德州儀器 (TXN) 2006 Q3 法說會逐字稿

Good afternoon.

My name is Lindsay, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Texas Instruments third quarter 2006 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS].

Thank you.

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

Sir, you may begin your conference.

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

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

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 midquarter update to our outlook is scheduled this quarter for December 11th.

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 December 1st until the update.

In this call, all of our financial results will be described for continuing operations including historical comparisons unless otherwise indicated.

TI's former sensors and controls business, divested in the second quarter, is reported as a discontinued operation.

Revenue in the quarter was at an all-time high and profitability continued strong.

At the same time, orders declined and the near term is becoming more challenging.

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

We will keep our remarks short, saving time for us to respond to your questions.

Third quarter TI revenue of $3.76 billion was up 2% from the second quarter and grew 13% from a year ago.

This was about 1% below the middle of the updated guidance range that we issued in September.

Semiconductor revenue was up 2% sequentially and was up 13% from a year ago.

In the sequential comparisons, please remember that the second quarter revenue for TI and semiconductor included a $70 million royalty settlement that reduced the reported growth rates by about 2 percentage points.

Driving the semiconductor revenue this quarter was solid demand for TI's high-performance analog and DSP products.

Total analog revenue grew 5% sequentially and grew 15% from a year ago, primarily due to high performance analog products.

High-performance analog revenue grew 14% sequentially and 37% from a year ago.

There were several factors behind this strong growth.

First, we saw strong sequential growth in certain end markets such as notebook computers and wireless infrastructure.

Second, our distribution business was also strong, with sales into and out of the channel, both up about the same.

Distributor inventory of our high-performance analog products remains lean and was essentially unchanged from the second quarter level.

Finally, high-performance analog growth also benefited from a reduction in delinquencies that were carried into the third quarter.

Outside of high-performance analog, analog revenue was affected by a sequential decline in products for wireless handsets.

DSP revenue grew 5% sequentially and was up 12% from the year-ago quarter due to demand from the wireless market.

Turning to wireless, our revenue in the third quarter grew 4% sequentially and 14% from a year ago.

Growth was negatively affected by a decline in OMAP application processor revenue due to an inventory correction of 3G handsets in Japan.

In addition, handset revenue was less than seasonal outside of Japan.

As we explained last quarter, the inventory correction in Japan was associated with an operator that had proactively built inventory in the first half of the year as part of their strategy for the transition to number portability that begins in that market in October.

Despite this inventory correction, 3G revenue grew almost 50% from a year ago and was up slightly on a sequential basis.

On the infrastructure side of wireless, revenue growth for base station products was strong on both a sequential and year-on-year basis.

Finally, in DLP products, revenue increased 11% sequentially and grew 6% from a year ago.

HDTV products were the biggest factor in this sequential growth on a percentage basis, although products for front projectors contributed almost as much dollar growth.

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

Kevin?

Thanks, Ron, and good afternoon, everyone.

TI's second quarter gross profit from continuing operations was $1.93 billion, and gross margin was 51.4% of revenue.

Gross profit increased $25 million from the second quarter.

Please keep in mind that gross profit in the second quarter included $91 million of benefit associated with a royalty settlement and sales tax refund.

Operating expenses of $1 billion were up $48 million sequentially or about 5%.

Most of the increase was due to a $26 million operating expense benefit from the sales tax refund in the second quarter.

TI's operating profit for the quarter was 930 million or 24.7% of revenue.

Operating profit declined $23 million in the second quarter, which included $117 million of operating profit benefit or 3.2% of revenue from the royalty settlement and the sales tax refund.

Operating profit in the third quarter also included stock-based compensation expense of $79 million or 2.1% of revenue, about the same as in the second quarter.

Other income and expense was $55 million, down $33 million sequentially, primarily due to a $20 million benefit from the sales tax refund in the second quarter.

Income from continuing operations was $686 million or $0.45 per share.

It might help if I summarize the third quarter's earnings per share transition from the $0.47 that our continuing operations produced in the second quarter.

Higher revenue contributed about $0.03 and the lower share count contributed about $0.01.

These were offset by about $0.03 from the sales tax refund, and about $0.02 from the royalty settlement in the second quarter.

Higher operating expenses further reduced earnings per share by about $0.01.

I'll leave most of the cash flow and balance sheet items for you to review in the release.

However, let me make just a few comments.

Cash flow from operations was $419 million in the quarter, and we ended the quarter with $4.18 billion in total cash.

In the third quarter, we used $1.69 billion of cash to repurchase 56 million shares of TI common stock.

Over the past year, our repurchase program has reduced TI's shares outstanding by more than 8% and by more than 14% over the last 2 years.

Inventory of $1.49 billion at the end of the third quarter increased $157 million sequentially, closing above our desired levels.

Days of inventory at the end of the third quarter were 73 compared with 67 days at the end of the second quarter.

At the time we started this material in our factories and in our foundries, our outlook was based on a strong fourth quarter consistent with average seasonality, especially for wireless handsets.

Our outlook has since changed, and we now expect a weaker than seasonal fourth quarter.

As a result, we have taken action to align production levels with our current view of demand.

We continue to work toward our goal to replenish work in process inventory, especially die banks that had been previously depleted for catalog products such as high-performance analog.

TI's orders in the third quarter were $3.43 billion, a decline of 12% sequentially.

Semiconductor orders were also down 12%.

Our semiconductor book to bill ratio was 0.93, down from 1.07 in the second quarter.

We believe one of the reasons for the order decline was customers' decisions to operate with less extended backlog now that semiconductor supply constraints have eased and their own chip inventory levels are replenished.

Additionally, we expect wireless revenue will be less than seasonal as the industry handset mix is weighted more toward low-priced handsets.

In addition, our wireless revenue continues to be affected by the handset inventory correction underway in the Japan market that Ron previously mentioned.

As a result, in the fourth quarter, we currently expect total TI revenue from continuing operations to be in the range of $3.46 billion to $3.75 billion, or down 8% to flat.

Semiconductor revenue should be in the range of $3.39 billion to $3.66 billion or down 5% to up 2%; and educational and productivity solutions should be in the range of $70 million to $90 million, a seasonal decline by more than half.

Earnings per share from continuing operations are expected to be in the range of $0.40 to $0.46 in the fourth quarter.

To summarize, our performance in the third quarter was quite good.

Record revenue and strong profitability reflect the importance of the DSP and analog products that we make, as well as the success of the customers that we serve.

Nonetheless, the environment is shifting, and we're entering a near-term period where we are expecting less than seasonal growth.

As a result, we have tightened our expenses, are managing our inventory, and are continuing to realign our production levels with demand.

We are confident that our distributor channel inventories are low and that we have a highly responsive manufacturing model.

Both should serve us well in this weaker environment.

We're competing from a position of strength.

Our product portfolio is strong, our balance sheet is healthy, and we are engaged with customers that are gaining share.

As a result, we will continue focusing on our customers, extending our technology leadership, and expanding our own market share, regardless of the environment.

With that, let me turn it back to Ron.

Thanks, Kevin.

At this time, I'll 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, Citigroup.

Thanks, guys.

First question's on the handset market, particularly in Japan.

Recognizing that it's going to look a little weak again for Q4, can you talk about how much of that is purely inventory reduction and how much of that may be share loss, recognizing that, I think, Renaissance has made inroads in the Japanese market?

Glen, you're correct that Renaissance is a player in the Japanese market on the application processor as well.

This is a -- their part is similar -- their participation will be similar in terms of technology to a new part that TI will be ramping into production early next year, which integrates the application processor and the baseband functionality into a single chip.

I'll also remind you that even though we may see some share loss to Renaissance on the application processor, we should offset that to some degree, certainly, based upon our higher share on the baseband processor, where currently, we have no participation in that market.

So, we'll have to see where that nets out over time.

In terms of what we're seeing in third quarter and in fourth quarter, overwhelmingly we believe this is the -- associated with the inventory correction, which, again, was associated with the inventory build they did proactively in the first half of the year, preparing for number portability that kicks in in October in that market.

So, Ron, just to clarify that point you made there, which is that you feel like you've got some baseband wins, that you think will help revenues in 2007 in Japan?

We certainly have baseband wins.

We can't at this point talk specifically about which players we have those wins with.

But we have -- again, let me just remind you, this is a chip that we began sampling late 2004.

And our timeline is basically 2007 during the first half is when we will ramp that into production.

And that is based upon design programs and design wins that we have underway currently with customers in Japan.

Okay.

So my second question is, on the analog side -- and we've seen now a lot of companies talk about weakness there.

I am wondering now -- as you look at the business into Q4 and even looking beyond that into Q1, do you feel you're now undershipping consumptions somewhat so that the inventories that seem to be replenished at your customer levels will actually start to work down now in Q4, or do you think you're at a level where it stays pretty stable and you kind of track seasonality at this point?

And, Glen, your -- that question about end consumption is specific to analog or is that an overall thing?

Well, it's specific to analog, although if you want to answer overall, that'd be helpful as well.

Well, let me start with overall and maybe even more so take that into the wireless market.

Because again, the biggest area of what I would call less than seasonal performance will be in wireless.

And that's just based upon what we saw.

We actually saw some less than seasonal performance on the handset side of wireless in third quarter.

But probably even more so in fourth quarter.

And I'll just remind you that typically for TI, we see wireless growth on the order of 10, maybe even a little bit more, percent in the fourth quarter.

So just given the size of that business, and what we expect in terms of relative weakness, that's going to by far have the most impact on our overall revenue being less than seasonal in the fourth quarter.

And I'll also say with respect to, are we undershipping consumption in wireless, typically we undership consumption in the fourth quarter.

The normal process is we lead our customers' shipments as in the third quarter, they build inventory of their product that they then ship in the fourth quarter.

They tend to have a much stronger fourth quarter growth than what we typically would in wireless.

On the analog side, I would just affirm what we've said in prior periods, as well as in our prepared remarks.

We believe that in analog, if we look in the distribution channel, which is where we have direct visibility into inventory levels, inventory in third quarter -- despite the strong performance you saw from us, inventory in third quarter was basically even with where it ended up at the end of the second quarter.

Shipments in, shipments out, were basically the same.

In fact, if you look at growth, probably resale growth or sellout growth was a little bit above what we shipped in.

Not at a significant level, but it was a little bit above.

So in analog, I don't believe at least where we see inventory directly in the distribution channel, that we believe inventories are excessive at all.

Now, of course once you move out into our distributors' customers, we don't have any real visibility into their inventory levels at all.

So your analysis is probably as good as our visibility on what's going on there.

Okay.

Thanks a lot, Ron.

Thank you, Glen.

Next caller.

Michael Masdea, Credit Suisse.

Yes.

Thanks a lot.

You talked a fair amount about wireless already, but I guess what's a little surprising is you talked about this -- what you just talked about, lean inventory in the distributors, HPA strong, and wireless infrastructure strong, all of which seem like areas that everybody else has highlighted as weakness.

Do you think you're taking share here, or is there any risk that this change in delinquencies might have given us a little bit of a short-term pop and that we could have a little bit more bad news coming?

No, I think the change in delinquencies basically transferred some of the growth that should have been there for TI in second quarter into third quarter.

So you can call that a bit of a pop in the third quarter.

But I don't know that I would necessarily say that one's still ahead of us.

That's basically just revenue that we shipped in third quarter that, had we been fully on top of customer demand, would have shipped in the second quarter.

There was another part of that question, Mike, that I think I --.

Part of it was, in some of these areas like wireless infrastructure and HPA, that's been -- there's a lot of weakness.

Do you think there's material share gains happening right now?

Or is this because those delinquencies went away, you're just sort of catching up [inaudible]?

No.

I think -- I mean delinquencies in both spaces, HPA as well as infrastructure, may have played part of a role, but I think the bigger factor by far is absolutely share gain.

High-performance analog, this isn't the first quarter of share gain.

I think we had something like four years running now where we've been pretty steadily gaining share.

This one may have been another surge quarter in terms of that performance, but clearly with the performance we just had there, share gain's a big part of it.

In wireless infrastructure, what I'll say there is we're benefiting from -- you've heard us say for some time that our share in 3G infrastructure was very strong and much stronger than what we had historically held in 2G, 2.5G.

And when I say very strong, I'm talking on the order of probably 80% or so market share in these 3G systems.

So as those deployments continue to gain steam, we are disproportionately benefiting.

So, probably when you look at -- and I don't know specifically who you would do the comparison to, but other players, if their share was more weighted toward 2 or 2.5G, versus in our case 3G, that may be the bigger factor in explaining individual company's performance.

Okay.

Great.

Just a quick follow-up.

On the mix side, you talked about wireless and a little bit more low end.

Is that something that we just have to get used to in terms of more of the market going that way and it means lower revenue growth for you guys?

Or is it just the confluence of the factors make it more extreme this quarter?

I think it's more extreme this quarter, certainly.

I think this is -- if you look at the growth we have seen and you've heard us talk about for some period of time with high-end handsets and just the disproportionate TI content opportunity that those handsets represent, I think what you're seeing is basically a pause going into the fourth quarter, and we don't believe it's part of a longer-term trend.

Now, at the same time, we expect the low end -- low price handset growth to continue quite strongly.

But I think what we're seeing at the high end is probably somewhat anomalous this quarter.

Thanks a lot.

Thank you, Mike.

Let's go to the next caller, please.

Adam Parker, Sanford Bernstein.

Hi.

This is the second straight quarter, I guess, of incremental gross profits being a little weak in semis, and I think -- one of the things you guys just cited for further structural margin expansion is mix.

And I guess with HPA growing this much, I was just trying to kind of balance what other maybe negative influences as it were.

Did you cut utilization a lot for your lower demand outlook?

Or how should I think about margins kind of going forward?

Your gross margins in particular in the semiconductor business, maybe out kind of this quarter, next quarter, next couple of quarters there?

Adam, you're talking in the context of the [fall-through] in gross margin sequentially?

Yes.

Just that you had your revenue grow in semis, but the gross margin level didn't go up.

I'm just trying to think about what sort of secular and cyclical forces that are left in terms of gross margin expansion from here.

Okay.

Well, looking just, talk to current sequential fall-through, just to keep in mind that in second quarter we did benefit from a sales tax refund and the royalty settlement.

Right.

And actually if you adjust for those, the fall-through rather than being about 39% was closer to about 86%.

So that added about 2.5 points to our margin back in second quarter so actually it goes up sequentially in that context.

Those are nonrecurring events that tend to make the analysis a little bit confusing.

I was looking at more of a -- rolling over the last quarter quarters combined so I was -- because I think it was weaker than expected in Q2, and I was just trying to figure out what kind of things going more forward-looking would impact your margins, normalizing for these one-time events, just if you could think about where your utilization is or what your mix is or how could I argue margins are 200, 300, 400 basis points higher from now maybe two, three years down the line?

Yes.

I think that if we look a couple years out, if we continue to see our high-performance analog business growing with the kind of success that it's grown in the last few years, taking share and growing at the rate it's growing, and it becomes a bigger portion of our overall revenues, as well as the products inside the portfolio offerings we have in HPA become a richer mix of our newer products which are doing much better than the older products, those elements coming together will help quite a bit I think with our gross margin.

In addition to the extent that DLP continues to grow and that continues to be quite a profitable business for us, we would expect that to also have favorable affect on our gross margins.

And then the other, just more block and tackle one is just revenue growth.

As we continue to keep our capacity well-utilized and growing our revenue consistent with our goals for the last few years, that is faster than our competitors.

So it's really as straightforward as that, Adam.

Just keeping up with the mix game and continuing to gain share.

What about in the near term here, like, say, Q1 versus Q4, or any pluses or minuses that you can point to that would -- we could see gross margins actually up 50 or 100 basis points in the next couple of quarters from here?

I won't comment there.

We've pretty much tried to limit our comments on outlooks to just the revenue line and the EPS line when it comes to the near term like that, Adam.

But, again, as these mixes change, I think it'll contribute.

When those mixes actually occur and what quarter they fall into, I would be presuming to know too much to try to forecast that specifically for you.

All right.

Just one other observation, just to get out of the noise of those events -- or those benefits that were in the second quarter.

If you look at incremental growth margin from the year-ago quarter, it was 58% for semiconductor according to my math, which I think is probably not that far off from where we've run over the longer term.

Yes, I guess -- all right.

I guess there's -- okay.

Maybe just on the HPA side just to follow up that point, then.

Do you think -- if I look at the strong growth you had, is the gross margin level on this growth above what your other HPA margin structure looks like?

In other words, it's all -- this extra revenue growth is coming at a higher margin level, so we saw some benefit this quarter, it was just masked by other issues, or can you comment at all on that HPA profitability itself, because that seems to be a bit of a black hole.

Yes, Adam.

I would say that it's improving, but it's a very -- it's a slow pace.

It's not a sudden pace or a big quarter-over-quarter.

It's more a year-over-year kind of improvement we see in HPA margins as we see the mix shift to these newer products that are higher profitability.

And that's just going to be a slow and steady process to continue to improve that.

All right.

Sorry.

Last question, Kevin.

Maybe you can talk about what some of your long-term goals are, just because periodically you guys update us on that.

I'm just trying to figure out if in your longer term plans do you think your earnings are growing 1.5, 2 times the market's growth, or is it sustained high level return of capital, or any goals that we could pin you down to, sort of so we can evaluate sort of 2, 3, 4 years out, how we're headed from here?

Certainly the goals we talk about internally -- and I believe we shared externally, also, is that -- growing revenue faster than our competitors, in other words, taking market share.

Right.

Grow our earnings faster than our revenue -- our earnings per share faster than our revenue, and to have a return on invested capital that would put us in the upper quartile of our competitive universe.

We've been seeing those trends in that direction for the last few years, and we are -- that is clearly our internal objective as we look out into the future to continue that pattern over the next few years.

Okay.

Thanks, guys.

Thank you, Adam.

Next caller, please.

Jim Covello, Goldman Sachs.

Good evening, guys.

Thanks so much.

Question -- I guess, first question, how long do you expect the period of weakness to last?

Any way to triangulate around that?

Jim, right now, we're just really forecasting out the first quarter.

And so obviously we're looking at that being below seasonal.

The fourth quarter.

I'm sorry.

Excuse me, the fourth quarter.

From a pattern standpoint, I mean, traditionally we do see -- I think Ron had mentioned that our fourth quarter is usually up -- our third quarter is usually up, our fourth quarter is usually up, our first quarter is usually down a little bit.

What we're seeing right now, though, is we seem to be breaking with that seasonal pattern as it relates to fourth quarter.

And so we'll probably need to wait a few more months before we give you any more flavor as to what we think will -- the first and quarters beyond will hold.

And I guess the follow-up around that is you guys have done a really nice job of kind of balance the flexible manufacturing where you can kind of -- the first hit on wafer starts comes out of the foundries and a prolonged period, I guess it would take a prolonged period of weakness to cut into your internal wafer starts.

I guess, how long would the period of weakness have to last before your internal wafer starts would have to maybe get cut and maybe gross margins would be at a little bit of risk at that point?

Boy, that's a pretty tough question, Jim, to be specific on.

I guess that -- keep in mind that we source a significant portion of our most expensive capital-intensive wafers from the foundries.

And as you point out, we pull back on those load-ins first.

It would have to take a theoretically pretty steep decline in overall demand for those load-ins to start the pulling back into our actual TI factories.

And right now, I don't think I have a good number that I could really share with you to give you any more color as to what that kind of decline would take.

I think what we could share, Jim, is that if you look at, I think we said for example, 2005, we had about half of our advanced logic outsourced to foundries.

So that's what Kevin's saying.

I mean, theoretically, you could -- you could cut that demand almost in half and it would -- before we have to strike internally.

Now, the other thing we should also remind you of is that's only our advanced logic.

So areas like wireless, certainly, fall into that category.

But on the other hand, in areas like analog or specifically high-performance analog, we have much more of our capacity sourced internally.

So, to the extent we see softness in areas like analog or maybe some of the lagging logic process technologies, we would certainly have more direct impact on those.

Now, also as Kevin said, they tend not to be quite as capital intensive.

But nonetheless, there would be some level of impact.

Maybe one final way to get at this.

What do you expect inventory to do for the calendar Q4?

Jim, we don't typically forecast inventory.

I think you do usually ask us that and we usually have to gracefully deny answering that.

But I would just keep in mind, there's quite a few moving parts inside this.

We have -- we started commenting on this a couple of quarters ago that as we got capacity open in certain of the constrained areas that were affecting our chip supply in high-performance analog that we would go ahead and use those lines as they came open to go ahead and build ahead of that die stock.

We started doing that in third quarter, and we expect to continue doing that in fourth quarter.

What actually happens to inventory in relation to that moving part is going to be just a function of where our overall demand winds up being for the quarter and how much of our current inventory is consumed for that.

Great, thank you.

Thank you, Jim.

And then I think, Kevin, also you said in your prepared remarks certainly some areas like wireless where we build inventory during third quarter and the seasonal outlook -- or the outlook has changed for fourth quarter, we certainly have excess inventory that we hope to deplete going forward, is that correct?

Right.

Okay.

Thank you.

Next caller, please.

Ross Seymore, Deutsche Bank.

Thanks, guys.

Just a question on the bookings, if I look back to the '04 downturn, it didn't look like bookings fell nearly as severely as they did this time.

Could you draw any parallels between the inventory versus demand side now and why it's so much more severe than back in '04?

Boy, Ross, I don't -- we're sitting here looking at each other, I don't know that we have any real insight into the bookings trends and, frankly, we haven't gone back and tried to do those comparisons recently.

What I will say is, to me, a big difference between 2006 and 2004, and you've heard us mention this before, is that in 2004, we had a very significant inventory correction that took place in our distribution channel.

Our weeks of inventory in 2004 at distributors got up to somewhere in the 11-week range.

And that probably compares to a historical level of, say, 10 weeks or so.

Currently, our distribution inventory levels are running less than 8 weeks, lean, certainly by historical standards, but also generally where our distributors want them.

So that's not saying, again, there may not -- we don't have visibility into their end customers, but what we see directly in our channel doesn't lead us to believe that we have a big inventory correction.

We certainly don't believe we have a big inventory correction at all that needs to take place in distribution.

So that [disti] side is why you're relatively comfortable on the HPA side, despite it doing such -- better than most of your peers this quarter?

It's a much different situation currently from a channel inventory than 2004, that's correct.

Perfect.

Then the one follow-up is just to dive into the OMAP side of things, you talked about Japan and the number portability and why that OMAP business is down.

When can we roughly find some sort of equilibrium in the that business?

If you give us any color on that, that would be helpful.

Boy, Ross, I don't want to try to go out on that limb.

It's always been a challenge for us to estimate how long inventory corrections tend to take.

And this one's not any different.

We know -- we came into -- we were well aware during first half, they were building inventory.

They told us that was part of their strategy.

We knew coming out of -- in fact, we talked about it in our July call, that third quarter is when they would begin to bring those inventory levels back down.

We expect it's going to continue into fourth quarter, whether it goes into 2000 -- early 2007 or not, we just don't have that direct visibility.

Okay.

Thank you.

Thank you, Ross.

Let's move to the next caller, please.

Cody Acree, Stifel Nicolaus.

Thanks, guys.

Can you guys get any more specific on your expectations for gross margins next quarter?

It sounds like you've obviously got some internal inventories to work through.

I think you mentioned a little bit about loadings, whether it's internal or external.

Is most of that going to come from outside, and what do you expect the impact to be on margins near-term?

Cody, we're not actually specifically forecasting gross margins, but let me give you some color to think about it a little bit with.

Most of the inventory growth that we had in third quarter was as a result of foundry-sourced wafers, it was on the wireless side of things.

As we saw the demand expectation for the mix of high versus low cell phones in fourth quarter shift versus our prior expectation.

So that was really an external or a foundry-sourced inventory growth, if you will.

We pulled back in those loadings and we will continue to adjust those loadings as we go through fourth quarter to match up with demand.

That did not have much impact on our internal capacity, our internal demand going into -- coming out of third quarter or going into fourth quarter.

Okay.

Very good, very good.

And maybe, Ron, specifically for you, it's only been a handful of weeks, really, since the midquarter update and obviously the tone is much different today than it was then.

We're still not pointing to a lot of excess inventory out in the channel.

It sounds like your sell-in versus sell-out has been about as you expected.

But yet, we've got a much, much different tone, much more conservative tone.

Can you try to put some color on what's changed, what's different and where you got surprised?

I think probably the biggest area, certainly, would be wireless.

And hopefully, you've read that in the release, as well as taking that away from the comments we made thus far.

Even in -- even from the midquarter as it applies to third quarter, handsets were less than seasonal.

And certainly didn't provide the upside that certainly they had the potential to in third quarter.

And we see that carrying into fourth quarter.

So, again, the big shift is on the wireless side and for all the reasons that we've discussed already.

And, Ron, can I finish there just on that?

Sure.

Do you believe that that is a matter of handset sales or do you believe it's a matter of handsets that are sitting out there, just not been sold and we need to work through that?

I think if, and again, we don't see -- we don't have the visibility into what our customers are carrying in terms of inventory in our channel -- in their channels.

Yes, but you know better than we do.

Don't -- you're assuming way too much.

But I'll also say, the other thing that complicates it, Cody, is they've all built inventory in third quarter as they do every third quarter because they're preparing for the holiday season.

So it's not anything that you can really look at balance sheets and try to ascertain.

What I will say is if you just as we did, listen to what they said in their conference calls, you heard certainly some of our customers talking very similar to what we have, in that units are fully meeting expectations, but much more weighted toward low-price handsets.

So again, what we're describing is not a TI-specific occurrence.

It's what -- it's a description of what I believe has happened in the wireless industry.

And certainly, we're a participant there.

But we will -- and also, as I said before, I don't think this is any kind of a longer-term shift.

On the high end side, it's probably a pause and then hopefully we'll see the kind of resumption of growth that we've experienced in earlier periods here.

All right.

Very helpful.

Thank you.

Thank you, Cody.

Next caller, please.

Chris Danely, J.P. Morgan.

Thanks, guys.

Hey, Ron, what percent of your wireless revenue is from Japan?

Oh, I don't know specifically Japan.

I'll -- I'm going to have to walk you, get you there, though by talking out loud. 3G this year is roughly about a third of our wireless handset revenue.

And inside of 3G, oh, it's probably 45% OMAP and roughly 55% baseband.

And then OMAP is not all Japan, but certainly Japan is a very big part of it.

I'm sorry, I just don't have more granularity than that set of numbers.

That's fine.

And Japan is all OMAP for now, right?

The baseband has not kicked in yet?

That is correct.

That'll be 2007 before that occurs.

Okay.

Great.

And what was disti sell-in versus sell-through during the quarter?

The same.

So we don't specifically break out our distributor numbers, but what I can say is, you didn't have a difference in sell-in versus sell-out, that made a difference in terms of the growth numbers that we reported.

Okay.

Thanks a lot.

Thank you.

Next caller, please.

Doug Freedman, Am Tech Research.

If I could, if I look at the bookings number, it looks like your guidance for next quarter is above what you just booked.

Is it safe to assume that you believe bookings may increase in the quarter to book to bill of 1 next quarter?

Hey, Doug, I think our -- it's a good observation.

Our turns requirements in the fourth quarter will be higher than they were in third quarter.

But keep in mind, you heard us talk about coming out in the July call, that we had more backlog coverage coming in the third quarter than what we had had in many, many quarters.

So I would describe it as third quarter was disproportionately high in terms of backlog coverage, therefore, lower turns.

And fourth quarter is kind of returning more toward a more normalized level just based upon historical numbers.

All right.

One clerical issue, if I could.

You mention your tax rate is going to be 29%.

Is that annualized?

So, are we looking at like a 26% tax rate for the fourth quarter to get to you the 29%?

No, it'll be 29% in the quarter and 29% --.

In the quarter.

-- and it'll work out for the year, also.

Earlier in the year the tax rate after you figured the nonrecurring items was actually a little bit less than 30 in the first half of the year.

Okay, backing out the one-time --.

Right.

Got it.

Can you talk a little bit about the LoCosto ramp and how that's going and if that has progressed on plan?

It is progressing on plan.

We are in production currently, so we're shipping to customers and we'll let them talk about when they're shipping their product.

But we are in fact shipping that to customers.

I shouldn't say we'll let them talk about it.

I think we've had customers publicly confirm that they will have their handsets based upon LoCosto on the market this year.

So it'll be happening very shortly.

And then if I could, one last question on DLP TV uptake in the market, any early indications on how it's doing in retail this season?

Boy, it's probably -- it's probably too early for us to draw sell-through conclusions there.

What I can say is, what we said already, which was DLP going into our shipments in third quarter were good.

And we also feel good about the inventory levels that are out there of DLP TVs that they're at appropriate levels, and we don't feel like we have an excess inventory situation by any means going into the holiday period.

But again, to be able to get any kind of real sell-through results with meaning, we probably need to wait another quarter here.

In the past, you've been hesitant in sharing seasonality of the DLP business, given just so many shifts in the market.

Has that stabilized at all that you can help us a little bit with what we should expect in terms of seasonality out of that business?

Yes, Doug.

I don't have -- I don't -- again, we don't have enough history there to be able to talk about what our revenue does.

I can tell you what, [end] TV sales seasonality looks like for large-screen TVs.

But again, it's not based upon five years of history of our DLP TV revenue.

If you look at end TV sales, first quarter tends to be down about 20% in terms of units.

Second quarter sequentially is down about 10%.

And then third and fourth quarter both tend to be up in the 30% to 40% range unit-wise.

Our sales lead those end consumer sales by about 12 weeks.

So I'm not sure exactly how useful that information is.

But I'll let you determine that.

And with that, let's -- thank you for your call, Doug.

Let's get to the next caller.

Titus Menzies, Jefferies & Co.

Good evening, gentlemen.

This is on behalf of John Lau.

A couple of questions, quickly.

Firstly, you spoke about these -- or the good traction you're seeing in the analog market.

Between some high-performance and some mainstream, can you sort of break it out between where you're seeing strong traction and do you perceive yourself gaining any market share or is it just the entire space is rising?

I think if you just look at the results that have been reported to date, for third quarter and just recent months, not all of our peers are on the same calendar system we are, we absolutely believe we're gaining share.

And I just made the point earlier that that share didn't just begin in third quarter.

It's a trend that's been going on for about four years now.

So again, our product portfolio in high-performance analog has improved significantly.

And we believe we have a larger sales footprint than any of our high-performance analog competitors, and I think this quarter is just another quarter of results where you see that the benefits of both of those items coming to bear in terms of our high-performance analog results.

Do you have a follow-up question?

I do indeed.

Going back to the wireless handset market, if you -- you're guiding down for a seasonally weak Q4, of that, how much of it is due to unit weakness or pricing weakness or change in product mix?

Okay.

It's all product mix.

I shouldn't say all, by far, it's overwhelmed by product mix.

And I'll just clarify, sometimes you will hear even -- and I saw, I think, some different analysts reporting that handset level from our customers' reports, what they were calling weaker ASPs or declining ASPs.

What I can tell you for us, and I believe even for a lot of these customers, that's not what I typically think of as pricing weakness.

It's lower ASPs that resulted because of a shift toward -- in the marketplace toward lower-priced handsets as opposed to higher-priced handsets.

And again, I'll just reiterate what I said earlier, units are completely consistent with ours and with most customers and the analysts' expectations, roughly about 950 million units of handsets this year.

But again, it's a different mix than what we had expected.

I thank you for your call, let's move to the next caller, please.

Chris Caso, Friedman Billings & Ramsey.

Yes, thanks.

I do wonder if you could just clarify some of what you were talking about with regard to the shift towards the low-end handsets.

Because they're called -- there were times in the past where we've seen some lower ASPs out of the channel and it didn't affect you guys.

Maybe you could talk about content that you have within the phones between the GPRS side and the 3G side, is it really just a question of 3G growing a little bit more slower than your expectations, or is it even a mix shift within the GPRS product line?

I don't want to limit it just to 3G, but I think for example, I will note some of our customers that have made comments to the investment community over the last week in their reports, that WCDMA maybe wasn't being pushed as aggressively by some of the European operators as they had originally expected.

So certainly, I would suspect that's part of what -- of what's driving our results as well.

So partly 3G, maybe just in general high-end smart phone type of technology.

So again, low-end, maybe if anything doing better than expected.

But 3G and high-end just in general doing less than what we expected.

Now, if you go into your question about what is the relative content difference?

Maybe I can use the LoCosto product as an example of what we're doing at the low end.

That single chip product will have ASPs ranging from $5 to $10.

Maybe -- and what will drive the range -- we actually have features like mp3 capability, Bluetooth capability that will be working its way into that LoCosto family of products, but generally call it $5 to $10 for low-end handset content for TI.

If you go to a 3G handset, for example, today, the baseband would be -- oh, I would characterize it as probably low to midteens.

And an OMAP application processor would similarly be low to midteens.

And again, that doesn't mean in every handset -- 3G handset we're selling both of those products.

But you can see the content opportunity for TI is certainly much higher in a 3G or high-end handset than it would be in a low-end handset.

Do you have a follow-up, Chris?

Sure.

Maybe a follow-up on LoCosto, and I'm sure you don't want to give us a revenue guidance for LoCosto for next year.

But I mean in terms of the addressable market that you guys see for that sort of low-end handset, I mean maybe if you can give us some more clarity or perhaps what your customers are telling you.

And then as a follow-on to that, is there any expectation that that low-end market may cannibalize some of what's the existing low end of the GSM GPRS market?

Sure, there's potential for cannibalization just from the standpoint of a customer, for example, today that's using a multichip solution from TI or comprise a combination of product from TI and maybe some other semiconductor suppliers, I suspect we will find the LoCosto value proposition quite compelling and will convert over.

So today's low-end marketplace, we expect, will convert over to single chip solutions.

And just by way of example, as to the rate of that conversion, we would expect probably the low-end handsets that we're shipping today, roughly about half of it by the end of next year -- I shouldn't say half.

More than half of it by the end of next year will have converted over to LoCosto.

And a lot of factors come into play as to individual customers' plans and models and new model introductions and things like that, that drive that conversion rate.

But it will be an aggressive conversion.

Yet at the same time, the price points that LoCosto will enable our customers to deliver in terms of low-priced handsets, we are absolutely convinced will drive that market larger and larger.

So, yes, there's some conversion of -- or cannibalization of existing business, but the bigger opportunity will be driven by just a lot more unit shipping into that space, based upon LoCosto and the higher value or the higher penetration we will have in those handsets because of the integration that is involved in that LoCosto product.

Okay.

Thank you for your questions, Chris.

And let's move on to the next caller.

[Yushi Orhe], UBS New York.

Thank you very much.

I just wanted to go back to the analog question one more time.

You've seen your revenue growth [inaudible] sequentially in high-performance analog.

If you look at the rest of your peers, you're going through an inventory correction right now.

Can you give us an idea of how long you think you'll be able to [evade] the general slowdown going on in this industry -- in this part of the industry, and how should we think about your future growth rate, say, in the next couple of quarters in this segment, also given that your inventory levels are fairly high at this point.

I mean, you have an all time high inventory.

So I'm looking at -- you've gained share.

How much longer do you think you can continue to run [inaudible] the market?

[Utay], we don't -- we don't break our outlook down into individual product lines.

So I mean I realize we made some comments about wireless in the fourth quarter and our expectations there because of the materiality of it.

But we don't have specific comments to offer in areas like high-performance analog for our growth expectations.

What I can -- back to the comment, though, of our performance relative to our peers, again, I would just point specifically to areas like distribution, comments we've made about our current levels and what you've heard from us in the past few quarters about our levels of inventory and distribution and compare those to what some of our high-performance analog competitors have talked about.

And I think in several cases, you've heard them talk about inventory corrections that are taking place in distribution and you've talked about weeks of inventory much higher than the less than eight weeks that we currently have out there.

So again, at least in the distribution channel, and given distributors' current view of demand, we believe our inventory is lean.

I'll always put the disclaimer that if our distributors' view of their demand changes, then, of course, they could view inventory levels in that light.

But as we see it today, we believe our high-performance analog distributor inventories remain lean.

Do you have a follow-on, Yushi?

Yes, I do.

Just stepping back a little on to LoCosto, and I get your point about if the market will expand as most of your customers convert aggressively.

In terms of your ramp plan of the moment, when do we think -- how should we think about the volume ramp of LoCosto?

At what point do we expect to see it hit a more efficient scale?

And if I think about the margin impact of that, do you think the margin will be incremental to your overall corporate margin at what point?

So let me just think about how this will ramp over time, so if you can just give me an idea.

I mean, if you get that 50% conversion -- or more than 50% by the end of next year, what point do we see the margin go from being dilutive to being accretive?

Okay.

On margin, I guess I would just say, don't confuse low price necessarily with low margin.

Low price just means we have to have a low cost to go along with it.

And again, the value proposition that we offer with LoCosto is very high.

For our customers, LoCosto basically will enable them to achieve on the order of about a 20% electronic [filler] material reduction versus their current solutions.

And so again, we're delivering very strong value to our customers.

That doesn't even comprehend all the benefits of things like lower power consumption and better form factor and all that.

So again, it -- LoCosto is low price, it enables low price for our customers, but it also is low cost because of the integration level that we've achieved with that technology.

So again, I wouldn't -- in terms of how significant and what's the pace of the ramp, what I can say is we're ramping into production, but in the near-term, it's going to be relatively low volume, considering the size of our wireless business overall.

Once we get into '07, certainly, it will be more significant as we progress through the year.

Okay.

Thank you for your questions, and let's move to the next caller, please.

Sumit Dhanda, Banc of America Securities.

Ron, I just had a question on your expectations for turns on the quarter.

Clearly, you expect sequentially higher turns.

Could you comment on what you've seen so far this quarter?

Does the turns rate you've seen so far support your outlook for sequentially higher turns on the entire quarter?

And then I have a follow-up.

Sumit, I'll go ahead and take that one.

We do expect the turns would have to be higher in fourth quarter to meet our revenue outlook than what we've seen in prior quarters.

As Ron mentioned with the kind of extended backlog that our customers were giving us during these past few quarters, as we were trying to recover from delivery delinquencies, that has begun to pull in back to a more normal order environment, which means we'll have to have more turns.

And I would just say that the order pattern we're seeing is consistent with the range of the outlook that we've given to you so far.

Do you have a follow-on question?

Yes.

Actually, a couple.

First quick one, the share buyback fairly significant last quarter.

Do we expect this pace to continue or is it going to decelerate from here?

Well, there's a number of factors that work into our share buyback.

I mean, we look at the relative price, we look at the accretive nature of repurchasing certain volumes at certain prices, and we also look at offsetting overall exercises and so on.

When we put those together, it helps us develop our models as to what we think repurchase will be.

The Board has given us an additional $5 billion of authorization on top of what we've previously had, which means that we end the quarter with about $6.6 billion of remaining authorization.

As long as we continue to see the kind of accretive opportunities that we've seen for the past quite a few quarters now at these prices, we'll continue to be buyers of the stock.

But beyond that, I couldn't really comment on absolute levels.

Sumit, I'm going to ask that we stop that question there, because we still have a significant backlog of callers trying to ask questions and our time is nearing the end.

So, thank you for your questions, and let's move to the next caller, please.

Ambrish Srivastava, BMO Capital.

Hey, Ron.

Where are your lead times now, and more specifically in HPA where they were stretched out quite a bit?

Lead times actually are pretty stable.

There are some areas, especially those where we had what I would call supply constraints, say, assembly test, things like that earlier in the year.

And where, one, our delivery performance maybe had gone down, but we also had moved lead times out that we have been able to pull those areas back in.

But I would say overall, including high-performance analog, lead times remain stable with where they were 90 days ago.

Did you have a quick follow-on, Ambrish?

Yes.

A quick follow-on.

I'm just trying to understand.

You've talked a lot about wireless and then also about DLP a little bit.

Just trying to understand if you look out, what are the trends for the other business segments, the major buckets?

And what I'm trying to get to is, what we should take away which we should not worry about broader slowdown in end demand.

Of course, somebody like me, I always worry about end demand.

Yes.

And you certainly -- in terms of end demand in macro events, we can all kind of -- we probably all read the same economic reports and debates and we certainly don't have anything incremental that would be of value for you on that one.

But I guess what I would just say is we don't really have much color.

If you go into fourth quarter, the most -- the area of most significant weakness by far is what we're seeing on the wireless front.

And beyond that, we'll probably just need to wait, we'll give you an update on December 11th.

But we'll report our results in January.

So, Ron, as of now, you expect all the other markets to be -- all the other segments to be kind of in line with seasonality?

I didn't say that.

I said we'll report in January.

Thank you.

Thank you, and let's move to the next caller.

Mark Edelstone, Morgan Stanley.

Good afternoon, guys.

Hey, Mark.

Could you guys just provide a little bit more color into the trends you saw during the quarter, both in terms of orders and maybe revenue patterns for the non-wireless and kind of non-analog DSP businesses so looking at controllers, standard logic, ASICs and so on, kind of the broader businesses that TI still plays in?

Yes, Mark.

What we saw with -- from an order trend standpoint, is as we went through the months of the quarter, July was probably a little bit -- started out a little bit weaker than June.

But then August got quite a bit stronger than July.

And then September, especially late September, got weaker than both July and August.

From a revenue standpoint, we saw a fairly normal pattern of revenue, where it increased as it usually does as we come into the holiday quarter, it increased steadily throughout the quarter and such that each month's revenue was larger than prior month with September clearly being the very largest month.

From the standpoint of the various other businesses -- and Ron may have to help me out here to remember -- I think that we had pretty much single digit kind of growth in the other businesses on a sequential basis.

The standard logic, as you mentioned, ASIC and some of the other smaller pieces.

Just let -- looking at a piece of paper here.

Yes, standard logic was -- it grew less than 10%, risk was down a bit sequentially.

Microcontrollers about even.

So really, nothing of real note inside those pieces.

Mark, you also asked just about trends and I don't have this broken down by business, but if you look at our semiconductor trends month by month overall, on the revenue side, it built monthly.

So August was higher than July, and September was higher than August.

On the order front, August was higher than July, but then September declined from the August level.

So we did see orders weaken during the month of September.

Do you have a quick follow-on, Mark?

Yes, I do.

I guess -- have you tried to do a postmortem there to kind of understand, because it sounds like most of this calls so far has really centered around you guys being somewhat surprised by the trends in wireless.

But I would argue that the order patterns you're seeing here in the non-DSPs businesses would have been unusually weak in September.

So what do you attribute that weakness to on the order front?

I think the biggest thing that we saw on the order front on the other businesses, Mark, was the fact that as we began to catch up on deliveries, the extended lead times that we were seeing from a host of customers, as our ship availability and their inventory levels became more in line with what they felt they needed, they reduced their orders that were going way out in time.

And that really is as simple as that.

In our view is what's happened, they simply haven't put the orders out several quarters as they have been, they're been putting orders more in a normal time frame.

So I guess is it likely that we'll see an inventory correction there then, do you think, and it sounds like it's a classic sort of reversal after relatively long lead times and potential delinquencies.

Well, we don't have enough information yet to -- by inventory correction, that would presume that everybody's inventory's a little bit too high, and we don't have enough information to be able to make any conclusion like that.

All we can conclude is that the distance out in time in which they put orders on us came in quite a bit.

And so we can see that they have reduced the order window consistent with our chip availability increasing.

But we don't have enough information to be able to help add color to that point that you were making as to whether or not there's more inventory than they choose to have.

Okay.

Thanks a lot.

Thank you, Mark, and let's move to the next caller.

Joseph Osha, Merrill Lynch.

Hi there, two questions, I'll be quick.

First, your HPA analog business, I assume is sort of on a margin level comparable with the other companies out there, right?

Joe, we don't actually break it out, but I think that we've talked in general that there's room to grow on that. --

I guess here's the thrust of the question.

If I look at those companies, they seem -- there seems to be a fair amount of pressure on kind of the traditional HPA model as you talk about that as the source of margin expansion, and I know it's got to be well above corporate average for you as there's some concern that maybe you're running into a market that has some problems there.

Yes, I think that's a good question for perhaps some of those competitors.

But I continue to say to you is that our margins do tend to be above corporate average as you observed, Joe.

And as HPA becomes a bigger portion of our total revenues, we look to that to continue to improve our overall corporate performance.

Okay

And, Joe, the color I'll add is I think we've set our goal for our high-performance analog business is to achieve gross margins in the range of 65 to 70% and operating margins probably in the range of 40 to 50%, and we're not at those goals yet.

So we are progressing toward those.

We're expanding margins, but at the same time, we're not at the kind of very high margins that some of those players that maybe are more challenged by growth as well.

Okay.

Thanks.

And if I may ask, the second question is just looking at buybacks versus dividends, I have to ask, $5 billion in buybacks over the last 12 months and the stock's where it is.

Any chance that we might ever see, say, a dividend yield approaching in -- S&P on the stock?

Well, that's a question that our investors bring up from time to time as well, Joe.

And what we're looking at is right now at these stock prices, it does seem to be a better return for our shareholders over the long haul by going ahead and buying back shares at these price points.

And as you've seen us do in the last couple of years, we've been increasing our dividends, and we'll continue to take a look at that, but I don't have any particular specific forecast for you on the dividend outlook.

Thank you, Joe.

And let's move to the next caller, please.

Tim Luke, Lehman Brothers.

Thanks.

Ron, just a couple of clarifications.

Just with respect to the 3G market, is your forecast there the same?

Could you give us a number there?

I'm sorry, Tim.

The --

[inaudible] -- the 3G market in saying that ex-Japan, the wireless is lower.

I was wondering if you were adjusting your expectation for the 3G market this year.

Thank you.

Oh, I don't think we ever independently had our own forecast.

I mean, I think given with three quarter down, we probably still see it in the 100 million-unit range.

But probably -- for the year 2006.

But I think certainly as the year is progressing and 3G was running as strong as it was, you saw a lot of analysts that were probably taking that number up probably a range of 100 to 120 million units over the last couple of quarters.

So I think we believe it'll still exceed 100 but just not sure exactly how much.

And then if I may, just in saying that 3G was around a third of the revenue, would it be fair to assume that the low end is approximately a third as a well, with a third in the mid tier, or perhaps you could -- any color there would be helpful and then just for Kevin, in saying that the DLP was up 11% in the quarter, I think that was what you said.

Was -- is that broadly in line with your expectations in terms of that arena?

Thanks.

The low end, we would characterize that being about 25% of our year-to-date wireless revenue.

And let me define what we -- what we think low end is.

Basically, that's the products that we have shipping in the handsets that generally sell for $75 or less.

And again, it's not a perfect science.

It's our estimate of how much of our revenue is low end.

So again, a third high end; 25% or so, low end -- I'm sorry, a third 3G; 25% or so are low end, and then the rest, whatever that nets out to be.

Kevin on DLP?

Tim, I think you asked was the DLP what we expected in the quarter?

And the answer is yes, it was up 11% sequentially, which was consistent with our expectation.

And actually, just as a little bit more color from a prior commentary on that, the TV side of that is doing quite well -- did quite well from the order pattern standpoint, especially in the 1080p or the -- I guess what they're calling the ultimate high definition as being received well by our customers and apparently at the end market.

We're seeing sell through being quite positive on that.

Okay.

And with that, we're going to wrap up the call.

I apologize for those of you that were holding, and we were unable to get to your question.

But let me remind you that the replay is available on our website.

Thank you, and good evening.

This concludes today's conference call.

You may now disconnect.

Have a great evening.