德州儀器 (TXN) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Texas Instruments second-quarter conference call. (OPERATOR INSTRUCTIONS).

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

Ron, you may begin.

Good afternoon and thank you for joining our second-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 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 September 8th.

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 September 1st until the update.

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

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

Second-quarter TI revenue was $3,239,000,000 at the top end of our guidance range with semiconductor revenue stronger than we had expected at our June update and Sensors & Controls revenue a little weaker than we had expected.

TI revenue increased 9% from the first quarter as semiconductor growth resumed after three quarters of inventory correction at our customers and distributors.

Educational and Productivity Solutions or E&PS was also a factor in driving this revenue growth due to strong seasonal demand for graphing calculators.

Operating profit set a new all-time high in the quarter, and both growth and operating margins expanded despite the headwind of a significant reduction in inventory that was achieved in the quarter.

Kevin will provide more details on this in a few minutes.

Sensors & Controls revenue of $295 million was about even sequentially and was up 2% from the year ago quarter.

E&PS revenue of $181 million more than doubled sequentially and was up 7% from the year ago quarter.

Semiconductor revenue grew 6% sequentially and was about even with a year ago.

The sequential increase was driven by broad-based increases in demand, especially for TI's analog and DSP products.

Total analog revenue increased 9% sequentially, mostly due to strength in high-performance analog which increased 13%.

Please be aware that this comparison and the total semiconductor comparison includes $39 million of first-quarter revenue from the commodity LCD driver productline that was divested in that quarter.

Removing this LCD driver revenue out of the comparison would result in sequential analog revenue growth of 13%.

LCD driver revenue was $50 million in the year ago quarter, and the 7% year-on-year decline in the analog revenue would have been a 2% decline if adjusted for this divestiture.

DSP revenue grew 8% sequentially and was up 10% from a year ago.

Wireless was the biggest factor in this growth.

DSP sequential growth also benefited from solid contributions from the automotive and industrial control markets, consumer applications, particularly imaging, and catalog products.

TI's remaining semiconductor revenue was about even sequentially and declined 6% from the year ago period.

As expected, the inventory correction in DLP-based televisions and prompt projectors wound down in the quarter, and TI's DLP revenue grew 10% sequentially.

TI shipped below sell-through levels at our customers and their channels for the quarter overall, and revenue was more than 20% below the year ago level as a result.

We are encouraged that the excess inventory is now resolved, and our DLP revenue should be relieved of this pressure in the current quarter.

In other areas we had double-digit sequential growth in RISC microprocessors and microcontrollers, single digit growth in Standard Logic, and a double-digit decline in royalties.

Year-on-year RISC microprocessors and microcontrollers each grew by double-digit percentages, while royalties declined by a single digit percentage and Standard Logic declined by a double-digit percentage.

We had expected royalties to decline in the quarter as we transitioned one of our licenses to an accrual basis from a cash basis.

The actual decline was a little more than we had expected, reflecting weakness in the memory market that drives much of the revenue at several of our licensees.

In the wireless market, revenue increased 8% sequentially and grew 8% from a year ago.

TI's strong leadership position in the UMTS market continues to benefit the Company as 3G handsets were the most significant factor in this growth. 3G revenue was especially strong in baseband processors, although OMAP processor growth was strong as well.

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

Thanks, Ron, and good afternoon, everyone.

TI's second-quarter gross profit was 1,521,000,000, up $185 million sequentially due to higher gross profit from semiconductor and seasonal growth in E&PS.

Gross profit margin of 47% of revenue increased 2.1 percentage points sequentially.

Semiconductor gross profit of 1,315,000,000 increased 126 million sequentially due to higher revenue, as well as a combination of cost reductions and higher factory utilization.

Second-quarter factory loadings increased despite a $43 million reduction of inventory resulting in the higher utilization levels.

The inventory reduction in semiconductor was even greater than this amount as E&PS seasonally built inventory.

In Sensors & Controls, gross profit of 108 million or 36.6% revenue increased 2 million sequentially due to cost reductions.

E&PS gross profit of 111 million or 61.2% of revenue increased $67 million sequentially due to higher revenue.

The gross margin in E&PS was an all-time high for this business.

Operating expenses of $852 million or 26.3% of revenue increased 13 million from the first quarter.

As a percent of revenue, operating expenses declined by 1.9 percentage points compared with the first quarter.

R&D spending of $493 million declined by 2 million, and SG&A expense of 359 million increased by 15 million due to our first-quarter gain on the disposition of a sales office facility.

TI's operating profit for the quarter was $669 million or 20.6% of revenue.

This was the highest operating profit TI has ever had in a quarter.

Operating profit increased 172 million sequentially, and operating margin increased 3.9 percentage points.

Semiconductor operating profit was 594 million or 21.5% of revenue.

Sensors & Controls operating profit was 72 million or 24.5% of revenue.

E&PS operating profit was 79 million or 43.7% revenue.

In the second quarter, other income and expense or OI&E produced income of $56 million.

This was an increase of $8 million compared with the first quarter primarily due to adjustments to previously accrued interest expense related to favorable developments on several tax matters in the quarter which was partially offset by reduced interest income on lower cash balances.

The tax rate for the second quarter was 13%, lower than the 24% rate that we had expected due to the previously mentioned favorable developments on outstanding tax matters, partially offset by a tax expense for the planned repatriation of foreign earnings under the American Jobs Creation Act.

Net income was 628 million or $0.38 per share, up 217 million from the first quarter.

It might help if I summarize the earnings per share transition from the $0.24 we reported in the first quarter.

About $0.04 of higher earnings per share resulted from the higher revenue level and about $0.05 from manufacturing cost reductions and efficiencies.

About a penny of benefit resulted from the share count reduction associated with our repurchase program.

These were partially offset by a couple of cents for lower OI&E, net of the tax interest benefit and the gain on asset sales in the first quarter.

Finally, the total non-recurring tax-related items I mentioned contributed about $0.06 of EPS benefit.

The benefit associated with our share count reduction was included in our most recent guidance range and did not contribute to the upside to those expectations.

Average diluted shares outstanding of 1,669,000,000 in the second quarter were essentially at the same level as we stated in June as the basis for our mid-quarter update.

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

Cash flow from operations was 827 million in the quarter, up 304 million sequentially primarily due to the payment of employee profit-sharing in the first quarter and higher net income.

Total cash at the end of the second quarter was 4,478,000,000, decreased 662,000,000 from the end of the fourth quarter.

TI used 1,292,000,000 in cash during the quarter to repurchase 52 million shares of TI common stock.

In total we have repurchased 110 million shares since the beginning of the year at an average price of $25.36.

Capital expenditures of 257 million in the quarter decreased by 20 million sequentially.

CapEx is down 99 million from the year ago quarter.

Depreciation of 345 million decreased 2 million sequentially.

Depreciation is down 8 million from the year ago quarter.

Accounts Receivable of 1,902,000,000 increased 206 million sequentially due to seasonally higher E&PS receivables and higher revenue.

Day sales outstanding were 53 days at the end of the second quarter compared with 51 days at the end of the first quarter.

Inventory of 1,202,000,000 at the end of the second quarter declined 43 million due to strong shipments.

Days of inventory were 63 days at the end of the quarter, down from the 69 days at the end of the first quarter.

TI orders in the first quarter were 3,389,000,000, up 12% sequentially.

Semiconductor orders were 2,950,000,000, up 15% sequentially.

Semiconductor's book to bill ratio was 1.07, up from .99 in the first quarter.

Turning now to our expectations for the third quarter, we currently expect total TI revenue to be in the range of 3,290,000,000 to 3,560,000,000, semiconductor revenue should be in the range of 2,835,000,000 to 3,065,000,000.

Sensors & Controls should be in the range of 275 to 295 million, and E&PS should be in the range of 180 to 200 million.

Earnings per share are expected to be in the range of $0.31 to $0.35 in the third quarter.

This estimate includes the expensing of employee stock options which we will initiate in the third quarter as we announced last quarter.

This expense is expected to be about $80 million in the third quarter or about $0.03 per share.

We have included a chart on our website that gives the quarterly history of stock option and total equity-based compensation expense back to the first quarter of 2004.

Our expectations for 2005 R&D, capital expenditures and depreciation are unchanged from the beginning of the year.

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

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

In summary, we are very encouraged by our second-quarter results.

The growth in our revenue was strong, especially for DSP and analog products, and the expansion in our backlog gives us confidence that we should have solid growth again in the current quarter.

Operating profit hit a new record and margins expanded despite the reduction in inventory that also occurred.

Finally, we are encouraged that the inventory in our channels including our DLP channels is in good shape.

We're also continuing to return value to our shareholders.

We announced today that our plans to increase TI's dividend by 20% to an annual dividend payment of $0.12 per share effective with the October 2005 dividend declaration.

We also announced that our Board of Directors has authorized us to repurchase an additional $2 billion in Company stock.

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 ask your questions, please limit yourself to a single question.

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

Operator?

(OPERATOR INSTRUCTIONS).

Glen Yeung, Smith Barney.

Thanks and obviously a great quarter.

Both my questions are relative to gross margin.

So the first one is, if you can maybe talk qualitatively about baseband margins and the impact that we have seen from lower end handsets on those margins?

Yes.

The margins across all the products in wireless tend to be pretty much the same.

The prices are different, but from a manufacturing cost standpoint, the costs are also different, so the margins are pretty much similar whether they are on the high end or on the low end.

So that really doesn't affect our overall operating margins there.

Okay, great.

And then the second question is, if I look at your guidance -- and I'm just trying to quickly put it through my model -- it looks like we should expect gross margins to be flat to slightly up in the third quarter.

I want to understand if that is the right assumption, and the heart of the question is, do you feel comfortable that should revenues continue to grow that even from this high level of gross margin we should see gross margin expand with that?

There's a couple of moving parts in there.

First, we really won't forecast -- we will forecast revenue and EPS, but we won't forecast between those lines.

But keep in mind that we will be implementing the expense in the stock options in third quarter, so that may have a bearing on the way you are computing that number right now.

Cody Acree, Legg Mason.

Let me echo my congratulations.

You mentioned just briefly, Kevin, channel inventories.

Can you talk maybe a little bit more about that, about what you're seeing out there?

Do you believe that you are shipping into the channel about what is coming out?

Do you have any view on where the --?

Okay.

If you recall probably we had two different areas where we had inventory correction going on.

Certainly part of it was in the distribution channels.

That was probably our biggest correction.

That really took place third quarter through first quarter in earnest.

If you look at second quarter, demand through distribution was strong with double-digit growth.

We had shipments out of the distribution channel, exceeded shipments in, resulting in what I would describe as a small decrease in inventory.

But really by the end of the quarter, we believe we were shipping into that channel consistent with in demand, and we don't really expect that there will be additional inventory depletion taking place in the current quarter.

But in distribution there was a small level of inventory depletion in the second quarter.

And DLP is the other major area where we have been talking about an inventory correction that has been underway probably starting in the fourth quarter of last year, and they are continuing in earnest through the second quarter.

And as we had expected, the inventory depletion that took place in the second quarter had begun to wound-down.

In fact, it was less in the second quarter than it was in the first quarter, and that certainly is what resulted in the revenue growth that we saw sequentially.

There similarly we believe that we ended up the second quarter with that inventory correction behind us, and therefore, as we were saying previously, that pressure will not be on our margins as we go into the -- or as we proceed through the current quarter.

Thanks.

And then one follow-up, please.

Kevin, you said you did not want to forecast gross margin specifically, but could you talk maybe a little bit about some of the levers that could move margins up especially through this second half?

What kind of utilization rates are you're running at now?

Are we going to be more dependent on pricing, and how are you kind of internal versus external production?

Okay.

Actually you have hit on probably the main lever, and that would be we do expect revenue to grow in the third quarter.

And recall that we mentioned that our inventories declined in the second quarter.

So clearly we will be using the factories more in the third quarter than the second quarter, and so that should give us some additional gross margin benefit just from a utilization standpoint.

You also may recall as we announced back in May that we have approached our commodity logic pricing in a different fashion than in the past in a much more orderly fashion.

And the price is there, while up a little bit in second quarter.

The backlog prices there are up also going into third quarter, so we expect those to be two positive trends for us going into the quarter.

Michael Masdea, CSFB.

Congratulations on the quarter.

With book to bill above one here and what seems to be in the supply chain ex some distribution variation pretty lean inventories, are we starting to see this typical cyclical reactions from your customer base, and is there any risk that we're pulling in some of our builds here because of that?

Michael, I don't think we're seeing that.

In fact, one of the means by which we would measure that is if we just look at our backlog, what period of time is that backlog expected to ship over.

And we really have not seen the coverage, meaning the time period which that backlog covers extend over the last couple of quarters.

So, for example, most of the backlog growth that we saw during the second quarter either shipped in the second quarter or we would expect to ship in the current quarter.

So we are seeing backlog increase really what we believe to be associated with the demand as opposed to just trying to extend it out over time, and that is really coming down we think to a couple of things.

One, our leadtimes remain short, and two, our delivery record, our on-time delivery record with our customers has been very good.

So they continue to have confidence that they are going to be able to turn to TI with some pretty short-term demand and have us meet our commitments to support it as opposed to having to get out beyond the horizon in terms of them trying to call their demand for TI.

Okay, great.

Did you have a follow-up?

Yes, there is a quick follow-up.

One of the concerns out there is the OEM profitability on the handset side, especially has been a little bit weaker than expected.

Does that typically, when you see that happen in the past, does that typically flow through to TI, and if so, what is the kind of timeframe that would normally kind of flow through to your pricing?

Michael, recall that we negotiate these supply contracts with our large OEMs well in advance, and we come down a natural price curve over time.

We continue to see that happening in an orderly fashion as we have seen for quite a few years now and expect that to continue to be that way in the foreseeable future.

Michael, I would just add that part of what you're seeing from, as I am hearing it from those various handset customers on their conference calls, is really the emergence of low-price handsets.

And you will recall that in that low-price arena that is where we are introducing single chip solution to allow them to get their bill of materials down to be able to aggressively go after those price points.

That is a product that I believe we announced in December.

We had started sampling to Nokia.

In June of this year we started sampling the merchant product or the standard product to a broader base of customers, and part of our solution to helping our customers increase their margins is not slashing our price but rather providing them a more optimized solution to address that segment of the market that allows our profitability to maintain at good levels and allows our customers to become more profitable as well.

You did say that the profitability like you said right there is in the same ballpark as your higher end solutions for the higher end --?

Yes, exactly.

Generally when you look at TI's gross profit across product lines, you see bigger differences between the vertical areas and the standard product areas like DSP or high-performance analog.

The verticals tend to run lower than corporate average gross margins, but then the revenue level they generate, the high revenue level, gives them a lot of leverage on their operating expenses so that they generate certainly acceptable operating margins.

And within an area like wireless, you tend not to see a lot of variation across the products inside of that vertical.

Paul Leming, Soleil Securities.

I've got one mechanical question if I could ask up front and then get to the MediaOne.

The mechanical question, when you institute the expensing of stock options in the third quarter, will you add a one line entry in the cash-flow statement to show what, if any, cash-flow impact there will be from the adoption of that accounting standard?

Yes, it will be very clearly shown on the cash-flow statement.

I would just also say we plan also to break that expense out on the income statement as well.

I will tell you exactly how much expense was associated with it and what lines that expense occurred on.

Okay.

And then the question I wanted to drill down into, are you starting to see leadtimes lengthen in any of your analog product areas?

The answer on that is pretty broadly no.

We have enough inventory in place to meet the leadtime requirements that we are trying to get to as Ron mentioned.

We build and position our inventory in order to be sure that we are meeting what we call customer service metrics, which include on-time delivery requirements as well as leadtimes, and we have sufficient inventory position to be able to handle that as a general statement.

There may be one or two products where we would like to have more, but that is always the case in any quarter.

Ambrish Srivastava, Harris Nesbitt.

A question back on the order rate.

At 15% for the quarter, could you please put that in perspective with what you normally expect, I say "normally" in Q3 and then I had a follow-up?

Thanks.

I don't have the history on what would be normal order of growth for Q3, but I would say certainly not 15%.

If you just look at what is normal seasonality for our revenue, and these are 10-year average numbers for what they are worth, but typically our revenue will grow sequentially in Q2 4 to 5% and then somewhere in the, I don't know, 2 to 3% range sequentially in Q3.

So what we just delivered in terms of revenue growth, what we are seeing in terms of order growth and what that portends in terms of revenue growth in the third quarter is certainly above what historical average seasonality has been.

Is that majority coming from catch-up revenues, for example, in areas like DLP?

Well, I don't know how to break it out like that, but I would not describe it as catch-up.

Keep in mind, for example, in distribution, we said our inventories actually continued to deplete somewhat there in distribution.

We saw good solid growth in distribution, but we certainly saw inventory depletion take place there.

DLP, we probably saw some rebound there as that inventory depletion wound down.

But the same thing, we did have ongoing inventory depletion taking place during the quarter in DLP.

A follow-up, please?

Sure.

What was the expectation for royalties for the remainder of the year?

Ambrish, we aren't forecasting specifically, but generally speaking we have talked in the past about our royalties will usually be around 100 million a quarter give or take 10 or 15% either way.

They were lower than normal this most recent quarter, but we would, if you're trying to model that in, we would probably expect you to model that about the same rate as we normally experience.

John Lau, Jefferies & Co.

A quick question with regards to the inventory again.

You had mentioned that you do have enough inventory for the analog components and the leadtimes are not extending outward.

Inventories are also down to about 1.2 billion.

Are we near the normalized level for your inventories to feel comfortable, and at what point are we going to see some of the leadtimes extend if demand continues?

Thank you.

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

Again, our inventories will fluctuate each quarter based upon really three things.

That is our outlook for the coming quarter and our desire to maintain certain levels of on-time delivery performance and certain levels of leadtimes.

So to the extent that that changes and that mix changes by product family, it will have a direct bearing on our inventory levels that we carry.

Right now we feel that we have sufficient inventory to maintain the on-time performance requirements and leadtimes that we are interested in keeping for our customers.

And with regards to now that the DLP excess inventory is done, do you feel your inventory levels to support the DLP is sufficient going forward?

We believe that we are well positioned to be able to handle all the requirements and orders that our customers have indicated to us for the quarter, for third quarter.

Yes.

Jim Covello, Goldman Sachs.

A quick question on one of the things that Kevin had talked about.

Kevin was talking about levers on the margin side.

Can you talk about the impact as foundries, your foundry partners increased their utilization rates and get a little bit tight on capacity.

The impact that that could potentially have on your pricing leverage there and in turn on the margins?

And then just generally speaking on the use of foundry capacity, any thoughts on if that changes as your foundry partners get a little bit tighter on capacity?

On the foundry sourcing, we enter into arrangements in advance with the foundries for our capacity, and the foundries honor those arrangements in a very respectable fashion.

So we don't expect that there will be any kinds of pricing changes that would have a negative effect that we have any concern about.

From the standpoint of sourcing from foundries, keep in mind this tends to be on our most advanced lithographies, so those will be the manufacturing lithographies that are going to have the longest cycle times on average.

So to the extent that we would expect revenues for this quarter, those wafers and the foundries would have been started last quarter to support revenues this quarter.

In fact, in another couple of weeks the foundry starts that we will do in those advanced lithographies will actually be in preparation for the fourth quarter.

Does that get to the answer of your question?

Yes, thanks very much.

Mark Edelstone, Morgan Stanley.

Nice job on the quarter overall.

From your prepared remarks, it sounds like the sequential growth in wireless came largely from 3G, and yet it seems like the ramp of 3G taking place in most places, maybe with the exception of Japan, has still been rather sluggish.

I wonder if you could comment on that?

And as you look into the second half of the year, where I would expect you would benefit from seasonal strength in the handset market as well, do you expect that the growth will continue to be driven by 3G, or do you expect that it broadens out?

Mark, when people talk about sluggish growth in 3G, it is really relative to their expectations.

I think most analysts and customers that are out with forecasts are talking somewhere between 45 and 55 million units of UMTS or WCDMA handsets in '05.

And that compares to 25 million last year.

So essentially the market is doubling, and we have a great position in it.

So it is going to be a big driver of revenue.

And keep in mind because our content in a 3G handset is so much greater than the prior technologies and the prior generations of handsets, we get -- I guess I would describe it as an especially high leverage off of that growth of units in 3G.

So maybe the market has not developed to everyone's expectations, but if you keep it in the perspective of it is still doubling versus last year, it is a big driver of our revenue growth.

Now the other thing I would say is you are hearing a lot of the customers talk about for them some of the customers anyway talking about growth at the low-end.

And what we are really seeing is kind of a barbell type of model in terms of our growth.

We're seeing it at the high-end, and that is the primary driver of our wireless revenue growth, but we are also seeing it at the low-end of the market for these low-priced handsets that are going into emerging markets.

So your question on second-half seasonal strength, yes, historically second-half is a seasonally strong period both third quarter and fourth quarter in terms of sequential growth for our wireless revenue.

Certainly in terms of 3G specifically a lot of our customers are talking about expectations that some of the operators will deploy UMTS more aggressively, especially operators in Europe during the second half.

I think we will have to see on that, but as you see already in terms of our second-quarter revenue, we're seeing a lot of benefit already if it gets better, it gets better.

Did you have a follow-up?

No, that is great.

Thanks for the complete answer.

Tom Thornhill, UBS.

Back on the gross margin issue, Kevin, can you give us some outlook long-term for the operating model for TI?

Your achievements in this quarter are about a year ahead of what I was expecting on gross margin and operating margin.

And your incremental margins look like they were for the Company about 69% for the quarter and for semis actually somewhere around 75%.

So how far can we go?

Well, first off, I agree with your calculation on the sequential fall-through.

I think those are pretty close to what I came up with also.

From the outlook standpoint, we had mentioned about a year ago that we had established a model for the Company that in good times we should be able to deliver about 50% gross margin and about 25% operating margin.

Hopefully this quarter is demonstrating that we are heading in the right direction towards that.

That is still the model that we have the Company targeted at.

I would just mention some additional background on that.

When we had targeted this a year ago at 50 and 25, that was before the FASB came out with the stock option expensing rule at the end of December last year.

Clearly when you work the expenses from stock option expensing into our P&L, that is going to be about 2 or 2.5 points of margin.

So there is going to be some headwind.

But without the stock option expensing, we are still aiming clearly at the 50 and 25.

And one follow-up.

In the analog space, your growth rates in high-performance analog, is this do you think in line with market trends, or do you feel that you are gaining share in the high-performance analog sector?

Tom, I think we would like to think we are gaining share, but we also really need to wait until everybody has reported to be able to stake that claim for good.

But 13% sequential growth in HPA certainly feels to us like we are gaining share, but again we will have to wait and see once everybody puts the score up on the board.

What do you attribute the share gain to?

I think two things, and if you look at it over the course of the last couple of years, you have seen share gains -- I mean certainly 2004 you saw share gains from Texas Instruments versus on our high-performance analog players.

And I would attribute those longer-term share gains to one, the quality of products that we are putting out from our high-performance analog group now and basically the acceptance of those products with customers.

And then two, which is somewhat of an intrinsic benefit for TI that I think is going to hold long-term relative to those competitors, is we just have a much broader sales coverage in terms of number of customers we're calling on and the depth of the coverage with those customers than what these smaller high-performance analog customers will have out there.

And so as our salesforce gets more used to the product line, gets more comfortable selling it, you are starting to see some pretty significant results.

I would say those are probably the two primary reasons.

Chris Queso, Friedman Billings.

I was just wondering if you could address the foundry orders a little bit again with the foundry orders looking like they are going to be increasing into the second half?

What exposure does TI have to any potential increase in price on the foundries, and perhaps you can comment a little bit on the current environment what you're seeing in terms of pricing for the foundries now?

Chris, I will kind of reiterate what I commented on a few minutes ago.

From a pricing standpoint, we enter into arrangements with the foundries well in advance of our needs, and the foundries do a good job of honoring those arrangements.

We also are able to get the kind of capacity and cycle times that we are very interested in.

So we see no issues with the foundries supporting our business needs.

We in anticipation of third quarter began increasing our foundry wafer starts last quarter as it typically takes about two-months cycle time from the time you start to the time you are ready to deliver on one of those wafers.

I'm not sure if I can add much more color than that.

Chris, I would just affirm we believe we are in good position with the foundries in terms of their ability to support our demands as we see it.

And then similarly we feel good that we're not going to be exposed to price increases from the foundries based upon the contracts we have in place.

So there is probably not too much more to add.

Thank you.

Did you have a follow-up, Chris?

I guess I will just follow-up with a question regarding the back-end and perhaps what you see in there in terms of capacity utilization and availability of product from there.

Are you confident from what you guys are seeing in the back-end now that would not contribute to some higher leadtimes in the second half?

Chris, you might recall last year we had a substantial portion of our capital expenditures actually went into our back-end operations as we expanded the size of our facilities and also installed a lot more equipment.

So that is in place today and it is available.

We continue to steadily increase our back-end capacity as our total units go up.

But right now we don't foresee any issue that we are concerned about from being able to meet our customer demands.

Again, it goes back to how we stage our inventory to try to keep our leadtimes at a respectable level.

Nimal Vallipuram, Benchmark Company.

Also, I would like to extend my congratulations on a great quarter and a great guidance.

Two questions and let me be brief about that.

The first one is I guess everyone is trying to figure out whether we're getting into a situation like we saw the last two years whether we had one quarter, great quarter, or two quarters great quarters, and then we have to pay in terms of having an inventory correction.

I mean I know that you don't give guidance one quarter out.

Can you give us some idea whether -- what would TI be doing differently if you believe that what we are seeing is probably going to continue beyond the third quarter?

Let me address part of it, and then I will let Kevin make some comments as well.

I guess the best I can describe is what we saw in second quarter and what we believe will be happening in third quarter, and keep in mind the biggest area where we had excess inventory build in the first half last year was in distribution.

The second quarter, even though we saw solid growth in distribution, inventory reduction occurred.

So we are not seeing any inventory build taking place through the second quarter.

In fact, the distributor turns, if you recall back in April, we described them as just over five or really about five.

They have moved up to about six as their resales are picking up and their inventory of TI product is going down.

So no signs of inventory build taking place in the distributor channel through the second quarter.

Now our expectation of what they will do going into the third quarter is basically we think at about six their turns level is where they have them targeted.

So what we would expect in the third quarter is that they will basically hold turns and grow their inventory basically at the same pace that their shipment is out or their resales grow.

But again, we don't expect them all of a sudden to start stockpiling inventory, and the other thing is we're watching that very closely.

We have good visibility into our distributor's inventory, and we're working with them to make sure that it does not do a repeat.

Kevin, do you have any further comments?

Yes, it is hard to add to what Ron just said.

I would just add some examples though.

We have been getting much better inventory reporteing and spending a lot more time looking more deeply at the inventory inside our distributors and being much more proactive on helping manage that, staging more inventory in our own warehouses so that the distributors had a lot more confidence that should they have a sudden demand uptick they won't be without the opportunity to meet that demand.

In addition, just as an example, when we announced our price increases on our commodity logic products, we had some distributors, particularly in Asia, attempt to put extra orders on us in advance of that, and we simply did select order of controls on those so that would not happen to keep that sort of ordering way ahead of demand from occurring.

So those are some of the things that we are doing a little bit differently.

Can I have a follow-up, please?

Can you also give us some idea given your end market that you do supply other than the handset market, if you can rank the kind of strength you saw in your different end markets in the second quarter and possibly by the orders going into third quarter, but I believe you don't give that guidance?

But just give us an idea which were the strongest end market and which were the not so strongest end market in terms of demand?

I don't know that I can break it down quite that finely.

I can just make some general comments on various end markets, but I don't know that I can rank it.

For example, if we move -- we talked about wireless handsets.

Let me just briefly talk about wireless infrastructure.

We saw good strength there with revenue up over 30% sequentially.

About 10% growth year on year.

If you look in the PC market, products that we sell into notebooks showed good strength in the second quarter.

If you look at hard disk drives, they grew kind of mid single digits sequentially.

They are up -- storage products are up over 30% year on year.

Printers kind of similar to what we're seeing in hard disk drives were up.

They are up double-digit levels sequentially.

In case of printers, they are probably down a little bit year on year.

What would be considered industrial markets I would say, you know, kind of normal seasonal pattern.

We saw improvement in the second quarter.

Consumer markets are generally doing pretty well.

I think I mentioned that DSP strength there, especially in digital still camera imaging products.

Broadband is something we did not touch on.

We saw about 20% sequential growth, growth from a year ago, up about 15%.

That is really being driven by Voice over IP, Voice over Cable and wireless LAN products.

So that hopefully gives you a flavor of some areas of strength.

I will be honest, nothing is popping out at me as an area of significant weakness.

Kevin, do you have anything that comes to your mind on weakness?

No, actually you characterized it well.

It is very broad-based is what we're seeing both on new orders and on revenue out the door.

Apjit Walia, RBC Capital Markets.

Just on the high-end analog segment, you obviously seem to be doing better than you appear based on the things you were saying.

It is a quick question on that in terms of historically the high-end analog days or the business is a late cycle mover that usually sees strength late and weakness late as well.

But is that something which is different for you guys?

I mean obviously you seem to see strength much sooner than they do.

Is there any dynamics there which are playing out which you could explain?

I don't know if we could really explain it just yet until we hear more about the commentary from some of our competitors that Ron talked about.

But I would reiterate what Ron said, we have two things working in our favor that probably is a little bit difficult for our competitors to come up against.

One, we have a large catalog of new products that we are introducing somewhere on the order of 500 new products per year with a lot of them being really nicely accepted in the marketplace.

And the other is we probably have the largest available salesforce of any high-performance analog company to be able to address more customers with more product offerings than anybody else.

So those two together give us an edge from a growth standpoint that is probably somewhat unique for our competitors in this space.

And relative to where it is in the cycle versus other products, generally high-performance analog is not that different than the rest of TI's product line, meaning our commodity exposure is very low, and for the most part, we sell highly differentiated products or custom products.

So to me I don't know that I would necessarily expect high-performance analog to move earlier or to move later versus the other product line in terms of any kind of cyclical trend.

Can I have a follow-up, please?

In terms of cycle times, I mean someone actually asked a question about maybe you see strength two quarters and then perhaps there can be concerns, but there seems to be growing talk obviously in the foreign manufacturing food chain that because of the consumerization of semis and the consumer cycles are much shorter overall, the product lifecycles of most end products are getting shorter and shorter, the cycle times are shrinking.

And if that is the case, then inventory volatility is going to come down, but what that also does possibly going forward is in the absence of a major major killer ramp, you are reducing the stock, the length of the upturn or obviously downturn as well.

But if that is the case, then before we know it, the good times are over and vice versa.

Is that something you guys are seeing as well, or how could you comment on that?

Well, I think that is a tough one to comment on.

I don't think that anything you said is anything different than what we have seen from how those markets work.

I would just point out that there is probably 10% or so of our revenues are in the consumer electronics space.

So it is not a major driver to TI overall.

It is an important market for us and we like being there.

But one of the things also that we have noticed happening is that our ability to consolidate multiple chips into single chip solutions gives us a chance to continue seeing a larger portion of revenue in certain consumer sockets than some of our competitors because we can consolidate their opportunities onto our chips.

The only thing I would just add is, if you look at consumer versus enterprise as opposed to just consumer electronic products, look at areas like wireless.

I mean wireless certainly is highly driven by consumer, but to try to describe a life cycle in terms of any particular phone model I think would be a mistake.

You really are seeing cycles move in terms of generations of technology such as 2.5G and then that being handed off to 3G.

These are multiyear trends, not 18 month type of trends.

So I think I would be a little careful with assuming too much in terms of what that will induce in terms of volatility to the industry.

Tim Luke, Lehman Brothers.

I think you outlined the baseband area was slightly ahead of the OMAP area in terms of the rate of growth, and I was wondering if that was something that we should expect to continue, or also wondering with respect to OMAP, whether you were seeing more of a shift in terms of interest for the European market rather than the Japanese market and whether the integrated OMAP-Vox product was still on track to sample, I think you had said, by the end of this year?

Okay.

There are several questions there.

Let me hit them.

The rate of growth of baseband versus OMAP, keep in mind our presence in the 3G market really started off with OMAP in Japan.

And then that would have been late '03, '04 our baseband revenue turned on, so part of what we are seeing is just the staging of OMAP versus baseband.

Baseband came on later, and therefore, it is going to experience more rapid growth just because it is not quite as mature if that is the proper term for our position in 3G.

So whether it continues, I mean I would say in OMAP we are highly driven not exclusively, but we are highly driven by that Japanese market.

So what grows faster between the baseband and OMAP will to some degree depend upon what happens in some of these relative markets, Europe versus Japan.

Your question on OMAP-Vox, which specifically for UMTS is going to be the integration of our OMAP 2 application processor with a UMTS digital baseband.

And the answer is yes, we're exactly on track.

We expect to be sampling that product by the end of this year and then ramping into production in '06.

And that product is the key product that will enable us to for starters increase our penetration in Japan on the DoCoMo program beyond the OMAP processor to also now start to participate in the digital baseband business.

And, of course, it will be offered as a standard product to customers and service operators on a worldwide basis as well.

So that is key to our strategy in UMTS.

As a follow-up if I may, just on the options expensing for our modeling purposes, should we consider that that would be a flat line of $0.03 impact going forward through the quarters?

And I was also wondering to what extent you were looking at the trading of -- secondary trading of stock options, and what do you feel about the likelihood of that developing and whether you in your evaluation what sort of ease and binomial or what sort of evaluation you will be using?

Tim, we will give you guidance each quarter on the stock option expensing.

And the reason we need to do that is because it actually won't be uniform each quarter.

It may be -- it probably won't fluctuate in a large way, but because of how you compute it for TI, we expect it will probably be a slightly larger number in the first quarter and work its way down a little bit as you go through the year.

Calendar quarter?

Calendar quarter, yes.

As to the secondary markets that are being talked about and some other companies are looking at, we're certainly watching those with interest, but we don't have any plans to do anything on that front just yet.

And on the method of calculation, we have been using Black-Scholes and we -- and that is what is being used in the calculations for the stock option expenses you will hear about from us.

If we use a different method of calculation, we will go ahead and also report on that.

Let me also just reinforce that chart that we put out on the website does give you some historical trends.

To the extent that is useful and modeling forward, it is out on the website currently.

David Wu, Global Crown Capital.

First, an easy one.

If you look at things historically, your third quarter tends to be stronger seasonally than your Q4 events because your wireless OEMs tend to take their products in Q3.

Have they changed the mind, I mean changed the buying pattern, maybe buying closer to where they have peak shipments, or do they still buy because of the custom nature of your largest customer a quarter ahead?

And I have a second one which relates to your operating leverage.

As I look at it, most of your fastest-growing part of your business right now are internally fabbed products.

So it should flow more into the gross margin line than the external fab products, and the stock option probably has less impact on your manufacturing folks than your R&D and SG&A folks.

Did I get it right?

Okay, I will let Kevin take the second one and I will take the first one.

Your point is the third quarter is historically stronger than fourth quarter, actually that is true for wireless.

It is not necessarily true for semiconductor overall.

For semiconductor overall, and again just looking at averages, we probably tend to have a little more growth in fourth quarter than third quarter, but it's probably not a meaningful difference.

In wireless I would describe both third and fourth quarter just based on seven-year averages as running in the low double-digit type of sequential growth.

There is a huge range around those numbers.

Some years, third quarter is stronger, some years fourth quarter may be stronger depending upon what customers experience as they move into the holiday season more directly.

One thing that is potentially having a shift on that it would be the fact that a higher percentage of our wireless revenue has moved to JIT in recent years than what had been the case historically.

But generally I think the way to look at it is the historical number would put both third and fourth quarter in low double-digit.

And that would be -- you would have to modulate that up or down depending upon whether you think the year is a robust year or a less robust year for handset -- the handset industry in general.

Kevin, do you want to take the second one?

Yes, David, let me try the operating leverage question and the stock option expensing question.

The first quarter saw -- or excuse me, the second quarter saw our analog revenues grow 9%.

We source almost all of our analog internally and saw our DSP revenues grow 8% with wireless actually growing similarly 8%.

As you know, that is where a lot of our more advanced lithographies wind up being at, and that is where we source externally.

So at one level yes, I would say you're correct.

That is one of the reasons why we actually saw a pretty good fall-through in the second quarter on semiconductor revenues because we got more operating leverage off the internal factories.

But traditionally, and according to the market forecasters, analog is expected to be a slower growing market overall than what DSP is, so I'm not sure that we can necessarily conclude a repeat performance every quarter to what we just delivered on the sequential fall-through.

Turning to the stock option expensing, you are right into where the expense would go in that we estimate right now about 20% of the expense amount will go into cost of revenue, probably about 30% into R&D and the remainder into the SG&A lines.

Christopher Danely, J.P. Morgan.

Can you just talk about the percentage of outsourced wafers it was in Q2 and Q3, and when you think you sort of max out on your internal capacity and you'll really have to start depending on the foundries for more wafers?

Chris, I would describe that if you look at percentage of total wafers at TI in Q2 we were about 15% outsourced.

That is up a little bit from probably more like 10% in Q1.

But keep in mind our strategy is in the advanced logic area where we do the outsourcing is basically keep our internal fabs running full and then modulate to market demand through the foundries.

So that is exactly what you're seeing.

And to the point of when do we run out of capacity and therefore have to outsource more, again in the advanced logic area, we're essentially running full, and we have been essentially running full for the last year and a half.

So the foundry strategy, even though it may go up and down, the strategy is pretty much the same.

Did you have a follow-up?

I thought you guys mentioned on the previous question that you got a little more leverage from using the internal fabs more.

That is why my question was there.

Did I misunderstand something?

Chris, that is on the analog fabs that we were able to use more because we had stronger growth in analog this quarter than we did in the digital factories.

Okay, got it.

And I guess as my follow-up, on the pricing side, it sounds like pricing is getting a little bit better.

Can you just comment how much of the pricing helps gross margin, or is that all coming in Q3 and beyond?

On the pricing front, Chris, we're seeing a normal pricing curve for semiconductors in the majority of our products.

What we are seeing a little bit of price increase on is in the commodity logic, which is, you know, 5% or less of our revenue and actually very small price increases.

These are not big increases.

So, frankly, what I would say is it is becoming less of a drag on our margins than what it was in the past.

It is still not where we want it at.

But if you look predominantly at the increase in gross profit, the increase in gross profit margin was driven by shipping more product, increasing the volume, not by the pricing impact.

Hans Mosesmann, Moors & Cabot.

Just a clarification on the wireless side.

You said that basebands did a little better relative to OMAP processors.

Does that mean that your business with larger OEMs or your custom business is doing better than the merchants?

I would not try to read anything in there.

It will vary somewhat based on customer, but for the most part it is not a merchant versus custom.

For the most part, our OMAP revenue is predominately driven by our business in Japan, specifically with the DoCoMo 3G rollout.

And the baseband revenue that we are seeing is probably more driven by the European UMTS rollout today than the Japan program.

So as Europe is in an earlier stage of their deployment and we're seeing more aggressive, call it growth in terms of rate of growth out of Europe, that is what is driving the baseband revenue for TI in 3G at a faster rate than what we are seeing in OMAP.

But it is not custom versus standard.

It is more particular service operators that we have penetrated with those different product lines.

Adam Parker, Sanford Bernstein.

Just two main areas for questions.

The first is on the share count.

How many shares did you issue during the quarter and at what average price?

And what do you see happening to your share count over the back half of the year under a normal scenario?

I don't know the exact number.

I think you're talking about what was exercised during the quarter.

You can see in our cash-flow statement the amount that came in I'm not sure how many shares that represented.

How many did you issue -- sorry -- new ones -- new shares?

We did not issue any new shares.

As people exercised their stock options, those shares go into the market, but we are also buying shares back off the market.

Right.

I'm just trying to figure out the difference between the average price that you bought them back and what those that were exercised were issued at?

I don't know that number right now.

Any comments on given you have really hiked up the share repurchase here in the last couple of quarters what you think the share count will look like in the back half of the year?

We are again giving guidance from a revenue standpoint, an EPS standpoint and not really guiding on other lines.

To the extent that our share count change will affect that guidance, we will communicate that in future updates, but right now we don't have any new guidance to give you on that, Adam.

And part of the complexity there is estimating the price of the stock, right?

That is going to impact the diluted share count, so that's why we try not to come out with specifics.

Maybe in September when we are closer to the end of the quarter as we did in June, we might have a better (technical difficulty) at that point.

Just asked another way, is there any reason to think the dollar amount of your share repurchase is going to decline a lot in the third quarter versus the second quarter?

Adam, I cannot forecast that.

Okay.

The secondary question is, I got a little confused, Kevin, on your answer on inventory.

You listed three things in terms of what you look at, your outlook, on-time performance and leadtimes.

It kind of confuses me then here that your second-quarter inventory came down, which is obviously good that you could produce such good gross margins in that environment.

But if you go back to your transcript from the prior couple of calls, you seemed happy with your inventory there, and obviously the outlook would have looked pretty positive.

So I'm just trying to understand what you think will happen to your inventory in dollar terms over the next couple of quarters, maybe for the third quarter given those metrics.

Do you think inventory is going to grow in dollar terms here?

Again, Adam, we won't forecast separate lines, but let me just kind of talk at a high-level on what does it mean when we say we feel good about our inventory?

It means do we have the right mix for the kind of order patterns that we are seeing.

One of the ways we answer the question is if we have the right mix is whether or not we had to write-off inventory because we don't do wrong inventory.

We have not had to write-off inventory.

We have not built the wrong inventory, so we felt quite comfortable as we have indicated in the past with the kind of inventory that we have staged for each of the quarters we have come into.

One of the things that you see happening come out of the second quarter is that recall that we have a seasonal down on wireless in first quarter.

And so you slow your wafers down and then they start picking back up.

Well, you drain your inventory, and you'll have a little bit of a timing on the drain on that.

But didn't you say that your inventory bottomed -- you took the factories up again in Q1.

That is why I guess I'm confused about why this year was different, right, because you sort of said margins were off last Q4 and now we are loading our factories more in Q1?

I guess I'm maybe missing your point.

Well, I'm just trying to figure out -- yes, I'm trying to figure out now you're saying your factories are coming up.

Is it all going to be absorbed by demand or should we -- basically you're saying you are absolutely comfortable with your inventory levels here?

Yes.

And, Adam, certainly our shipments are going up as well, so you know it all comes into play.

The other thing that -- keep in mind, inventory -- the metric we talk about are one day in the quarter.

The last day in the quarter is where you would nail it down and quote those things.

It does not comprehend what linearity of demand is looking like or our shipments are looking like in the next quarter and things like that.

So there's just a lot of moving pieces into how much inventory we choose to put in place that don't always get comprehended in call it the more simple metric that we look at.

So thank you, Adam.

Jack Romaine, SG Cowen.

Could you guys talk about your DLP business?

Are you still expecting that to grow this year, and could you give us a little insight into the trends in the projector and TV business over the remainder of the year?

I will take part of that and let Kevin add to it as he will.

I don't know that we ever came out specifically and stated our expectations for this year compared to last year.

Certainly even though we saw 10% sequential growth in DLP in the second quarter, as I said, we are down more than 20% year on year as we are still -- we were still shipping below consumption in the second quarter.

And so whether we show year-on-year growth, we will probably have to wait until the end of the year to be able to make that assessment.

You know what we're encouraged by is the fact that we don't have that inventory dragging us down, and we will start to ship more consistent with the end consumption patterns from here.

So in terms of specific trends, let me not be more specific than that because we don't go down into the individual product line in our guidance.

But again, we are pretty encouraged about where DLP is now headed with this inventory correction behind us.

I would also just add to that from at least market evidence that we have we've got market share data through the end of first quarter for projectors and it rose to 47% market share, and we have market share data for the Americas with greater than 40 inch TVs through the end of May and that is now at 20%.

So from the market share data, there certainly are encouraging signals there that the market still likes this product.

Okay and then just a clarification.

Did you say earlier in the call that your guidance assumes that distribution inventory is flat in the third quarter?

No, I did not.

What I said is that we believe distributors will hold their turns levels even.

So basically they are running about six turns currently, and then their output inventory plan will track resales.

So in other words, if their resale is growing, they may grow -- if their resale grows, I don't know, 10%, they may grow their inventory accordingly, but their intention is to hold their turns levels at the level that they came out of the second quarter.

But their inventory will go up or down depending upon whether they expect their point-of-sale to be higher or lower.

Okay.

Thanks for the clarification.

Ben Lynch, Deutsche Bank.

Probably a question for, I don't know which one of you.

What do you expect just the semis revs will do in Q3 versus the overall implied semis guidance?

And also could you give maybe at least some relative color on the book to bill and the distribution business in Q2 versus OEM business?

I hope you have some other questions in line because I don't have the answers for you to either one of those.

You know I'm sure distributors I would expect they will trend up just given the strength of the overall market in Q3.

But a specific number are relative versus the guidance that we have given I don't have, and I don't have the book to bill information for second quarter.

I do have another question.

I will let you throw it out then.

I don't know if this is going to get me much further.

You know you guys are pretty comfortable with just the inventory levels, and certainly we have not heard any reason for alarm bells either.

But I think this industry has shown in the past that you can get surprised on those things.

There are various things that are happening at the moment which would suggest disties get a little bit more nervous about their inventory levels, foundry utilization certainly for lagging edges become very tight, and I know some people are already starting to talk about allocation.

You guys are okay on back-end capacity, but some of the subcontractors are very tight at the moment.

There is some selective price increases coming through.

IDMs like yourselves are bringing inventories down.

What do you think are the sort of triggers that disties will actually act upon to start growing inventories whereas currently you think they are not?

I think they may try to grow inventory when it gets to the point that they believe they are going to start missing resale opportunities because they don't have the inventory in place.

That is usually the trigger for any type of inventory build is that they start missing sales opportunities.

You know all I can say is to the nervousness that you described is again inventories and distributors went down during the second quarter, and at least from our discussions with distributors, they are not intending to increase inventory outside of the growth that they expect to see in resales in the third quarter.

But again, as Kevin said, we've got a lot of visibility, and we are working pretty closely with the distributors on that, and we will monitor it as we proceed forward.

Great.

Great quarter by the way.

Thank you.

We're all sensitive to that issue of not getting inventories back out of line.

Joseph Osha, Merrill Lynch.

Just quickly on 3G revenue, you said at one point that '04 3G revenues were about 600 million, and then you talked about this year being in the neighborhood of a billion.

Does that number for this year still sound legitimate if we take DoCoMo and ENT and Nokia, or those pretty much the three customers we should be thinking about at this point?

I think we have described that we expect -- I don't have an update for that -- but I would just say that, as you see, we are doing pretty well, and 3G is coming in nicely.

We still have -- we are only halfway through the year, but I don't have any kind of update.

I certainly don't have a reduction in that goal to throw out.

So --

Have you guys said a billion?

I don't recall.

I think we described at one point that we expected our 3G revenue, that was $600 million last year, to cross $1 billion this year.

And it is really per the dynamic you mentioned earlier, it is sort of a question of how your Nokia and ENT revenues ramp at this point, and we should think of your DoCoMo revenues as, of course, growing but maybe a little more steady-state?

And I think that is exactly right.

And you know certainly how aggressively the service operators deploy will be a big part of that.

Did you have a follow-up?

Just to drill further down on that, looking at the data I've got right now, I know you can't comment exactly, but it looks to me like the ENT run-rate should be substantially larger than the (inaudible) rate almost 2.5 or 3 to 1.

Is that fair at this point?

I'm not going to get into any kind of customer by customer breakdown.

We've got lots of great customers that are all working aggressively to establish their position in the marketplace.

And in general our customer base is doing very well in the 3G market.

So --?

Can I ask a follow-up follow-up?

It will be a quick one.

Okay.

You have got 10 seconds.

What is the foregoing philosophy on options grants?

Are we going to essentially continue to act as we have in the past, or are you being more tight fisted there?

Well, naturally that is going to be our competitive response, but just to kind of give you some history on that, for the last three years, our average dilution has been about 2.3% compared to a comparative group that we watched that seemed to be running about 3.3%. 2004 our dilution net of forfeitures is exactly 1.4%.

So as we look at this thing, our goal is to keep it below 2% net of forfeitures.

We're going to take one more caller and then we are going to wrap up.

Operator, is there another caller?

William Conroy, Sanders Morris.

A couple of quick ones I think.

First one, can you discuss a little bit, Ron, maybe some of the manufacturing efficiencies that you mentioned earlier?

Is this really coming from yield?

Is it absolute cost reductions where you are actually taking dollars out of the cost structure?

Just a little color there maybe.

William, I will go ahead and just offer some comments there.

The utilization actually increasing through the quarter, of course, is absorbing any fixed costs that would have just fallen through to the income statement without any revenue.

So that certainly is helping us.

We are seeing -- the operations are all working very well.

We are seeing both our yields and our line speeds operating very efficiently.

By line speeds we mean that how fast the wafers are actually moving through on a cycle time.

So when you look at that, that means your actual cost to produce the wafer is declining because you are able to produce it in a shorter period of time.

In addition, you get that line speed when your yields are running nicely.

So you are seeing a combination of those types of events going on.

Did you have a follow-up, Bill?

Just a real quick one.

Did you mention earlier in response to a question that the order strength by end market would roughly dovetail with revenue strength?

Did you actually confirm that?

I did not actually make any such commentary, and to be honest, Bill, I don't have the end market breakout by order, so I don't have a comment one way or the other on that.

Okay, thank you, Bill.

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

Good night.

Thank you.

This concludes today's teleconference.

Please disconnect all lines and have a great day.