on that.

If you look at our sell-in to distribution, which again is where we recognize our revenue, sequentially our revenues declined by more than 10 percent in the fourth quarter.

If you look at distributor resales, their resales at TI products or sellout actually increased by just about 5 percent sequentially.

So that'll give you a feel for the level of inventory reduction that was taking place in the quarter.

Okay.

And I guess what I was trying to ask is, are there any particular products where you feel the inventory levels are better or worse?

Glen, there may be some differences by product area, but in general if we look across high-performance analog, the commodity areas and catalog DSP, they're all being affected and they'll all still be in effect and I think we would expect going into the first quarter they would all continue to be affected.

Yet, at the same time, just base d upon the -- the numbers that we gave in our prepared remarks, for example, the commodity linear area was down, I believe I said over 30 percent sequentially, where the high-performance analog area was down I think the number was 11 percent sequentially.

So, clearly the inventory reduction has been more intense in the commodity areas, I guess, is how I would describe it.

Thanks.

Thank you.

Next caller, please.

Thank you.

Our next question is coming from Andrew Root of Goldman Sachs.

Thanks very much.

Your comments on operating profit sharing, Kevin, are actually quite remarkable.

I was just doing a quick calculation.

It would seem like that would result in a pretty significant reduction to something in the order of $4,000 per employee, based on the calculation they would have had last year.

And I'm just wondering sort of in the context of a year where you're going to go through the ESO transition, if you could maybe talk about how you're going to manage those things in context and try and make sure you have, you know, basically well-motivated employees or just sort of how you're thinking about compensation overall?

Well, Andrew, from a compensation standpoint, we start that question by looking at what's happening in the outside market and what's going on with our competitors and we try to make sure that we remain competitive to that market.

We have -- actually we have announced the change in the profit-sharing plan well over a year ago and so this is no surprise to the employees.

Okay.

They are also familiar with what we are doing on our equity compensation plans.

So, frankly, this is no surprise to any of the employees and we had our normal pay and benefits increases in the first quarter, and I think that the TI community understands that and they're responding to it quite well.

Andrew, one thing I would just add is keep in mind 2004 is the first time we've accrued profit sharing since 2000.

So based upon the old formula for profit sharing, we had some pretty high peaks and some pretty deep valleys in the payment of profit sharing to the employees.

And I think what you'll see with the new formula is that we're smoothing out some of the peaks and valleys.

The employees will see more consistent profit sharing, although you're not going to see the kind of big payouts like they've had in a few of the years.

Right.

No, that makes sense.

The -- I guess as a follow-on to that, the long-term benefit, presumably if you're more operating commodity it would be better returns which ultimately reflects in the stock price.

Are you -- even with the ESO change, are you trying to guide people more to equity compensation, more stock appreciation rights or restricted stock, or is it going to stay pretty much as is until you see what the other people are doing.

Well, we've already been responding to what we're seeing and what other people are doing.

And we've used all those tools that you've indicated for some time and that mix will change as we go forward.

I think beyond that, I probably couldn't add any more color at this time, Andrew.

So it's changing, but you don't want to indicate sort of in what direction.

It's going so the total equity compensation's beginning to decrease.

Okay.

And the mix is changing more as we look at restricted versus non-qualified.

Great.

Thank you.

Thank you, Andrew.

Next caller, please.

Thank you.

Our next question is coming from John Barton of Wachovia.

Thanks.

Ron, you talked about this inventory in a couple of different ways.

Could you give us an idea of where you think days of inventory stand and distribution and then the target range was?

What I would say overall turns in that they are right around 5.

And, I think we think there's probably room for that still to go up.

But, we don't have -- and, as to a target, that 5 is a very blended number.

We're going to carry different turns; goals the distributors would have, depending upon product areas.

So for example, are they running high-performance analog maybe different than what they would run in a commodity type of a -- type of product.

And their goals will vary over time even.

So it -- don't know that I want to add too much more granularity other than to say they're about 5 now and we think there's room for that to go up.

Okay .

As a follow-up, just for the pricing front.

In fourth quarter, December quarter, can you give us an idea of what price declines you saw from a commodity perspective and what your anticipations are for the March quarter, please?

John, there were price declines.

I would say they were not insignificant, I guess is the way I would characterize them in the fourth quarter.

I don't have a percentage decline number or anything like that to give you, but if you look at our commodity revenue, it declined both as a result of lower units being shipped as well as lower pricing on those units.

And, I don't know that I have a forecast specifically, but certainly just commodity pricing's going to move with supply and demand and an environment where distributors are reducing inventory generally, that says the demand is lower and pricing's going to reflect that.

Once that distributor inventory reduction completes at the end of first quarter, certainly that will be a stabilizing influence on pricing, I would expect.

And just one attempt to define your not insignificant, mid to high single digit declines fair?

Good attempt.

I'll stick with insignificant, John.

Okay.

Thank you John.

Next caller, please.

Thank you.

Our next question is coming from Tim Luke of Lehman Brothers.

Thank you.

I was wondering, Kevin, if you might have been able to frame, as you see your loading improve, the range by which you might expect the greatest margin to improve given your guidance with respect to revenue?

Tim, we do expect the loading to improve.

I can't really frame it.

I think I can frame to you what we would expect to happen.

That is, with increasing loading, we would expect our work in process to begin to increase as we go through the quarter.

What that may amount to from an inventory level as we go through the quarter will be purely a function of where we land within the range on revenue that -- that we just offered as a guidance for the quarter.

With respect to the gross margin there was more -- what I meant.

No, that's probably a little more granularity than we're prepared to speculate right now.

Just with respect to the operating expenses then, you -- I think in your comments you're suggesting that the R&D might be up a little bit sequentially and should we assume that SG&A now goes a little bit lower sequentially with your guidance?

No.

I would probably just look at that guidance and say that we're going to be not too far off from what you've seen in the recent past.

In terms of seasonal pattern or broadly flat?

Tim, what I would say is -- is our guidance -- you know, we really -- we keep it revenue and we keep it the earnings level.

There certainly are some pieces that we've tried to explain inside of that, such as, seasonal variations and specific expectations on depreciation, as well as our annual assumption for R&D, but we don't break that down into -- into quarterly guidance.

So we 'll have to leave it at that.

If I might just try one other area then just on the wireless seasonality, what do you see, there have been some very mixed data points of late?

We're not going to try to get into the mix of our guidance by product area, so other than just the statement of the top-level declines and the range that we provided there.

We're not going to try to break that out by product area because every time we try to do that we get it wrong, so we'll just keep with the top-level guidance.

Thank you.

Thank you, Tim.

Next caller, please.

Thank you.

Our next question is coming from Mark Edelstone of Morgan Stanley.

Good afternoon, guys.

Another question on manufacturing.

Can you give us a sense as to what the decline in wafer starts had been like from the peak that you would have had earlier in 2004 to the bottom that you saw some time in the fourth quarter?

Mark, no, we're not breaking out our utilization on a public basis anymore, other than to say that our utilization in our advanced lithography factories remain very highly utilized throughout the quarter, and to the extent that we saw underloadings, it was in our older analog factories where we saw quite a bit of underload ing.

But beyond that we're not giving out any specifics right now.

And I assume it's those underloadings that will snap back in the first quarter?

We'll begin to see the benefit of our increased loadings on that -- on that side, yes.

Then maybe just a question if I could on the wireless market.

Can you just give us a sense as to what the polls look like as you were going through the fourth quarter from those companies that you have on more of a hubbing relationship, or that portion of the business that's on more of a hubbing relationship?

You're talking the inventory polls from a consignment standpoint?

Yes, exactly.

I guess I would describe it, Mark, that our revenue in general tends to be heavily weighted toward our big OEM customers, and of course, that's where we tend to have those hubbing relationships.

I guess I could quantify it to say that about a third of our wireless revenue is supported by those -- those consignment or hub--type of programs.

I probably don't want to be more granular as to how that revenue compared to the rest of our wireless revenue, just given that you guys can pretty quickly deduce who those hub customers are.

So -- but I would say there really probably wasn't a big difference between the overall sequential trend of 12 percent and what we saw across the space by -- by various customers.

Thanks a lot.

Thank you, Mark.

Next caller, please.

Thank you.

Our next question is coming from Ambrish Srivistava of Harris Nesbitt.

Hi.

Thanks, guys.

Ron, just a quick question on the 3G.

What does the number imply for your market share?

And, also, I was wondering if you could share with us the profile of these -- of the 3G revenue.

Thanks.

Let me ask you to clarify the profile of the 3G revenue question.

How did it grow through the year?

Oh, okay.

And you're talking about how did it grow through 2004?

Yes.

I can can kind of describe the phases of it.

I would say third-quarter '03 is when we saw the OMAP 3G revenue really start to kick in to high gear and that was being driven by our program in Japan with NTT DoCoMo on their WCDMA or their phone handsets.

In first quarter is when we started ramping on the UMTS modem side and that has pretty -- both of those have pretty consistently ramped through those 6-quarter time period, although again the UMTS modem side lagged the OMAP side by a couple of quarters.

The -- the market share question you asked.

I would say -- what does it say about our market share?

We believe that we would characterize it as a strong majority of UMTS handsets used TI's VSP for their modem function.

And what I will exclude out of that is the WCDMA handset program in Japan with NTT DoCoMo where we don't have a position on the modem today.

What we are providing for those WCDMA handsets is strictly the application processor.

We've talked about the program that we announced mid-year with DoCoMo where we have a joint-development program to integrate the next-generation OMAP II processor with the UMTS modem, but that'll be probably 2006 handsets when we're starting to ship that -- that modem function.

On the application processor side, a combination of WCDMA, UMTS together, we ship OMAP application processors into more than half of those 3G handsets.

So we feel very good about our market position and our market share both on the DSP for the modem function, as well as the OMAP application processor.

May I ask a follow-up on your press release you had recently?

Okay.

Is there any exclusivity arrangement with Nokia, or can you sell that to your ODM customers as well?

Are you talking about the single-chip.

The single-chip one with know Nokia that we announced yesterday.

I believe we have rights to sell that product outside of Nokia as well.

Thanks much.

Okay.

Thank you.

Next caller, please.

Thank you.

Our next question is coming from Cody Acree of Legg Mason.

Thanks, guys.

Maybe following up there on that DRP.

When do you expect to see revenue -- you announced sampling, but when can we expect to see real revenue and when do you expect to see that move beyond just kind of an entry-level voice platform?

The initial -- so let me just review.

You're right.

We announced sampling, that is a -- a product that started sampling to a customer and in the case of Nokia in December.

I don't want to talk about their product road map specifically, but generally customers take about 12 months or so from sampling to their product introduction.

So I think we're talking sometime in 2006 before that will -- that will translate into a revenue for Texas Instruments.

I was just handed a clarification on the -- on the earlier question.

The GPRS product -- single-chip product that we announced yesterday with Nokia is a custom product for Nokia.

We will be introducing a standard product based upon that -- call that same architecture, single chip, GPR standard product that we'll be sampling mid this year.

Cody, did you have a follow-up?

I did, Ron.

And then can you just talk about the OMAP versus the baseband contributor to 3G growth.

Obviously, both have been a big driver, one lagged the other, but which do you expect to see maybe the biggest driver through 2005?

Well, I don't know that -- that's like asking which of my children I love more and I -- I think has higher potential.

They all do.

But what I can say today is that OMAP and the base-band are pretty comparable in revenue size.

There's some difference, but revenue between those 2 is reasonably comparable, so they're both big contributors.

I talked about the timeline.

That would generally say that in 2004 I guess the modem probably grew a little faster than OMAP, but the difference is pretty negligible.

And I think going forward, we believe the opportunity is similarly pretty balanced between OMAP as well as the application processor.

I mean OMAP as well as the baseband.

What I would note is just in general, we think in a 3D handset you will see the application processor emerge to be the most important chip or most important function on that 3G handset.

Yet, at the same time, if you look today, the baseband is a little higher content per handset.

So, those are the -- those are the general trade-offs, but we have high expectations out of both product areas.

Thanks for the detail.

Thank you, Cody.

Next caller, please.

Thank you.

Our next question is coming from Allan Mishan of CIBC.

Hi.

I've got a question about the announcement from last Wednesday regarding the win with Samsung, a handset OEM who you have not done a whole lot with.

Can you just clarify, is that an imaging chip, is it a full-on application processor like you sell to the Japanese?

Do you have any baseband wins that go along with it?

What can you tell us about that new relationship?

It is a derivative that we would call it of our OMAP product family that is specifically focused on the imaging application.

So, we -- we talk about OMAP like it's a single product.

The reality is OMAP is a broad family of products that will cover over time and even an ever-increasing space.

In this case we have OMAP derivatives that are specifically targeted at imaging applications and that's what we announced with -- with Samsung.

So, for example, Samsung would not intend to -- for those particular handsets, there wouldn't be, for example, a high-level operating system loaded on it.

It's more specific to the imaging function.

Understood.

And also, Ron, you gave a lot of color about the selling patterns of DLP and I understand it's all kind of new and there's a whole lot of new sets out there.

But can you just tell us how you expect that to influence your revenue patterns?

You indicated that it was down less than 10 percent this quarter but it certainly was down.

What does that mean for Q1 and then what do you think the seasonal patterns will be for the year?

Well, I -- just as you pointed out, Allan, I think we're learning about these seasonal patterns, especially in the television space, as we work our way into it.

Up to now we've just been kind of riding a secular trend as opposed to starting the seasonal patterns.

But the only thing I could really say is, since again, we don't give guidance that's granular down by product area into the first quarter, but, if you think about the big-screen TV selling period runs through the Super Bowl and then probably would seasonally decline from there and back up, generally call it 8 to 12 weeks for the pipeline that I described between TI's shipments and the consumer purchase.

That would indicate the kind of expectation that you might see from TI or at least the seasonal piece of it.

But, there are a lot of moving pieces inside of that, so I don't want to try to be more specific than that.

Okay.

But just if I examine that math, you're saying that for the Super Bowl you've already shipped it in the December quarter.

Yes.

I mean, if -- yes, I think that's exactly correct.

Okay.

Thank you very much, Ron.

Next caller, please.

Thank you.

Our next question is coming from Tom Thornhill of UBS.

Kevin, if we could go back to the gross margin question for a minute.

You provided some pretty interesting detail on the impact of underutilization on the Q4 gross margin, $81 million and $0.04 and those 2 numbers tie together nicely.

As you start to reload the factories, how much of that starts -- and how quickly does that start to reverse?

Tom, we aren't forecasting or breaking out that kind of granular or detail, but you are on the right track, that that should be a contributor as you move into first quarter.

In other words, we should no longer see that being a pressure point on our gross margin.

But we aren't offering granularity just yet, given to a large part it depends on where we land on that revenue range and just how much inventory we need to start to support the revenue that we're guiding to.

I would just say that the range that we have offered for our revenue and earnings per share do take that into account.

Understood.

Typically how quickly, though, as you start to reload the factories do those underutilization charges start to reverse?

Well, immediately.

As soon as the loads start going up, it immediately inventories, so it doesn't hit our income statement.

Okay.

And then another contributing factor should be the decline in depreciation, shouldn't it?

That's correct.

Depreciation will decline year-over-year about $40 million, I believe, is what we indicated.

Was that year-on-year or -- ?

I'm sorry, excuse me.

Fourth quarter into first quarter, about 40 million.

Thank you very much.

Okay, thank you, Tom.

Next caller, please.

Thank you.

Our next question is coming from Chris Stanley of J.P. Morgan.

Thanks, guys.

Just a follow-up on Tommy's question.

So you think that the -- the utilization rates will be high enough to help gross margins in Q1?

Chris --

Instead of hurt ing them like it did in Q4.

Yes.

Chris, right now what we believe is that we were draining inventory in fourth quarter and so that was causing utilization rates to be somewhat depressed.

We do not -- we expect to increase loadings as we move into first quarter and so that will immediately convert into -- rather than being a pressure point against margin, it will begin to take some pressure off the margin.

Let me offer some clarification because maybe we didn't make this clear enough.

We expect our average loadings or our average utilization in first quarter to be higher than the average for fourth quarter.

So if these are questions about the profile of the ramp and -- up and the ramp down, we expect utilization to be higher in first quarter compared to fourth quarter, which says that is a benefit to gross profit.

Yes.

That was my question.

So it hurt gross profit in Q4, but it's going to help it in Q1.

Correct.

Okay and then just as a follow-on.

Given that we -- let's just say we fell into the middle of your revenue range in Q1, what would you expect inventory to do sequentially?

Chris, we're not forecasting that level of granularity.

We would expect that work in process will increase and really it's a question of the mix of finished goods and the strong down by wherever our revenue lands that tells us what the total inventory will end at.

So that's a bit more precision than I can really give to you right now.

I guess overall inventory should be up, down, flat?

Not going to be able to forecast that for you, Chris.

Okay.

Thanks.

Thank you, Chris.

Next caller, please.

Thank you.

Our next question is coming from John Lau from Banc of America Securities.

Great.

Thanks.

Ron, DLP is growing very, very strongly year-over-year.

With that kind of a ramp and growth rate, does your DLP demand grow sequentially in Q1, which is seasonally slower?

And longer term, is the goal of the DLPs to move their product into the mainstream 40-inch screen sizes?

Thanks.

Right now, our strategy is focused on big-screen rear projection DLP televisions.

So 40 inches and greater is the strategy.

And, I don't -- as we've been indicating, we're going to keep our first-quarter revenue guidance and expectations at the Semiconductor level.

I think it's reasonable to expect that as our DLP revenue gets larger over time, that we're not going to be immune to seasonal trends and the -- the front projection in the television market that we serve with that.

But let me avoid giving any specific expectations for fourth -- for first quarter.

Okay.

And then just one final question.

On the outsourcing model.

What was the percentage of wafers outsourced last quarter?

About 15 percent.

Thank you.

And that again is of total wafers.

Okay.

Thank you, John.

Next caller, please.

Thank you.

Our next question is coming from Paul Lamene of Salay Securities.

Hi.

I just wanted to come at the DLP from a different angle.

Could you talk a little bit about the decline in DLP revenues in the fourth quarter, if that was at all a surprise to you?

And just any granularity you can provide on what drove that quarter-to-quarter decline.

Well, I think we -- we've seen such strong growth as we move through 2004.

We knew what was going on with various new manufacturers that were ramping or that were -- that were first coming into the business with DLP televisions and the fact that there was channel build and such taking place.

That being said, when we were ramping as hard as we were ramping, it -- it was -- there was some uncertainty, I guess I would say, as to exactly what the fourth quarter would look like between, again, would we start to -- would we start to reflect more seasonal trends or would we continue to kind of on a secular basis blow through seasonality.

So, I think -- I think when we stand back and look at it generally we understand it, but there -- we probably had some upside scenarios that would have shown growth continuing into the fourth quarter.

Okay.

Thank you.

Thank you, Paul.

Next caller, please.

Thank you.

Our next question is coming from Satya Chillara of RBC Capital.

Good afternoon, gentlemen.

Ron, on the question of DLP, would you care to comment on what's the expectation for 2005 in terms of the growth compared to plasma TVs there?

Boy, what I can say is in general the markets that we're serv ing with front projectors and high-definition televisions are growing probably 20 to 30 percent units.

Our trend over the last -- well, since we've been in the television market and even over the last couple years for projectors has been to increase market share and our aspirations and expectations are to continue to increase market share.

But, to put a specific number on it, I'd prefer not to do that, although we would like to put more distance between DLP and our market share and where the plasma technology sits.

Okay.

I have a follow-up in terms of the UMTS market.

Can you comment on what's your thinking about UMTS handset market for '05, also comment on the infrastructure if you could.

And, lastly, the chipsets in your UMTS arena, basically what are the goals that typically you have about 25 percent of your revenue in the GPRS running -- coming from chipsets.

Right.

What is that for UMTS?

Okay.

Today in UMTS, all of the product we have is generally -- is custom product through our big OEM customers, not standard product chipsets.

Our strategy in UMTS is similar to what we did in GSM and GPRS, which is to lead with these big customer OEM relationships, custom products, and then over time deploy chipsets.

So we don't have a different strategy there.

I think there were several questions embedded there, Kevin.

Infrastructure.

Infrastructure and what was the other one.

Handsets.

UMTS handsets.

Oh, handset growth.

We don't have our own independent forecast that we make publicly available, but if you say that UMTS plus WCDMA in year 2004 generally was in the 20 to 25 million unit range, most people are forecasting that's going to increase by 2 to 3 X in 2005.

So, again those aren't TI numbers, those are numbers from various customers and analysts that have been made publicly available.

Infrastructure, I don't have a breakout between 3G and non-3G infrastructure.

What I can say is that TI's wireless infrastructure revenue in 2004 grew by 75 percent, so it's been a nice -- even though it's a reasonably small part of our overall wireless revenue, it's shown very nice growth and we expect that to continue just given reflecting the strength of our position in these advanced technologies such as -- such as UMTS.

Okay.

Thank you.

Thank you.

Next caller, please.

Thank you.

Our next question is coming from Krishna Shankar of JMP Securities.

Yes.

Of the 40 percent of your business which is analog, is that roughly evenly split between commodity analog, high-performance analog and mix-signal System-on-a-Chip analog.

About 35 percent is high-performance analog.

Less than 5 percent is commodity linear products.

So those 2 are both standard product areas, but certainly a big difference than the business model.

And then the remainder would be application specific or mixed signal.

So that means the remaining 60 percent of that 40 percent bucket.

That's correct.

Okay.

That's correct.

And in the -- in the wireless business you mentioned that ASPs are significantly higher for UMTS and WCDMA chipsets, but these dye size are obviously larger.

Can you have any comments on modular implications there between the early stage learning curve of 3G chipsets versus more mature GPRS or --

No.

I think in general our strategy is they're all going to be high volume, the big opportunities.

So, I would not, from your perspective, recommend trying to model a significant margin difference one way or the other.

Okay.

Thank you.

Let's move on to the next caller, please.

Thank you.

Our next question is coming from Joseph Osha of Merrill Lynch.

I got in under the wire here.

Looking at your -- at the inventory balance.

Not just you guys, but a number of companies after hitting, very, very high Q3 numbers appear to have backed down a bit and declared that they're now at target levels.

You're at 62 days, if I look at the last couple year's bubble excepted, that's still behind the range.

It seems to me that you guys are more willing to tie up working capital in inventory than you've been historically.

So I'm curious if you can react to that.

And, also, say, for example, March semi's, your revenues are down.

Are you willing to run inventories back up to 70 days in order to keep the fabs full?

Joe, let me just kind of frame a reference for you and take a look at last quarter -- this same quarter a year ago, for example.

You might recall we were chas ing demand back then.

That is demand was coming in faster than we could meet it, and our inventories were at such a level that we were having a difficult time meeting our customers' satisfaction requirements.

So arguably if you looked at just a year ago our inventory days was too low, given the environment we were in and --

I'm looking at about 5 years of data and it's not just you guys so I'm not trying to give you a hard time but --

Yes.

If you look over the 5 years that you're talking about or a longer term average.

One of the things that's beneficial to keep in mind about TI is that we have grown this high-performance analog business into a bigger piece of our total revenues, and the nature of that market is you have to have more finished goods on hand to meet the demands of that market because you're selling smaller carnival lots to a much larger swathe of customers than we traditionally do with our bigger parts.

So those customers demand that you have finished goods on hand.

That is a contributing factor to driving up our days.

We'll see that probably change a bit more as we go through time.

And then once more we'll just adjust that with our seasonal expectation.

But over the -- the trend over time to your point I think is going to be up a bit versus what you've seen in the past.

Okay.

And then the second part I mean are you willing given that upward trend if -- if -- who knows where demand's headed, but are you willing to absorb a quarter or so of cost here by running inventory back up, given the fact that these are long longer life cycle products that you're building?

Well, we're actually building the inventory to meet what our customer service metrics that we're trying to perform to.

That's on-time deliveries, off-the-shelf requirements and so on.

And that wouldn't necessarily amount to a particular number of days.

That's going to be sensitized by the market channel that we're in and the season that we're in, so it's very difficult for me to give you a direct answer to that one, Joe.

Just as what you saw in fourth quarter.

It's not our objective to run up inventories just to keep the factories full.

Our inventory strategy is driven by our expectations for customer demand, not based upon a strategy of keeping the factories running full regardless of the outlook.

Okay.

Can you -- Ron, before you go away, can you please recap that HPA versus total analog comment you made for the last caller, I somehow didn't get that.

Sure. 35 percent of our total analog revenue is high-performance analog less than 5 percent of total analog is commodity linear products.

And then that would say 60 percent would be mixed signal or application specific.

Okay.

Thanks a lot.

Thank you, Joe.

Next caller, please.

Thank you.

Our next question is coming from Mona Eraiba from Rosetta Group.

Could you elaborate on the WCDMA market efforts and could you -- this is a little bit about what's happening in China with the handsets, wireless, chipsets, etc., do you think they are corrected and --

Well, as to China, I don't -- we've never claimed to have great visibility into what's going on in terms of inventory levels in the channels and even at local players there.

What we can tell you is just what we observed, which was that inventory -- I'm sorry, not inventory, our revenue from chipsets that sell into Taiwan and into local China manufacturers, that revenue increased sequentially in fourth quarter after being down in third quarter.

But what that reflects in terms of our inventories all clean or whatever, I don't want to try to -- try to translate it to that level.

What about the WCDMA effort?

I'm not sure I understand your question on WCDMA.

Could you -- ?

I think you mentioned a quarter ago that you are focused on customer solutions to address the CDMA market in general.

Well, that's exactly true.

So all of our statements that we've made about 3G.

Right.

Refer to the revenue that we're getting from UMTS and WCDMA.

And keep in mind, UMTS is a -- is a standard that combines WCDMA, GPRS and GSM.

So it's an evolution of GSM and GPRS where we've historically had just a great market position into now 3G or WCDMA.

So many of those statements are universal to -- to the question you're asking, I believe.

Okay.

Thank you, Mona.

Next caller, please.

Thank you.

Our next question is coming from Erach Desai from American Technologies.

Hi.

I think there's been several attempts to try and get to a potential growth rate for DLP.

I guess, for '05, is it feasible to look at DLP revenues obviously not growing at the same rate as '04, but reaching about 1.5 billion in overall sales?

Again, we don't have any specific forecast there.

We give TI level revenue, expectations for the next quarter, and not beyond.

We certainly believe DLP is -- is playing in some very attractive high-growth markets, but we're not going to forecast specifically our expectations.

Okay.

A follow-on, if I may.

Is the gross margin for DLP products at or above the Semiconductor gross margin?

I would take it even beyond gross margin and say operating margin for DLP is above the Semiconductor group level as well as the -- the Company level.

Thank you for that.

Thank you.

Next caller, please.

Thank you.

Our next question is coming from Ben Lynch of Deutsche Bank.

Thanks, Ron and Kevin for taking the question.

The first question I have is, can you sort of tell us which of the items which helped the Q4 EPS were in the original guidance and which of them became apparent during the quarter, the royalties catch up, the lower tax rate, the defense sales tax item.

And if there's any of these sort of let's say not easy for us to predict items showing up in the Q1 guidance.

Okay, Ben, I'll see if I can help with that a little bit.

Clearly, the tax came in a bit favorable to our guidance, as we resolved many of those issues right at the end of the year.

On the royalty.

We had -- we had expected -- because we were aware of the items, so we had expected a sizeable portion of that already.

It did come in a bit stronger than even what we'd expected though in the end.

And also the -- I mentioned that we had a sales -- tax settlement with -- having to do with our old defense unit.

That was unexpected.

But we also were able to reduce inventory a bit more than we'd initially planned.

So when you put it all together, some of the pieces might have been unexpected, but I don't know that in net we would say that those things would tend to cancel each other out to a large extent.

Great.

And I have a follow-up question if possible, please.

You might want to give exact numbers.

But if you could give us a rough feel for the Q4 over Q3 drop in semi's gross margin if you exclude the royalty contribution and what sort of the -- the order of magnitude of this that you're expecting in Q1, the same sort of measure, please.

I'll see if I understand your question.

I had mentioned that the semi gross margins dropped about 81 million.

We did have royalties come in a little stronger but we also had other revenue come in a little bit stronger, too.

So it's a bit of -- depends where you want to lay your stake in the ground, Ben, I guess to answer that question.

It might help if I got a feel for the -- the Q-on-Q change in royalties.

That might help me strip out that Q-on-Q effect from the reported gross margin.

Yes.

It was probably -- call it around 30 million out of trend.

Great.

And is -- in Q1, do you think the like-for-like -- do you think there will be a like-for-like drop again or -- ?

We would probably expect to get closer to trend.

Closer to trend.

Okay.

Thank you very much.

Thank you, Ben.

Next caller, please.

Thank you.

Our next question is coming from William Conroy of Sanders.

Hi, Ron.

Just a couple of quick ones for you and Kevin.

Can you give any comment on the level of cancelations or reschedules in the quarter or if you actually saw any expedites and maybe relative to the third quarter.

Cancelations fourth quarter were down compared to third quarter with the primary difference being distribution.

And secondly, can you just talk a little bit about pricing, X the wireless business which you addressed specifically.

I -- we answered a question about commodity pricing, are you talking about outside of commodity?

Yes.

And outside of wireless, which you also talked about.

Right.

Okay.

I would say outside of those areas, nothing really outside of the norm.

The wireless trend I described is -- even though it's very beneficial, we've been seeing that for several years now because of the 2 to 2.5G transition playing out, now transitioning over to 3Gs.

So that is actually not even a change.

But in the case of other proprietary areas, the pricing moves down in any high-volume area over time, but they tend to be contracted type of pricing agreements.

In high-performance analog we're seeing stable pricing, as you would expect for that type of a proprietary product.

And then as I said, only in the -- I would say put it all together, maybe sub 10 percent of our revenue that would be characterized as commodity, are we seeing inordinate supply and demand type of pricing weakness.

Right.

Thanks very much.

Thank you, Bill.

I think we have time, operator, for 1 more question.

Certainly.

Our final question is coming from Charlie Glavin of Needham.

Thanks, guys.

Ron, possibly the -- to come back to the seasonality within the first quarter.

I know that you don't give the granularity, but I'm a little confused in terms of the -- if you look at mid-point kind of a sequential down, since you got out of the DRAM business, I only only recall 2001 when you've actually had a sequential decline.

Is that more a caution reflecting the order pattern going into the quarter and I have a quick follow-up.

No, I think that's fair.

I mean, certainly it is a seasonally weak quarter, but on top of that you're exactly right.

We're coming out of fourth quarter with our backlog down about $200 million from -- from where it was at the end of the quarter before.

And we also know the kind of effect that the inventory reduction that has been taking place in distribution has had on our revenue.

I mean, just look at fourth quarter.

Fourth quarter we were -- we were basically even in Semiconductor in a quarter where seasonally we would expect to be up.

So that pressure we expect to add to normal seasonality in the -- in the first quarter.

And then as a -- kind of a quick follow-up.

In terms of the orders, though, as far as kind of a one-to-one relationship, as far as the book-to-bill, previous comments that you've made as far as your changing product mix and even some of the changing demands coming from OEMs, going forward we should probably expect there to be a higher level of turns within the quarter and greater whip as a percentage, should we not?

I think it's a fair statement that with -- and we are trying to reflect that in some of our comments about short lead times and visibility.

That lead times are short and we certainly are positioned to support higher levels of turns activity in the first quarter.

So -- and I think it's a fair perspective that in general customers -- because lead times are so short, they don't have to make longer-range commitments, and in fact, they 're not.

So part of our backlog decline very well reflects just the fact that lead times are coming in and customers are operating in more of a turns environment.

Exactly how much, that's why we would say visibility is down.

So those would probably be our perspective.

Do you have a follow-up, Charlie?

No.

I think you nailed it the visibility being down but not necessarily bad, just changing.

Yes.

It's just a little -- a little hazier.

Okay with that -- thank you, Charlie.

With that, we're going to wrap up.

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

Thank you and good evening.

Thank you.

And thank you callers.

That does conclude today's conference.

You may disconnect your lines at this time and have a wonderful day.