德州儀器 (TXN) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to the Texas Instruments' first quarter 2005 earnings 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 first quarter earnings conference call.

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

This call will last one hour.

For any of you who missed the release, you can find it on our website at 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 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 released 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 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 and the second quarter outlook.

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

First quarter TI revenue was $2 billion 972 million, about in the middle of the guidance range that we provided at our March mid-quarter update.

TI revenue declined 6% from the fourth quarter due to a drop in Semiconductor revenue that offset growth in Sensors and Controls and Educational and Productivity Solutions, or E&PS.

We are especially encouraged that TI's profitability increased in the quarter despite the sequentially lower revenue.

Kevin will address the factors behind the profit increase in a few minutes.

Sensors and Controls revenue of $296 million grew 7% sequentially, 4% compared with the year-ago quarter, and set a new quarterly record.

E&PS revenue of $82 million grew 3% sequentially and from the year-ago quarter.

Semiconductor revenue fell 7% compared with fourth quarter.

The decline was primarily driven by lower wireless revenue, and to a lesser extent, lower DLP revenue.

The decline in wireless was at the level we had expected in January.

The decline in DLP revenue was consistent with our expectations at the March update, although it was steeper than we had expected in January before we had access to sell-through data for the peak season.

Although the inventory correction of standard products sold through distribution continued to have some residual effect on our results in the first quarter, we believe distributors have now achieved their desired levels of inventory.

Our confidence is based on the sequential revenue and order growth for these standard products in the first quarter, with a book-to-bill ratio for these products exceeding one in the quarter.

Compared with the year-ago quarter, Semiconductor revenue was about even with wireless up and most other areas down.

Total analog revenue declined 3% sequentially due to weaker demand from wireless customers and declined 8% from the year-ago quarter due to broad-based declines.

High performance analog revenue increased 5% sequentially, reflecting the wind down of distributor inventory reductions, and decreased 2% from a year ago, a quarter in which distributors were building inventory.

Similarly, revenue from commodity standard linear products had a strong double-digit sequential increase.

Although both of these standard product areas sequentially increased shipments into distribution during the quarter, distributor inventory in both product lines was reduced.

DSP revenue decreased 12% sequentially and grew 16% compared with the year-ago quarter, with both comparisons reflecting trends in wireless.

TI's remaining Semiconductor revenue declined 6% sequentially, due to reductions of excess inventory at TI's DLP customers and their distribution channels.

DLP revenues declined about 30% sequentially, and about 25% from the year-ago level.

Although we are encouraged with the pace at which our customers are addressing the inventory issue, there remains excess DLP-based television and front projector inventory at our customers and in their channels.

Although the inventory correction will continue into the second quarter, we believe the pace of reduction should subside.

DLP-based televisions and projectors continue to sell well, and TI holds strong share in these markets.

For example DLP-based front projectors held 47% share in the fourth quarter.

This is the most recent period for which we have data from market analysts, and represents the 10th consecutive quarter of share gains for TI in the front projector market.

In big screen televisions, DLP share increased to about 18% of the North American market for the peak December and January selling months.

Nonetheless, both of these markets didn't develop to our customers' full expectations, resulting in excess inventory.

In other areas, we had mid-single digit sequential growth in commodity standard logic products and microcontrollers.

And low-single digit growth in risk microprocessors.

Compared with the year-ago quarter, commodity standard logic revenue declined over 20%, while mix [ph] RISC microprocessors and microcontrollers both grew about 10%.

Royalties of about $130 million in the quarter were almost the same as the fourth quarter level.

As expected, the semiannual royalty from our cash based licensee was received in the quarter.

This royalty revenue is now being accrued on a quarterly basis.

This should bring the total royalty level in the quarters ahead closer to the $100 million run rate that we've described as our average, while dampening the quarterly swings around this level.

In the wireless market, revenue increased 14% sequentially, and grew 15% from a year ago.

The sequential trends were generally consistent across all handset technologies 2G, 2.5G, and 3G, although the increase from the year-ago level was driven by the advanced 2.5 and 3G technologies, which more than offset a decline in 2G revenue.

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

Kevin?

Thanks, Ron.

And good afternoon, everyone.

TI's first quarter gross profit was 1 billion 336 million, up 2 million sequentially, as higher gross profit in Sensors and Controls and E&PS partially offset lower profit in Semiconductor.

Gross profit at the Company level included an $8 million gain on the sale of the commodity LCD driver operations in the first quarter.

Gross profit margin of 44.9% of revenue increased 2.6 percentage points sequentially.

Semiconductor gross profit of 1 billion 189 million declined 17 million sequentially, as cost reductions combined with higher factory utilization, mostly offset the impact of the decline in revenue.

Having completed a significant inventory reduction in the fourth quarter, first quarter factory loadings were increased to realign our factory output with our shipment levels, resulting in the higher utilization levels.

We are pleased that during this transition, we are able to avoid any inventory build.

In fact, TI's overall inventory levels declined slightly, although the decline partly reflected the inventory transferred as part of the sale of our LCD driver assets.

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

As we are beginning to transition our most advanced logic products from the 130 nanometer process to TI's 90 nanometer process, our total demand for 130 nanometer wafers is declining, yet our internal factory utilization for this process technology remains high.

Once again, we are pleased that our manufacturing strategy is yielding a positive results for which it was designed.

In Sensors and Controls, gross profit of 106 million, or 35.8% of revenue, increased 7 million sequentially due to higher revenue.

E&PS gross profit of 44 million, or 54.2% of revenue, increased 2 million sequentially due to higher revenue.

Operating expenses of 839 million or 28% of revenue, decreased $11 million from the fourth quarter.

For the R&D spending of 495 million, increased by 8 million, due to higher Semiconductor product development expense, and SG&A expense of 344 million, decreased by 19 million, due to the gain on the disposition of the sales office facility and lower expenses.

In general, expense and cost reductions include the effect of a lower profit sharing accrual.

This is the result of a change to the profit sharing formula in 2005, and affects compensation expense in cost of revenue, R&D, and SG&A.

TI's operating profit for the quarter was 497 million or 16.7% of revenue.

Operating profit increased 13 million sequentially and operating margin increased 1.3 percentage points.

Semiconductor operating profit was 460 million, or 17.7% of revenue.

Sensors and Controls operating profit was 69 million, or 23.2% of revenue.

And E&PS operating profit was 20 million, or 24.1% of revenue.

In the first quarter, other income and expense, or OI&E, produced income of 48 million, a decrease of 38 million compared with the fourth quarter, primarily due to the impact in the previous quarter of a partial settlement of matters related to the grants from the Italian government regarding TI's former memory business operations, and the resolution of an open sales tax item associated with the Company's previously divested defense business.

The effective tax rate for the first quarter was 24%, as we had expected.

By comparison, the effective tax rate in the fourth quarter was 14%, which included the effect of accumulative catch-up reduction in tax expense.

Net income was 411 million or $0.24 per share, down 79 million from the fourth quarter, primarily due to the impact of higher taxes.

It might help to summarize the EPS transition from the $0.28 that we reported in the fourth quarter.

About $0.04 of lower EPS resulted from the reduced revenue level in the first quarter compared with the fourth quarter.

An additional $0.03 decline resulted from the higher tax rate in the first quarter and $0.02 of decline were associated with the lower OI&E.

These were partially offset by about $0.04 of benefit that resulted from higher utilization, as well as lower manufacturing costs and operating expenses.

About a $0.01 benefit resulted from the combination of the gain on the sale of the LCD driver assets, as well as a couple of facility sales.

We had expected the sales of the facilities and our LCD driver assets to close in the quarter, and had included those gains in our prior guidance.

The quarter's results included $15 million of pre-tax amortization of acquisition-related costs.

Total cash at the end of the first quarter of 5 billion 140 million decreased 1 billion 218 million from the end of the fourth quarter.

TI used 1 billion 493 million in cash during the quarter to repurchase 58 million shares of TI common stock.

Cash flow from operations was 523 million in the quarter down 782 million sequentially, primarily reflecting a significant reduction in accounts receivable in the fourth quarter that was not repeated in the first quarter, and payment of the employee profit-sharing plan for the full year's 2004 performance.

Cash flow from operations increased by 130 million from a year ago.

Capital expenditures of 277 million in the quarter increased by 66 million sequentially.

Capital expenditures in the quarter were primarily for 65 and 90 nanometer wafer fabrication equipment, as well as equipment for assembly and test.

Depreciation of 347 million decreased 43 million sequentially.

Accounts receivable of 1 billion 696 million were the same as at the end of the fourth quarter.

Day sales outstanding were 51 days at the end of the first quarter compared with 48 days at the end of the fourth quarter.

Inventory of 1 billion 245 million at the end of the first quarter declined $11 million.

Days of inventory were 69 days at the end of the quarter, up from 62 days due to the lower revenue level in the first quarter.

TI's orders in the first quarter were 3 billion 28 million, up 3% sequentially.

Semiconductor orders were 2 billion 567 million, about even sequentially.

Semiconductors book-to-bill ratio was 0.99, up from 0.93 in the fourth quarter.

Turning now to our expectations for the second quarter.

We currently expect total TI revenue to be in the range of 3 billion to 3 billion 240 million.

Semiconductor revenues should be in the range of 2 billion 550 million to 2 billion 750 million.

Sensors and Controls should be in the range of 290 to 310 million, and E&PS should be in the range of 160 to 180 million, as retailers stock graphing calculators for the upcoming back-to-school period.

Please note that this outlook comprehends the sale of the Company's commodity LCD driver product line, which averaged about $50 million of revenue per quarter in 2004, and was $39 million for the abbreviated period during the first quarter of 2005 when TI still owned it.

The non-recurrence of this revenue will have the effect of reducing the sequential growth rate of our Semiconductor business in the second quarter by about 1.5 percentage points, and will reduce the growth rate from the year-ago quarter by about 1.8 percentage points.

Earnings per share are expected to be in the range of $0.25 to $0.29 in the second quarter.

Our expectations for R&D, capital expenditures, depreciation, and the effective tax rate are unchanged from the last quarter.

R&D is expected to be about 2.1 billion, capital expenditures about 1.3 billion, and depreciation about 1.4 billion.

The effective tax rate for the year is expected to be about 24%.

Although this tax rate does not include any impact related to the expensing of the stock options under the Financial Accounting Standard Board statement 123 R, the Company expects to implement expensing beginning in the third quarter of 2005.

Our recommendation is that you not bottle the impact of expensing into your second half estimates, until the end of the second quarter, at which time we will provide specific guidance on our third quarter expectations including the effect of this accounting change.

In summary, we are satisfied with our first quarter results.

Despite a headwind of sequentially lower revenue, TI's profits and profit margins expanded from the fourth quarter levels.

Our factory loadings are building, as the market environment is strengthening.

And our inventory remains at desired levels.

We are encouraged that the inventory reduction at the distributors that has weighed on the revenue for the last three quarters is now complete.

We still have challenges before we're firing on all cylinders again.

For example, the inventory correction that is now underway in DLP-based televisions and front projectors; however, we're confident that TI and our markets are once again moving in the right direction.

With that, let me turn it back over to Ron.

Thanks, Kevin.

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

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

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

Thank you.

The floor is now open for questions. [OPERATOR INSTRUCTIONS] The first question is coming from Glen Yeung of Smith Barney.

Thanks.

Good afternoon and good quarter.

Kevin, you sound pretty optimistic about the outlook despite the fact that we've seen some hiccups and some of the end markets exit in the quarter, and I think you're on the tape or on the news suggesting that March picked up over February.

I wonder if you could confirm that and maybe tell us how April looks so far this quarter on an orders basis.

Yes, Glen, in fact we did see in March that new orders that came in picked up their pace versus what we had seen actually for a number of prior months.

And that pace has pretty much continued.

And Glen, I would just add, if you look at linearity, for example, of revenue through the quarter, February was the weak month.

February declined from January, but we had nice pick up on shipments in the month of March as well in addition to the order trends that Kevin referred to.

Okay.

And just maybe as a follow-up, if I look specifically at your wireless business in the second quarter, it seems that one of your major wireless customers is looking relatively strong to start the quarter.

Would you view your wireless in Q2 as largely normal or is there some extra strength that we may be seeing here in Q2?

Glen, I don't know that we have any special commentary or specific commentary on wireless in that we generally don't go down below those segment level.

But I think what we saw in first quarter was a combination of seasonality, as well as just a comparison to a very strong fourth quarter.

And recall in the fourth quarter we had 3G revenue in wireless that was up, I believe it was over 60% sequentially.

So going into second quarter, you have neither the seasonality factor that would be weighing on us nor that more difficult comparison.

Great.

Thank you.

Thank you, Glen.

Next caller please.

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

Hi, good afternoon.

It is William Tell calling for Ambrish.

I was wondering if you can give us your expectation for inventory levels for the second quarter and if you could also remind us what are the normalized levels of inventory for TI?

William, we're not forecasting inventory.

We're giving guidance on our revenue range at the top and our EPS range.

But I would just point out that I believe we've been fairly consistent in our remarks over the last few quarters that generally we will begin carrying more inventory as we go into the future than we have traditionally in the past.

And again, that has to do with the changing mix of our products.

For example, as the high performance analog becomes a larger portion of our overall revenue mix, the nature of that market is such that you would have to meet demand with off-the-shelf availability.

And so that will require us to carry more inventory and we will see more of that in the future.

The inventory level that we just ended the quarter with, both in the amount and days, we're very comfortable with, is the right level to help support for the kind of revenue range that we're projecting for the second quarter.

Do you have a follow up, William?

Yes, a quick one with regard to DLP, I was wondering if you can break out for us the distribution between rear-view projector and TV versus a projector are for the DLP revenue.

And also, do have any visibility at this point in time in terms of growth in DLP revenue for the third quarter?

Thank you.

Okay.

We don't break it out quarter by quarter, but 2004 in general, about 60% of DLP revenue was from the front projector market.

About 35% was from the big screen television market.

And then about 5% would be from cinema or other large venue type of projector applications.

I don't have any projection for third quarter, but let me just say that we believe what we are going through in DLP with this inventory correction is a very temporary situation.

The first quarter as well as second quarter, we expect that we are shipping below the rate of, call it end consumption, and that therefore as that inventory correction completes, we will grow back up to that level of end consumption.

Now from the standpoint of what may be driving end consumption as we go forward, we're actually pretty optimistic on a couple of fronts.

First of all in the HDTV space, we have a number of customers that are in the process of rolling out 1080P models and 1080P is kind of an ultra-high resolution, high-definition television, that we think could be very good for DLP growth going forward.

And then similarly in the projector market, we see a lot of innovation.

For example, customers that are deploying one pound what are called pocket projectors or hand-held projectors, which are LED illuminated and battery powered that could drive some interesting growth as well.

So we have a temporary inventory correction situation which, frankly is not unnormal for a young emerging market such as we're seeing in DLP.

And once we get through it, we have a lot of optimism for where that business will go.

Okay.

William, thank you for your call.

Next caller, please?

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

Great.

Thanks a lot.

Yes, I guess there is still some concern out there given what we've seen in the end markets that maybe just the semiconductor supply chain is not seeing it yet.

Is there anything from a visibility perspective or anything from when you really step back and take a look at the customer mentality and their forecast that gives you comfort that we're just not blind on what is going on above the supply chain?

I think, Michael, what you have to look at for starters is the weight that's been on our inventory for the last three quarters, as in primarily the inventory correction that's taking place.

So, that -- having that weight off of us as we go forward says that we should see growth, because we've been significantly undershipping consumption or at least the shipment rate of our end distributors.

To the extent that the end markets, if they strengthen, we're certainly going to benefit from that, and if there is something that says end markets are going to weaken, we would see that as well.

But there is nothing that we see from our customers that leads us to believe that that latter situation of end consumption demand for our customers' products is weakening.

I guess just to follow up on that, how are you managing factory loadings?

Are you being pretty cautious in what the forecasts say for your demand versus how much you're bringing on or are you pretty much going with what you see out there?

Michael, we're loading the factories very similar to what we did last quarter, that is modest increases as we come through the quarter consistent with our demand outlook.

Great.

Thanks a lot.

Thank you, Michael.

Next caller, please?

Thank you.

Our next question is coming from John Barton of Wachovia.

Yes, thank you.

Ron, if you could just comment a little bit more on gross margins.

Obviously, up 2.6 percentage points quarter on quarter, you talked about higher utilization.

Any other further break down that you could give us that might be as what drove that and then your thoughts on how that goes into Q2 for us?

John, I will go ahead and try answering that for you.

The gross margins were up due to utilization and lower total costs.

Keep in mind there are several elements inside that.

As I mentioned, during my opening remarks about the profit sharing change, the profit sharing accruals in 2005 are expected to be quite a bit less than 2004.

That will have an impact on the cost of revenue as well as the other cost runs.

In addition to that, we have depreciation dropping, as we do each year at this time of the year.

And that also contributes to some of our cost of volume, inside our total cost of goods sold.

Those are two moving pieces that are inside that.

And then beyond that, we've kept our stacking levels quite well contained and our total discretionary costs well contained.

So all combined, that is giving us quite a lift sequentially on our gross margins.

Do you have a follow-up, John?

How do you think about that as you look into Q2?

We expect that with the higher EPS range that we've given that we should be able to deliver higher results going into 2Q.

Thank you, John.

Next caller, please?

Thank you.

Our next question is coming from John Lau of Jefferies & Company.

Great, thanks.

Ron, you had indicated that the inventory overhang is being depleted.

I was wondering specifically on some of the commodity segments you mentioned double-digit sequential increase, and Disti [ph] inventory is out, those are great trends.

Could you also tell us about pricing on some of these commodity components?

And is the rate of the pricing decline slowing down?

Thank you.

The rate of pricing decline is slowing.

In fact, it has reversed and pricing for commodities, so standard logic, standard linear, from our shipments in the first quarter, were up compared to the fourth quarter.

It reflects the combination of a more favorable supply/demand situation.

Again, as the distributors have completed their inventory correction, that's certainly favorable from a demand perspective.

It also just reflects that TI is getting more focused on profitability in these commodity areas, and in doing so, we're willing to trade off revenue for profitability if necessary.

But prices are up.

And generally, that's a trend that we're optimistic with continuing into the second quarter as well.

Ron, that was a pretty quick turn-around.

Is that because the profile of these commodity businesses is more turns related?

Certainly.

And I would say, it comprehends multiple things.

First of all, commodity prices move very quickly with supply and demand.

And keep in mind, what's limited the demand for us created excess supply was the distributor inventory correction that was underway.

So as soon as that gets completed, that supply/demand situation and therefore pricing turns very quickly.

And then similarly, as you point out, lead times are short, so we don't have extended backlog, and the extended price commitments for most of these commodity products, so the results can reflect that changing environment very quickly, and in fact, they did.

Great.

Thank you.

Thank you, John.

Next caller, please?

Thank you.

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

Yes, I'm sort of confused here about some of the margin variable, so maybe you could take me through them again.

But could you specifically say what the changes were due to profit sharing sequentially from Q4 versus Q1 across COGS, R&D, and SG&A?

And then also your expectations for profit sharing changes Q2 versus Q1?

And then I have a follow up.

Adam, we're not going to be detailing profit sharing this year.

It is going to be a smaller factor than it was last year.

But I would just remind you that from prior guidance that we've given, we accrued about 243 million of profit sharing last year.

Based upon the profitability that we had last year, the new formula would say that we would accrue something on the order of $100 million.

So based upon whatever you believe our profitability will be for the year, can be how you can model that into your expectation for 2005.

Okay.

So if I'm just taking it through your logic here, you had 40 million plus talent sequentially in depreciation, you had 8 million in LCD exit, you had, I guess, 8 million in non-semiconductor, and you had something like 0.4, if that's the ratio you're using for COGS, times the 140 sequentially improvement in lower profit sharing, plus you increased your factory loading sequentially.

Those things all were positive tailwinds on your margins Q1 versus Q4; is that correct?

Most of that is correct except for the depreciation.

Remember that depreciation has to go through inventory first.

If we're carrying 65 to 70 days worth of inventory, it is going to take 65 to 70 days before that depreciation makes its way into the P&L.

So for the quarter we probably had something more like 25 to 30% of that depreciation find its way into the P&L.

The rest will find its way into the P&L in later quarters when we sell that inventory.

It seems -- can you help then with the Q2 versus Q1 in terms of both the depreciation, should we assume that ramps up at the same rate it has in prior years?

And then also, can you -- the other sequential impacts, in terms of R&D, you didn't change the guidance but it implies that you have to have that accelerate throughout the year, also; is that the way I should think about it?

On depreciation I would just say that we've given you the annual number there and I think you can probably compute and get to a pretty good number.

On the R&D, again, we're not forecasting at that level, but we do have the full quarter's effect of paying benefits increased in the second quarter.

Recall that the first quarter is when we have our pay and benefits changes around the world.

And we have a partial quarter impact on that.

And the second quarters are near the first full quarter impact.

So you do tend to see a little pressure on the spend line due to that.

Let me add a little more color on the depreciation comment.

Yes.

First quarter we were at 347.

We have given guidance for the year that depreciation is expected to be around 1.4 billion, so you can see that we are expecting a pretty flattish year on depreciation in terms of the sequential increases.

There may be a little noise around that, but in general, a pretty flattish year versus what you would historically have seen as a ramp.

And the reason is because as we bring new assets online, and start depreciating them, of course that tends to increase the -- add to the sequential increases, but this year we we'll also be seeing some offsetting roll-off from depreciation from assets that were -- those significant CapEx years of 2000 and 2001 that are starting to provide some offsetting roll-offs.

So that's why you will see this year probably a more flattish depreciation profile as we go forward.

Okay.

Just one last thing on this point then.

Are you going to -- it seems like, obviously you increased your factory loadings in semis above the revenue growth, by definition into Q1, right?

Would you expect to do that again in Q2?

And I guess what I'm struggling with is as your revenue grows the next several quarters how I should think about your incremental gross margins?

Adam, we don't have a projection for Q2, but keep in mind in Q4, our factory loadings, our factories in general were loaded and outputting at a lower rate than we were shipping, as we were reducing $100 million of inventory.

So just the fact that we in the first quarter were holding inventory even as opposed to continuing to reduce inventory, said we needed to bring the factory loadings and output up, in order to realign the production loadings with the rate at which we were shipping.

So that's why you see partly utilization came up, even though revenue came down.

So it is normal from here then, you're factory loadings come up normally the way your -- in relation to revenue that it normally would over the next couple of -- ?

Certainly in relation to revenue and whatever inventory trends we would have.

Okay, and with that -- we will have to move on to the next caller.

Thank you, Adam.

Thank you.

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

Good afternoon.

One item I just wanted to clarify.

Can you give us some ballpark guidance on how much of your depreciation flows through COGS versus what percentage flows through R&D and SG&A?

Paul, the overwhelming majority of the depreciation goes through COGS because most of our capital expenditures are from manufacturing-related activities.

Safe to assume that it is north of 90%?

I don't have the exact number, but that may not be that far off.

Okay.

The more important question I wanted to ask is obviously you folks got extremely aggressive in the quarter on the share repurchase front and returning cash to shareholders, which I commend you for.

Would you be willing to discuss your long-term thinking on this whole issue of share repurchase, this utilization of cash and capital structure of the Company?

Should we look at what happened in the first quarter as kind of a one-shot event?

Or could you give us some coloring on your thinking looking out really to the remainder of this year and even into '06-'07 on where you want to take the cash balances, as well as the cash flow you continue to generate from operations?

Well, from a capital strategy standpoint, at a high level, I will give where our thinking is at and that timing will play itself out in the future.

Generally speaking, we will be generally adverse to debt in order to reduce the kind of fixed costs that debt can put on to your financial requirements, so we will be minimal in the use of debt over time.

From a stock repurchase standpoint, we will take advantage of those periods of time when our stock price seems to be cyclically low based upon historical positioning, such as what we've been seeing recently, and trying to use that opportunity to buy more shares than what we might normally do.

Over time, as stock options are exercised, in order to try to minimize the effect of dilution from exercise, we will generally do some purchases to keep from getting upside down because of exercises.

From a dividend standpoint, we will look at, from time to time, altering our dividend based upon the sustained changes in our operating cash flows.

And then from a cash balance standpoint, we will look to always maintain sufficient money available to us, or cash available to us to ensure that we can meet any capacity shortfalls that we see, and we can quickly install capacity if we need without having to go to the debt markets.

So that's kind of a five-point capital structure discussion for you.

That's what you will probably see us applying in years to come.

Just on the last of the five points, no change at all, though, in your thinking going forward that you want to outsource half your leading edge production at the peak of cycles?

We won't necessarily discuss what the ratio of outsourcing is.

In other words, whether it is 50% or something more or less.

But I would say that as long as the economics of the foundry market continue to deliver the kind of compelling outsourcing opportunities we've seen during the past few years, we will continue to take advantage of that.

Okay.

Thank you, Paul.

Thank you.

Next caller, please?

Thank you.

Our next question is coming from David Wu from Global Crown Capital.

Yes, good afternoon.

This one is on this high-performance analog business.

Sequentially it was up modest amount in the first calendar quarter and I was wondering, with distributors kind of eliminating all those excess inventory, would the second quarter be meaningfully higher in terms of the growth, quarter-to-quarter growth than you had in Q1?

And then I have a question on DLP, please.

David, I will have to stick with we don't get into our expectations for the second quarter below what we have already described for Semiconductor.

You're right, the distributors in the first quarter wrapped up their inventory completion.

If I look at -- this comment is going to be for distribution, our shipments and sell-in, sell-out of distribution overall, not just HPA, but if you look at distribution overall, resales were down, and I think it is probably not abnormal for them to be down in the first quarter just from a seasonal perspective, but they were down about 5%.

Our shipments, or our sales into distribution held about even with the fourth quarter level.

So some of the gap between our shipments in and the distributor's shipments out was narrowed in the first quarter, although we did continue to ship in below the rate at which they were shipping out, with the end result being they reduced their total TI inventory by about 10% in the first quarter.

And so just kind of with that set of facts, I will leave with you to determine what may or may not happen specifically in the second quarter on HPA.

Okay.

I know DLP is brand new business, but looking at how sharply it dropped in the last two quarters, I was wondering just going in -- in Q1, was it up year to year?

And when would it be a positive gradient?

I assume that we had a business that grew almost 80% last year, would show some revenue growth during calendar '05 and all coming in third and fourth quarter, but I just wanted to see where we are in Q1 and Q2?

Okay.

First quarter compared with the year-ago DLP, I think we said in the prepared remarks was down about 25% compared to year ago.

We're certainly starting off in a hole this year, but at the same time, we're also shipping below the rate of end consumption.

So as that inventory correction winds down and DLP moves back to end consumption and then sees growth from 1080P and then some of these other attractive new products, I don't want to sit here and project exactly when the cross-over will occur, but we do believe it will occur and DLP will get back to being a nice growth business for us.

But the exact timing, I will leave for you to project.

Thank you, David.

Next caller, please?

Thank you.

Thank you, our next question is coming from Cody Acree of Legg Mason.

Congrats, guys, on the solid quarter.

Can we talk a little bit about 3G and the wireless sector, what happened during the quarter of maybe sequentially and maybe what you expect for the current period?

Yes, I would just say 3G declined, I think wireless overall, we said declined 14% sequential, the 3G piece of it declined a little less than the overall rate.

The -- what do you make of it?

It really reflects we believe the strength of the fourth quarter 3G shipments.

And fourth quarter was really driven by customers that were preparing to introduce new phone models that were doing inventory channel fills in order to get preparations, and to get prepared for those models.

So that channel fill certainly is not a sustained number, and we saw some of that come out of the first quarter.

Our view in general is that, if you look at the total 3G handset market last year, most people have aligned that roughly 25 million UMTS or WCDMA handsets shipped.

This year, most analysts are projecting that's going to at least double, probably somewhere in the 50 to 70 million units.

We are very well positioned on the application processor.

Our position on the modem or the DSC that goes into the modem function is also very strong.

And in fact, we believe our market share on this modem function will expand further in the year 2005.

So 3G, we would say overall into '05 we would expect to be a much more significant contributor to TI's results and to TI's wireless revenue in '05 than it was even in '04 when we had $600 million of revenue and we had $500 million of growth from 3G.

Do you get back to that growth as early as the second quarter?

Well, you have to keep in mind that the first quarter 3G number was up significantly from first quarter a year ago.

So we're already showing solid year-on-year growth.

Once again, let me just say that I don't want to try to get down into the pieces of what's growing and what's not growing in the second quarter, but we are very optimistic about where 3G goes this year.

Ron, one, I guess what I'm trying to get at is there are a lot of discussions about excess inventory, kind of exiting the year here, do you believe that as we've cleaned a lot of the distribution channel and a lot of the end markets, have we also cleaned that 3G channel?

We don't believe 3G excess inventory was a big factor in the first quarter results.

We believe it had more to do with the inventory channel fill that occurred in the fourth quarter, but that's a much different statement than saying we believe there was excess 3G inventory.

I would say maybe our customers can shed more light on that for you as they report their results, but we don't perceive 3G excess inventory as being a big factor even now today.

Or in the first quarter.

Great.

Thanks, guys.

Thank you, Cody.

Next caller please?

The next question is coming from Eric Gomberg of Thomas Weisel Partners.

Good afternoon.

Could you talk a little bit about your 65 nanometer product that is sampling right now?

When do you expect to get to volume?

And when do you think 65 nanometer revenue could be become material to TI?

Yes, I would say we are moving very aggressively on 65 nanometer.

If you think in general our wireless products are aggressive users because they get cost benefit, they get performance benefit, they get lower battery or lower power consumption for longer battery life.

We keep the mass of our wireless products on leading edge process technology.

So in 65 nanometer, in first quarter, we announced that we had already begun sampling digital base fans for wireless in 65 nanometer.

And we expect by the end of this year, we will be ramping that into volume production.

So we look forward to it.

Do you have a follow-up question, Eric?

Yes, please.

You talked a little bit before about standard logic that pricing was actually up, can you talk about if you're seeing any incremental pricing as volumes grow on 3G and also just talk about the overall lead time environment on both analog and catalog DSP?

Okay, 3G, what I can say is -- are you talking -- let me just ask a clarifying question.

Are you saying are we seeing prices increase in 3G or are we seeing 3G resulting in blended wireless pricing going up?

Yes, I'm asking -- well, I guess it is two parts.

One is on 3G on an apples-to-apples basis, what type of price declines are you seeing as volumes grow, as well as what are you seeing on blended pricing as 3G becomes a bigger contributor?

Okay.

On a blended basis, what I can say is that if you consider a 2.5G modem sells somewhere below $10, in the -- probably the $8 range today, in the case of a 3G UMTS or WCDMA modem, that modem function is going to sell for well over twice what the GPRS one does, and I would emphasize "well over" today.

That will come down, and -- but we believe it will probably sustain, it is kind of a 2X type of price premium relative to 2.5G.

So the higher percentage of our revenue moves to 3G, that certainly will help blended wireless pricing continue to move up as we've seen over the course of the last few years.

Now, in addition, you also have the application processor that plays at a much more substantial level in 3G handsets than it did in 2G.

And I would say today blended prices on the OMAP application processors are generally in the $15 to $20 range.

So you can see for those 3G handsets that have a -- that have an application processor, that certainly will help the content story as well.

Now, I must also caution that, you're not going to have 100% of 3G handsets have that kind of stand-alone application processor capability.

Some of them will see lower -- what I would call lower performance versions, would include integrated versions of the application processor, integrated with the modem where you may not get that same level of premium, but in any case, that additional functionality will continue to help the 3G ASPs and wireless ASPs overall continue to blend upward.

Okay.

Eric, I'm sorry, you had a question also tied in there about standard logic.

Can you remind me of that, what that was?

I was just trying to get lead times on both standard logic and on catalog DSP.

Okay, what I can say in general on standard products lead times would range anywhere from immediate availability where we have inventory to the 8-week range.

They remain short.

I would say probably they remain stable.

Not a big change in lead times over the course of the last 90 days.

Thanks very much.

Thank you, Eric.

Next caller, please?

Thank you.

Our next question is coming from Tom Thornhill of UBS.

Asked and answered.

Thank you.

Wow.

Thanks, Tom.

Next caller, please?

Thank you.

Our next question is coming from Mark Lipacis from Prudential Equity Group.

Great.

The first question on options expense, Kevin, I understand that you prefer us not to model that until we get to the back half of the year, but can you tell us how it would have impacted EPS this quarter?

I have a follow-up.

Yes, Mark, roughly speaking, we've got about $100 million a quarter of options-related expense and if you compute the math against -- for this quarter and our tax rates and so on, it would be about $0.04.

Okay.

Second question, on your own internal inventories, your own revenues were down, your internal loadings were up.

And so your own inventories are flat to down.

Is that because -- could you help me understand to what extent that is due to whether or not your external loadings were -- came down, or it was just plain manufacturing lead times?

Really, Mark, a good chunk of that is explained by the depreciation remarks that I made a few minutes ago.

As you recall, depreciation being down like it was sequentially, it does have to flow through inventory first before it flows into the income statement.

And that's a significant contributor of reducing costs, even though utilization is going up, and you would be building more product.

In addition to that, we have the change of profit sharing that I mentioned.

And the general containment of expenses that we manage throughout the quarter.

So those three things all combined, allow us to actually be increased in our factory utilization, but actually the value going into inventory is being contained.

And let me just clarify, anything that is at a foundry in process is their inventory, not occurring on TI's balance sheet.

We recognize that -- or we moved that onto our balance sheet when they in fact ship those wafers to Texas Instruments.

Do you have a follow-up Mark?

No, thank you very much.

Thank you.

Next caller, please?

Thank you.

Our next question is coming from Chris Caso from Friedman Billings Ramsey.

Chris Caso are you there?

Okay.

Operator?

We will move on to the next question which is Christopher Danely from J.P. Morgan.

Good afternoon, guys.

Speaking for the bullish analysts by the way, thanks for the life preserver this quarter.

I just had a quick question on the utilization rate.

It sounds like they're increasing slowly but steadily.

Can you give us a sense of when they start to get, I don't know if you can say above 90%, but when they start to get back to the levels they were in Q2 or Q3 of last year?

And I have a follow up.

Christopher, I don't think we have a lot to really say on that.

I think you said it right, slowly but surely, and it's operating from a -- it was a pretty good dropoff in loadings that we took through last -- through fourth quarter.

So it is going to be just a slow steady March up.

I think we're talking quite a while before we reach those levels you're talking about.

Great.

So I guess like a Q4 type thing or even into next year?

I couldn't give you any more color than I just did, Chris.

Okay.

That's fine.

And then on the inventory, good job of burning down a little bit.

Yet the days are still pretty close to the all-time high.

Do you think that now that your business model is changing a little bit that you're looking for a new level of comfort inventory level?

I think generally speaking, yes, we will be looking at higher inventory levels.

I would just caution a little bit on looking at the days this quarter.

Because that was really driven by two things.

Just the math alone, with revenue declining like it did, and margins expanding like they did, that computation alone can make the days of inventory look a little bit odd on a transitional basis.

So we've got to kind of look at that over time.

But over time, yes, we do expect to be carrying on average more inventory than we traditionally saw us in the past and we are quite comfortable with doing that.

Can I squeeze in one last inventory question?

Sure.

At Disti's [ph], it sounds like the inventory correction is over.

In your opinion, do you think that the inventory levels that distributors are, I guess, a normal level or a little bit below normal as per your expectations?

Boy, I'm not sure -- I would say in some ways normal, but I would say they would be on the lean side, also.

Our turns in Disti [ph] are running over five, so I would describe that probably as a bit lean compared to historical.

And Kevin is a lot nicer than I am, letting you put in an extra question.

Thanks, Chris.

Next caller, please?

Thank you.

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

Hi, gentlemen.

Two questions.

First given what the SEC just said, is there any possibility given your fiscal year that you put off options expense until the beginning of '06 or you decided to go ahead and do it third quarter of '05?

Joe, we've been operating under the assumption with the FASB's original guidelines to begin expensing no later than third quarter.

We've been developing the systems and processes to get us in a position to do that.

And we've decided to continue along that path.

And in addition to that, our shareholders have made it pretty clear to us that they prefer that we expense our stock options and we're committed to going ahead and reflecting that on behalf of the shareholders.

Okay.

Any possibility that you take out of the money off the -- the options off the table prior to expensing or are you just going to go ahead and roll those through?

Right now, we are not planning on doing anything like what you just suggested.

Okay.

Then this counts as my second question.

Kind of following on what Chris said, if I look at your first quarter days of inventory back to '02, the trajectory is that the 8 days and 60 days and 64 days and 68 days, so clearly your business model is changing and that's great.

At the same time, and you're not alone in this, we've got -- you said that you think there is a typical inventory cycle occurring downstream.

The implication being that when things get better, your customers will want to build inventory.

I guess my question is, why?

It seems as if you are kind of becoming the company that bears more of the supply chain ups and downs for your customers, so why is it that your distributor -- now that you've got 68 days of inventory rather than 58, why should they restock?

Maybe this is just a new target level for them, just like it is for you.

Well, I think it is a very interesting hypothesis you're proposing there, Joe.

One of the other things I would remind you also about our inventory that we will be carrying more than we would have in the past.

Recall that we are on a consignment basis with some of our larger customers, so in the past where they may have held inventory, we now in fact hold that for them.

So between that and the high-performance analog and perhaps even the point you just brought up, we do expect to be carrying more inventory in the future than we traditionally do in the past, but we also have much more robust planning systems and so our ability to predict and position and stage that inventory is far better than it ever was in years past.

Better you have it than your customers.

Thank you very much.

Joe, I would just also say carrying less inventory downstream always sounds good in theory, and it lasts up until the distributor or the customer starts missing sales opportunities because they don't have product, because the lead times are moving out, or for whatever reason.

And so everybody plans to hold less inventory, until you start to get into that part of the cycle where things are changing, and then there we go again.

Panic sets in.

Thank you.

Thanks.

Next caller, please?

Thank you.

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

Tim Luke, are you there?

Okay.

Operator, why don't we move on and possibly bring Tim back in in a few minutes.

Certainly.

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

Just one question.

I was wondering if you could help to maybe reconcile the environment with what you saw in your orders.

In the March, April time frame.

Clearly, your order is getting better as you stated, but if we look at the environment, we look at the macro-economic data points and they've been getting worse here over the last 30 days, and we've definitely seen OEMs in the computer, and data networking sectors be softer as well.

So when you look at the differences there, do you think that the improvement in your orders that you're seeing is largely a snap back to consumption rates versus a read on what's really happening in the end markets from a demand perspective?

Mark, I think there is probably two pieces to that.

One is the distribution orders are now beginning to come back.

And so we are seeing a positive book to bill on that area there in catalog products.

And then in addition to that, your second point, I think, is exactly very important and a valid one in this, too, and that is that generally our customers are ordering at about what they're seeing their take-away rates are.

So in combination, we're seeing that pick up that I described happening in March.

Great.

Thanks a lot, guys.

Thank you, Mark.

Next caller, please?

Thank you.

Our next question is coming from William Conroy of Sanders Morris.

Ron, first one is a clarification of something you said earlier.

You talked about standard logic pricing and specifically addressed shipments.

Can you address how the orders -- pricing on the orders have looked?

Has that come up as well?

Sure, it has.

And so I was just trying to be specific that we actually saw pricing, not just in orders, but in terms of what we actually shipped in the first quarter move to a higher level.

When I said we are optimistic that it will continue into the second quarter, that's based upon the trends that we're seeing in the orders and the backlog that we have in place.

So it holds on both fronts.

Revenue as well as orders.

Great.

And as a totally unrelated follow-up, can you give us a little bit of an update on the application specific linear business out of those markets specifically?

I would describe them as generally pretty mixed.

So for example -- and these guys tend to have in some cases some different seasonal patterns than, for example, our wireless area.

But for example, hard disk drive is an area, is a significant area for these mixed signal products.

We saw the hard disk drive product, storage products down slightly on a sequential basis, year-on-year, they were up a little.

Printers, we saw up sequentially.

Which I believe is their normal first quarter seasonal pattern.

And then they were up year-on-year as well.

Those are probably the two most significant areas inside of mixed signal, and with the exception of again what we already described in wireless, where we saw the trends down, both sequentially, as well as year-on-year for those mixed signal products.

Great.

Thanks, Ron.

Thank you, Bill.

Next caller, please?

Thank you.

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

Tim, are you there?

Tim Luke, if your line is muted, please unmute your line.

Can you hear me, Ron?

Yes, we can.

You must be on your CDMA phone, Tim.

Wish I could say I was using a TI chip, Ron.

I think I understand the issue.

Go ahead.

Just to check on the wireless side, you talked about normal seasonality in the first quarter, it sounds like what you're describing, you're seeing normal seasonality broadly in wireless in your expectation for the second quarter.

Is that a fair statement?

Well, I think we're specific that we're not -- we're not describing our expectations for wireless in the second quarter.

What I said was certainly some of the considerations and what drove the sequential decline in the first quarter, which would be normal seasonality and the strength of the fourth quarter comparison won't repeat in second quarter.

But I didn't -- I wasn't specific on our expectations.

Just on the share count for Kevin, with that coming lower this quarter, we should expect it to move lower as you continue your buyback?

Is that a fair assumption?

Tim, you should expect it to move lower even if we don't continue the buyback.

Recall the way you compute your shares for an earnings per share calculation is based upon your daily average shares throughout the quarter.

So we -- you can look on the balance sheet and see what our end of quarter actual share count is, when you look at our shares issued and our treasury stock, and you will see that continue to bring down our average share count as we come into 2Q irrespective of our repurchase activity.

But we are only about -- just a little over halfway of the repurchase authorizations that were in place, so we still have a long way to go on that.

That's correct.

Excellent.

Thanks, guys.

Thank you, Tim.

Next caller, please?

Thank you.

Our next question is coming from David Wong of A.G. Edwards.

Thank you very much.

I think what you told us just now about content and 3G in terms of base band and application process, it was very interesting.

Can you give us some feel for the distribution of chips you sell into 3G?

Are a lot of -- are a big chunk of your unit volumes OMAP or do they tend to be mostly base band or do lots of firms have both chips in them?

Okay, if you look at '04 revenue, about 60% of our 3G revenue, which again was about $600 million was from the OMAP application processor.

About 40% was from DSPs that go into the base band function.

And in general, there was some overlap between those two in terms of handsets, but a lot of the OMAP revenue keep in mind is coming from DoCoMo, the program in Japan, where to date, they've used more domestically provided base bands, and that's the program where we announced last year that TI and DoCoMo had a joint development program to integrate our OMAP 2 next-generation application processor, with a fully standards compliant UMTS base band.

But that will probably be more '06 type of revenue than anything we would see near term.

Did you have a follow-up David?

That's it.

Thank you very much.

Okay.

Thank you.

Next caller, please?

Thank you.

The next question is coming from Charlie Glavin of Needham.

Thanks.

Ron, if you could give a little bit more granularity in terms of the end consumption on the DLP chip, given that you -- it sounds like several of your major customers are pulling in launches of both the HD3 and the HD4, the 1080 piece sounds pretty high end.

Even to the point I'm not sure when you are going to see blue ray.

Can you give a little bit more clarity?

Are you seeing more of a stall in terms of the end consumption of the HD2+ as the customers start to roll out the HD3 and pull in the HD4?

Just so we can get a little bit better idea of what is actually selling out there.

I wouldn't describe it as a stall.

I would describe it as -- keep in mind, you have to go back to last year, in general.

We had -- we went from 18 television models on the market at the end of '03 to today, there's well over 80 models on the market.

So as those customers -- and we had multiple new manufacturers coming online as well.

So as these customers are doing their channel fills, getting ready for those product launches, you have growth that is associated with that.

And frankly, the overall market, not the DLP market, the overall big screen TV market just didn't develop to those customers' expectations in terms of the inventory that they put in place.

And then similar happened on the front projector market.

But as I said, DLP televisions continued to gain share with respect to the overall big screen TV market.

It just didn't develop to the extent that those customers were planning for.

So I wouldn't describe it as a stall.

Similarly, the 1080P market, it will be higher end than what you see out there today, but in general, I believe you are going to see those televisions introduced at multiple screen sizes, and probably multiple price points that will be attractive to consumers.

At the same time, we're seeing the 720P television set around the market today moving down pretty aggressively on price.

And what I mean by that is you're already seeing all of the smaller screen sizes, DLP, big-screen TVs, sub $2,000 and the general expectation that will move down sub, or in the $1,500 price range by the end of the year.

So at the -- across the board, the price points are getting more attractive at the same time at the high end, we're blending in some nice new technology that we think can excite customers as well.

And, Ron, I wouldn't disagree with that, but it is interesting that you have the actual 720P DLPs go into the projector market.

Maybe a different way of looking at this without specifying certain customers, do you think there may be a bit more of a market share situation given the significant number of new products that are being launched on the DLP, both in the projector market as well as the TV, is it that people were so hyped coming out of CES that they launched too many models do you think and it needs to rebalance?

No I don't think this is coming out of CES at all.

This was something that was put in place for the, oh, probably starting, call it October through January selling season.

The excitement we saw out of CES is, frankly, probably more second half revenue for Texas Instruments.

So we can look forward to that ahead as opposed to anything that is causing the current situation.

Thank you, Charlie.

Yes.

We will probably need to move on to the next caller at this point.

Thank you.

Ron, if I could ask just one housekeeping of Kevin, in terms of on the balance sheet, shifting the long-term cash to short-term cash from what you originally reported from fourth quarter to first quarter, was that something the others just want to make themselves busy or should we read anything into that?

I wouldn't read anything into that.

It is just simply how we're restructuring the cash to make it available for stock repurchases.

Okay.

Thanks.

Thank you, Charlie.

Next caller, please?

Thank you.

Our next question is coming from Hans Mosesmann of Morris Cabot.

Thank you.

A quick question on the mix between 90 nanometer and 130 nanometer for the quarter and how you expect that to progress throughout '05?

What I would say is that a little bit as I described before, we're seeing 130 in terms of TI's total 130 wafer demand starting to come down.

At the same time we're ramping up 90 nanometer.

And, keep in mind that's the whole basis of the foundry strategy is that as 130 comes down, we only put in place enough internal capacity that we believe we will have capacity to be able to meet long-term demand of 130.

So where the 130 nanometer differentiation is, is what we're loading in the foundries versus again keeping our internal assets full.

90 nanometer will ramp through this year, both at TI as well as our foundries.

We currently have four Fabs that are sourcing our 90 nanometer, fully qualified.

They include KFAB.

They include CMOS6 as well as TSMC, UMC and then we have SMIC that we expect to qualify in 2005.

So that's probably a quick summary.

Do you have a follow-up, Hans?

Just to get a sense of the actual mix, is 90 nanometer, what 5%, 15%?

I'm assuming it is going to be in the double digits, but I wanted to get a sense as to where that was and is it on track relative to expectations?

It is on track to expectations.

In fact, what I would describe is, we are probably, I would describe more than a year ahead of where we were in terms of yields on 130 nanometer, in terms of, the life of 90 and its ramp-up.

So we're very pleased with how that is ramping up.

I don't have a specific yield mix for you, other than what I would describe as CMOS6.

Roughly that 14,000 wafer start per month capacity is divided up as 10,000 on 130 nanometer, 4,000 on 90 nanometer, but I don't have the specific overall mix for you.

That's fine.

Thanks.

Thanks, Hans.

Next caller, please?

Thank you.

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

Good afternoon.

Ron, a specific question on DLP.

Do you have more inventory in the business projectors or on the big screen TVs at this point?

Again, let me clarify, this is not TI inventory, this is inventory of those systems, projector systems and television systems.

Satya, I don't remember the specifics.

I know both of them, both -- if you just look at our revenue for example.

Television and front projector revenue declined, what I would describe as significantly in the first quarter.

But I don't know the exact mix of projector versus television inventory.

Okay.

The -- can I ask a follow-up please?

Sure.

Okay, on the wide band CDMA, UMTS market in Europe, can you give us a glimpse on what is going on in Q2, any feel there at this point?

I don't have a specific comments on Q2.

Although I do agree that UMTS this year, whereas last year, WCDMA was probably the big factor, I shouldn't say WCDMA, DoCoMo was probably the biggest factor in the 3G ramp.

Europe will be a much bigger factor probably in 2005, but I don't have it on a quarter-by-quarter blow type of basis.

So with that, let's move on to the next caller.

Thank you.

Our next question is coming from Seogju Lee of Goldman Sachs.

Thank you.

Just, Ron, when you talked about 130 nanometer, 90 nanometer, and just how you balance internal versus external capacity, if I interpret that correctly, or would it be safe to assume that your use of foundry capacity, at least in the interim, is going to be down?

Kevin, I will let you take that one.

Well, certainly, our use of foundry capacity over the last couple of quarters has has been down as we have pulled our loadings inside into our internal factories.

And as we switch over, whether or not that changes the total wafer take that we have for the foundries really depends on total end market demand.

Okay.

So in Q2, you wouldn't really expect that to change materially?

The cycle, I guess the one comment we would make in addition is, we are a really big customer for these foundries, and we affect their financial results, so we would prefer to let them announce their financials as opposed to us giving indications of what may be going on there.

So we will probably just be pretty limited in terms of what we're willing to say at this point.

Yes, I'm just trying to also understand the impact to your incremental gross margin, and if you should get a little -- if there is a benefit to say if you're pulling in more wafers internally, in Q2, if there is that benefit to your gross margin there?

Well, yes, as we actually continue to increase our factory loads, we will get a benefit from our utilization from our internal factories.

The -- we're still sourcing wafers from foundries.

It is not that we've dropped to zero.

Okay.

So the incremental margin on the foundry wafers is really equal to our gross margin.

And we pay, as you might suspect, we pay them a margin on their wafers.

Therefore, their costs -- the cost of those wafers is higher than the cost of an internal wafer.

So if the mix shifts significantly toward a higher percentage internal versus external, that in the short term is favorable to TI.

So thank you, Seogju, and let's move on to the next caller, please.

Thank you.

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

Thanks, guys, for keeping this call going.

First one is DLP related.

It sounds like you're sort of attributing more of this weakness to the projector segment than I had heard in prior comments.

Just explain to me why this should be some sort of correlation in end demand, and more importantly, inventory trends between the projector segment and the TV segment.

Oh, I don't think there is any correlation.

I think it just happens to be that both -- both of those marketplaces didn't develop to the level that those customers were putting in place inventory.

There is no correlation between the two, though.

Okay.

Because the inventory affects and other standard products, the classic semiconductor devices happen well in advance of DLP, and these just happen to happen at the same time, it just seems strange.

Just purely coincidental?

Yes, because I mean if you would maybe try to argue that it had to do with shortages of components, or something like that, I don't see that, because the components that have been in short supply weren't DLP chips, they weren't -- they were things like screens at various points, which is in a TV, it is not in a projector, so I think it is -- I would describe it as more coincidental than any significant correlation.

Great.

And then just a follow-up question I had was, I'm trying to sift through your language on the call and also the press release, is TI calling for an upturn in the cycle now?

Is that what you're saying?

And if so, how much confidence can we have based on the way this has worked in the past?

The macro changes and the semiconductor guys see it down the road, how much confidence could one have in that just listening to what Disti's are you saying and what customers are saying?

I would say it from a couple of perspectives.

First of all, it is our belief the downturn we saw over the last three quarters was strictly an inventory-related, inventory correction-driven downturn.

So to the extent that that inventory correction is over, yes, revenue should grow from here.

If you want to try to say where was the bottom, I would say at least for TI, the first quarter was the revenue bottom, from a profitability perspective, that would have been -- that would have been fourth quarter.

So, we don't like to try to make these grand calls, but kind of easier once they're behind us as opposed to ahead of us.

Okay.

And then you're not that worried about what the market seems to be saying about the macro environment and some of the news flow, et cetera?

Well, I mean of course end consumption is something we will watch closely, but we don't do our forecast based upon what the stock market does.

Okay.

Great.

Thanks.

Thank you, Ben.

Next caller, please?

Thank you --

Operator, this will have to be our last caller.

Our final question is coming from Krishna Shankar from JMP Securities.

Yes, what are you assuming for cell phone units growth in '05 versus '04?

And can you also talk about the competitive environment that you see in the 3G chipset market?

Okay.

Cell phone unit growth, we don't have our own forecast that we make public.

What I would say is most analysts are for the most part expecting cell phones to grow this year in total somewhere in the 5 to 10% range.

So I would just pass that on.

And that compares -- that is a slower growth rate than last year, when it ran probably 25% or maybe a little bit above that.

Now at the same time, I will remind you that with that 25% handset growth, TI's wireless revenue grew 40% and it certainly is our objective to continue to outgrow the overall handset market just based upon the fact that our handsets -- our content in these handsets continues to build as handsets take on more and more advanced features.

Your question on 3G competitive environment, I guess I don't really have anything profound to say there.

The competitors are the usual suspects.

We will be competing certainly against Qualcomm, against Freescale, against players like Intel that certainly want to stake a claim in 3G.

We are not relaxing our stance at all or our intensity of our efforts.

We know it is going to be a highly competitive market and even though we feel really good about the score at this point in the 3G game, and the revenue we've shipped and the market position we have, we realize that if we let up at all, we will have lots of competitors that are more than willing to take that position away from us.

So we are treating the game accordingly.

Thank you.

With that, we are going to probably need to wrap up our call.

And let me thank you again for joining us and remind you that the replay is available on our website.

Thank you.

And good evening.

Thank you.

That does conclude today's conference.

You may disconnect your lines at this time.

And have a wonderful day.