德州儀器 (TXN) 2007 Q2 法說會逐字稿

Good afternoon.

My name is Mary, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Texas Instruments second quarter 2007 earnings conference call.

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

After the speakers' 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, Ron Slaymaker.

Sir, you may begin.

Good afternoon and thank you for joining for our second quarter 2007 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 include risk factors that could cause TI's results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor Statement contained in the earnings release published today, as well as TI's most recent SEC filings for a complete description.

Our mid-quarter update to our outlook is scheduled this quarter for September 11th.

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

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

The second quarter results were very close to our expectations and demonstrated important progress at TI.

Revenue of $3.42 billion was in the middle of our guidance range.

Semiconductor revenue grew 5% sequentially from the cyclical trough in the first quarter.

At the same time, gross margins moved up 80 basis points to 52.1%, a new high for TI.

Operating margins moved up even faster, or 230 basis points to 23.6%.

These increases indicate good progress toward the new goals that we set earlier in the quarter for the Company to achieve 55% gross margins and 30% operating margins within the next few years.

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

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

TI revenue increased 7% sequentially, although declined 7% from a year ago.

In addition to the solid semiconductor sequential growth that I previously mentioned, education technology revenue more than doubled, as retailers began to stock calculators for the back to school period.

The decline from a year ago reflects a combination of items.

First, in the second quarter of 2007, the semiconductor market was still in the early stage of recovery from an inventory correction.

In contrast, in the year-ago quarter, our customers were building inventory.

Second, in the year-ago quarter, we received $70 million in revenue from a royalty settlement.

Finally, our calculator revenue was down about $25 million, or 13% from the year-ago quarter.

As we discussed at mid-quarter update, we expect this was a timing shift by some major retailers to move their inventory build closer to the start of school and this revenue should be recovered in the third quarter.

The sequential growth in semiconductor revenue was broad based with almost all product areas increasing.

Analog product revenue of $1.27 billion was up 2%, and DSP product revenue of $1.24 billion was up 7%.

The growth in analog product revenue was driven by strength in high performance analog revenue.

High performance analog revenue grew 6% sequentially and grew 11% from the year-ago quarter.

Total analog revenue declined 3% from a year ago.

The increase in DSP product revenue was driven by demand for DSPs in cell phone applications.

Revenue from wireless applications grew 6% sequentially and declined 8% from a year ago.

The sequential growth was driven mostly by products sold into 3G high end cell phones.

The decline from a year ago was due to lower sales of O-map applications processors in the Japan market, where a significant customer inventory overbuild was underway in the year-ago quarter.

Wireless infrastructure revenue declined slightly sequentially, although grew from a year ago.

The sequential decline primarily reflected continued inventory reductions in the 3G infrastructure market.

As we've said before, we remain confident in the strength of TI's position in the cell phone market.

As evidenced, today, Erickson and TI announced a significant expansion of our long-standing relationship.

In short, the two companies are forming a strategic technology engagement to combine 3G modem technology from Erickson mobile platforms, with TI's O-map applications processors.

Solutions from the engagement will include O-map, custom base bands and connectivity technologies, including bluetooth, GPS and wireless LAN.

These solutions are targeted at the smart phone market, specifically 3G handsets with open high level operating systems such as Windows Mobile, Symbian, or Lennox.

We expect that handsets using these solutions will be available on the market in the second half of 2008 and the revenue will ramp over time.

Nonetheless, we anticipate the wireless market will undoubtedly remain noisy in the months ahead, as OEMs continue to diversify their chip suppliers.

However, in the end we believe that TI offers a combination of technologies and customer focus that is unmatched, and will enable us to continue to thrive in the wireless market, as our renewed engagement with Erickson demonstrates.

The remainder of our semiconductor revenue grew 5% sequentially and declined 17% from a year ago.

The biggest factor in the sequential growth was a gain in DLP revenue.

The biggest factors in the decline from a year ago were risk micro processors, as well as the royalty settlement in the year-ago quarter.

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

Kevin?

Thanks, Ron, and good afternoon, everyone.

As Ron said previously, profitability gains this quarter reflect some of the potential that we believe is ahead for TI, as analog, especially high performance analog, becomes a more important part of our product mix.

TI's second quarter gross profit was $1.78 billion, and gross margin was 52.1% of revenue.

Gross profit grew $147 million from the first quarter as a result of the $233 million of revenue growth.

Resulting in an 80 basis point expansion in gross margin.

Operating margin grew even faster at 230 basis points, as we kept operating expense growth below the level of revenue growth.

Total operating expenses of $975 million increased $18 million sequentially.

We held R&D about even, while SG&A grew 5%.

Operating profit for the quarter was $809 million, or 23.6% of revenue.

Operating profit increased $129 million from the prior quarter.

Other income and expense was $56 million, up $16 million sequentially, primarily due to an impairment of an investment in the prior quarter.

Income from continuing operations was $614 million, or $0.42 per share.

This was a $0.07 increase from the prior quarter and a $0.05 decline from the year-ago quarter.

Let me remind you that the year-ago quarter included a $0.03 EPS benefit from a sales tax refund and a $0.02 benefit from the royalty settlement.

It might help if I summarize the second quarter's earnings per share transition from the $0.35 in the first quarter.

All of the $0.07 increase was directly attributable to the higher revenue and result in utilization benefit, $0.01 and below the line expense increase was offset by $0.01 of other income and expense benefit.

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 $898 million in the quarter, and we ended the quarter with $3.58 billion in total cash.

Both of these increased sequentially, reflecting the reduced need for cash to meet working capital requirements, such as the payment of annual profit sharing and bonus that was made in the prior quarter.

Higher net income also contributed to these increases.

In the second quarter, we continued our share repurchases, using $742 million of cash to repurchase 21 million shares of TI common stock.

Inventory of $1.42 billion at the end of the quarter increased $15 million.

All of the increase was due to our calculator inventory build in preparation for the back to school season.

Depreciation of $256 million in the quarter dipped to 7% of revenue and capital expenditures of $174 million moved down to 5% of revenue in the quarter.

TI orders in the quarter were $3.45 billion, an increase of 8% sequentially.

Semiconductor orders grew 6%.

Our semiconductor book to bill ratio was 1.0, up slightly from 0.99 in the prior quarter.

Turning to our outlook for the third quarter, we expect total TI revenue in the range of $3.49 billion to $3.79 billion.

Semiconductor revenue should be in the range of $3.29 billion to $3.57 billion.

These ranges are equivalent to sequential growth of 2% to 11% for TI and 1% to 10% for the semiconductor segment.

Education technology should be in the range of $200 million to $220 million, as retailers will be in the peak of the back to school season.

Earnings per share are expected to be in the range of $0.46 to $0.52 in the third quarter.

As you likely noted from Infineon's announcement in late June, we agreed to sell our DSL customer premises equipment product line to Infineon.

This move is consistent with our strategy to keep the Company's resources focused on the best opportunities that will help us continue to progress toward our financial goals.

These products had revenue last year of about $225 million and have recently been running at about break-even.

In the outlook that we just provided, we assume that the sale will close at the end of July.

In addition, the earnings per share estimate does not include the expected gain on the sale.

We should have more detail on that impact at our mid-quarter update.

To summarize, we believe our markets are regaining momentum, as the market inventory correction continues to move behind us.

TI's broad DSP and analog portfolio uniquely positions the Company across many of the highest potential electronics products in the market.

As revenue grows and as analog becomes a more important part of our mix, we expect further progress toward attaining our financial goals of 55% gross margin and 30% operating margin.

With that, let me turn it back to Ron.

Thanks, Kevin.

At this point, 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 an opportunity for an additional follow-up.

Operator?

Certainly, sir.

(OPERATOR INSTRUCTIONS)

Our first question comes from Cody Acree from Stifel Nicolaus.

Please go ahead.

Hey, guys.

Thanks for getting me in here first.

Ron, Kevin, can you talk about your inventories within the channel?

Obviously building a little bit for the calculator business, but what have you seen your customers doing?

Have we seen any changes in lead times?

Orders are up nicely, but kind of maybe even if you can't quantify, could you qualify what the--the tone has been from the customers as far as orders?

Cody, I think at the highest level, we said inventories are probably in pretty good shape, as evidenced by the fact that we saw our sales, or our new orders increase by 6% quarter-over-quarter.

As relates to lead times, they are really quite stable.

We continue to see some improvements in some of those lines that we've been constrained on in the past.

If we take a look at some of the channels, the distributor inventories look to be okay, in fact, our sell-in was less than their sell-out, so their inventories decreased and our calculation shows their turns now are at about 8.

Our EDI OEMs seem to be okay, although, of course we can't see into their channels.

As far as everybody else is concerned, again, based upon the order pattern, the indications are that the inventories seem to be in reasonably good shape.

All right, great.

Thanks, and then a follow-up, if I may.

Sure.

With regards to wireless, at the mid-quarter update, it sounded like things were a little surprisingly strong in the 3G sector, that maybe that was one place that had been weak and it was coming back.

With the benefit of hindsight now, do you have any more visibility as to maybe why that was?

Has that continued, can you put anymore color into what's going on, their low end versus high end in wireless?

Sure, Cody.

I think you have it right in terms of what we described at mid-quarter and basically that carried forward into--through the rest of the quarter.

Basically 3G maintained double-digit sequential growth and I said maintain because that was actually the second consecutive quarter where growth in 3G was greater than--was in the double-digit range.

So probably a little stronger than we had expected when we first came into the quarter, but welcome, nonetheless.

I would say that wasn't the only area of growth, we had growth outside of 3G.

In fact, the net of what was outside of 3G grew as well as in the quarter, but not as robustly, of course, as 3G.

I would say the very low end actually was probably more mixed results and I would characterize that mix just based upon specific customers.

We had one customer, I think even on their earnings conference call last week, they characterized that they had become more selective during the quarter, where they chose to engage at the low end, basically opting to trade off some share for higher prices at their handset level and certainly that--that pressured our unit shipments as well at the low end.

So again, good growth.

I would say probably if you look at the wireless growth overall, it was probably a little better than the average seasonal second quarter and certainly that was driven by strength in 3G handsets.

Okay, Cody, thank you, and I think Kevin had a quick addition to make.

Yes, Cody, I think I chose an incorrect word.

I mentioned that just the inventories were turning 8 times.

I meant to say there were about 8 weeks of inventory.

I just spoke incorrectly there, sorry.

Okay.

Thanks, Kevin.

Thank you.

All right, let's move to the next caller, please, operator.

Our next question comes from Glen Yeung from City.

Please go ahead.

Thanks.

Before I start can I just clarify that your guidance for Q3 does not include revenues from the DSL business you're selling?

Glenn, actually it includes probably about a month's worth of revenue.

Okay.

And that business has operated at about break even.

It does not include any gain that we expect from the sale.

Okay, that's helpful.

Thank you.

My first question really talks about analog linearity.

I wonder if you could just give us a sense as to how analog progressed through the quarter and how the third quarter has started in that business?

Glenn, I would have to say as you see from--and when you're talking about analog, there's a lot of different pieces in analog.

Are you specifically talking about high performance analog or--?

Kind of.

I would love to hear a bit of both, to be honest with you.

Okay.

Well, I don't know that I'm going to have any data for you on analog linearity.

I can talk about linearity for the semiconductor revenue shipments overall, but not once you get down into individual product areas.

I would say certainly just as you see from the high performance analog number that we're reporting, certainly that strength continues.

If you look outside of high performance analog I would say we certainly recognize that the other analog is contributing very solidly from a profitability perspective, but growth is probably a little less than what we would--we would have liked to have seen, and we're certainly taking actions there to try to accelerate that growth, but based upon the numbers we're reporting, certainly see that the growth that we've seen was driven by HPA.

Offsetting that growth would be some areas, for example, in wireless, and again, I would characterize that as custom product that we saw a decline in and, again, would be characterized as customer-specific, and then also a little decline in some of the analog products that we sell into--into the broadband area, specifically DSL and wireless LAN.

But again, I don't have a specific linearity as it applied to analog revenue.

Okay.

So my second question is both, Ron, yourself and Kevin referred to this idea of a cyclical bottom in the first quarter and if you think about the sort of cycles we've seen over the last two to four years, they have been largely inventory-driven, and I wonder if you could address--as we look into the future, are you doing anything differently to manage your inventories than you did over the last two or four years when we did see these cyclical moves?

Yes, Glenn, we actually commented on that, I believe it may have been last quarter or the quarter before, but to try to--lessons learned from the past.

One of the things we're trying to do is stage our inventory a little bit differently, and if you take at a look on even our most recent balance sheet, you can see some of that, but we're trying to position our inventory at the finished goods level such that we can meet very short lead times and then at the chip stock level, work in process, so that we can actually hit certain peaks or spikes in demand that may occur on short order.

By doing that, we're hoping to keep our lead times stable and fairly reasonable, which in turn should allow our customers to avoid having to overstock inventory and prevent us from getting behind on deliveries.

So overall, what that says is our inventory levels on average will be higher in the future than they were in the past, as we execute on that kind of strategy.

Okay, that's helpful, Kevin, thanks.

Okay, thank you, Glen, and let's move to the next caller, please, operator.

Our next question comes from Michael Masdea from Credit Suisse.

Please go ahead.

Yes, thanks a lot.

Ron, you mentioned the diversification of some of the OEMs and supplier base, it's not obviously new news, but can you give us an idea of what stage you think we're into that and also, you've shown your propensity to hold your market share there well, but what's profitability looking like when you look in the next couple quarters?

Is there any impact from that--from these competitors showing up?

Okay.

I would say it's hard for us to understand exactly where we are in--in terms of what stage.

I think just as you've seen with Erickson they have certainly diversified their supplier base even if you look at announcements over the last year and yet at the same time we're very encouraged that with today's announcement we've reengaged and we've reengaged probably stronger than we've ever been in terms of a much broader relationship with--with that customer that will now encompass O-map where it didn't previously and will also encompass connectivity solutions.

So some of these will come and go in terms of--of where the customers are in their particular supplier strategies.

At the same time I think just listening to the noise that's been out there for sometime amongst investor base, there's probably--there's probably still diversification taking place at various OEMs and we'll just--we'll wait and see how that plays out over time, but what I would say and reiterate is just what we said in the prepared remarks, which is it comes down to attention to customers and those customers' needs, as well as the breadth of technologies that a semiconductor vendor brings to the--to these wireless handset customers and we feel very confident that we will--we will continue to maintain a position of strength in the wireless market going forward.

Profitability and the impact of profitability of--I think what you're characterizing as an increasingly competitive wireless market, did capture that right?

Correct.

I would say not--the wireless market has always been profitable.

I think what you've seen, and you've heard us talk about this before, that historically it was--their diversity was across functions in the cell phone, so they would have a base band supplier, they would have maybe a power management supplier, an RF supplier and as that has now basically integrated into a single chip solution, from TI and other vendors, they are seeking new ways to maintain diversity, which basically is to take that function and divide it across multiple suppliers, but even though, for example, the strength we've had in base bands historically, by no means did that mean it wasn't a highly competitive market and I would say going forward, we would not expect what I would call the supplier diversification strategy by the OEMs to detrimentally impact the margins that we engage with in the wireless market.

Quick follow-up on LoCosta--

Sure.

It seems like a structurally more concentrated market.

Correct me if I'm wrong, but is that causing any more volatility in terms of transitioning from one platform to another or any customer concentration issues at all relative to the mid and high end?

I'm sorry.

Was that an E.

Costa question?

For either LoCosta or E.

Costa as you find, and maybe especially for LoCosta.

And you're saying more concentration from the customer--the handset vendor perspective?

From the fact that you have more of your revenue coming from fewer handsets models is more what I mean.

Do you find--first of all, is that true and do you find that causes any more volatility of that revenue line for you guys?

I wouldn't necessarily agree with that.

I think we've always had a handful of wireless customers and a handful of--at any one time, models--they have lots of different models, but for us, they are a much smaller number of platforms that drive that revenue, and when I look at the low end, if anything it's a positive because historically we only had probably over the last seven years, up until the last couple, there was this trend only toward more and more features and higher and higher end handsets.

What LoCosta and the low end segment of the market really was to add a new--a new vector in terms of wireless growth that frankly is quite uncorrelated to the trend toward the high end.

So if anything, that's probably--it may be volatile in and of itself somewhat, but in terms of what it does for the growth of our business overall in wireless, I would say probably is--is a positive and from a stability perspective, it would be positive because of that non-correlation to the high end growth.

Okay.

All right, Michael, and let's move on to the next caller, please.

Our next question comes from Tim Luke from Lehman Brothers.

Please go ahead.

Thanks so much.

Just as a clarification, Ron, it seems that the catalog analog business was a little lower, or slower as you closed the quarter, made up for by strength in high end of wireless, among other areas, such--I was wondering if you could clarify that, and then with respect to that, with a book to bill of around 1.0, your revenue guidance is obviously up fairly healthily for the third quarter.

How should we think about reconciling the book to bill and the revenue up seasonally and is it fair to say that seasonally you would usually end the third quarter with a book to bill that would be somewhat above the one level as you go into a reasonably strong fourth quarter, or how should we think about that in terms of revenue and bookings?

Okay.

I will take the first question related to catalog analog and then we will--I'll let Kevin address the book to bill question.

Thank you.

First, so there is--actually that's inaccurate, versus--as your point, or your assumption that catalog or high performance analog slowed late in the quarter--

No, no, not high performance, perhaps, just the broader analog, and the 60% that isn't high performance, but maybe both, yes, sorry, clarify.

No, okay, and so with that clarification, I would still say I disagree.

In general, from the mid-quarter update, things came in very close to what we had expected at that point.

If you go back to the expectations at the very beginning of the quarter, I would say the main areas that were different from, again, our April expectations, would have been handsets were a little stronger, our infrastructure was a little weaker and then there were some areas such as--in the DSP video arena that may have been a little weaker and that was really just driven by a delayed ramp of a new customer program, but the variances to our forecast, especially at mid-quarter, were pretty minimal.

Kevin, do you want to answer his questions related to book to bill?

Yes, on the book to bill, I think what's probably a little bit more relevant, Tim, that we take a look at is the trend to the book to bill.

For example, last quarter, the semi-book to bill was 0.99, which means we were draining inventory, this quarter, it was 1.0.

We actually had sales come in, new orders come in faster, 6% quarter-over-quarter versus revenue growing at 5%, so we're in effect building backlog, which gives us a bit more confidence and plus the trend is moving up and that tends to be more meaningful from a directional standpoint than what the absolute number is.

Beyond that, we also have very good visibility into our EDI customers and we can see what their factor requirements are.

So you put all those together and it gives us a pretty high degree of confidence on the revenue range that we've suggested and in fact we will see revenue grow going into third quarter.

Just as a reminder, I mean if you just look at our second quarter, we grew revenue 5% sequentially on a book to bill back in first quarter of 0.99.

So you don't always need a book to bill well above 1 to grow at the rate that we're talking about.

Right, and would one perhaps then expect that trend to continue, where the orders may exceed the revenue?

Well, on the thesis that it does appear that we're coming out of the--the correction cycle and we're at the early stages of the correction, that would tend to suggest that we'd see continuing growth as we go into the second half, and so naturally orders would have to lead that growth, so I think that's a fairly reasonable assumption.

Now, what that actual ratio actually comes out to, Tim, that's pretty hard to call three months in advance.

Thanks.

With respect to my follow up then, if I may, just to clarify with respect to DLP, if you had any color on how that had done.

Thank you so much.

Okay.

DLP was up over 20% sequentially, really reflecting the clearing out of excess projector inventory that was there in the first quarter, as well as growth on the TV front.

So, again, DLP came in very close with--with our expectations, growth over 20% sequentially.

Okay, Tim.

Thank you for your questions.

Let's move to the next caller, please.

Our next question comes from Jim Covello from Goldman Sachs.

Please go ahead.

Good afternoon, guys.

Thanks so much.

This is a little bit of a follow-up to Tim's question, but relative to the cycle having bottomed in your opinion in the first quarter and the book to bill being--improving, but not significantly above one, do you think that's a function of the way you guys kind of manage the inventory and started wafers a little earlier, so your customers don't have the same incentive to double order, so the way you manage this, or is this an indictment of what kind of upturn we're having here?

Jim, I think you probably have hit a pretty good point there, that in fact we do have a lot more inventory staged and ready for relatively short lead times for our customers, that they don't need to be putting extended orders on us way out in time, which is what typically does cause your book to bill to move well over one, so I think you've got a very good point there.

Beyond that, we are still in the early stages and as I mentioned a little while ago there's other points I think weigh into it as well.

And we would agree with what you described as to what we're actually seeing.

We are not seeing customers place extended backlog.

For the most part, they are giving us just the level of visibility that is required by the lead time on the product.

So that's probably pretty consistent with what we were saying a month ago as well.

Did you have a follow-on, Jim?

Yes.

I guess the idea would be maybe the slope isn't the same as previous cycles, but it could--you're not going to have the same kind of impact when things get a little bit softer ultimately?

I'm not really quite sure I'm following, Jim, what you're trying to get to on the slope.

You mean the rate of increase that we would see?

Well, right because if customers were double booking, then obviously the slope of your revenue growth or your book to bill may be a little bit higher, but then you're obviously going to pay the price for that at the end, so theoretically, we could go through an upturn where we never see that kind of slope in terms of the revenue growth or improvement in the book to bill, but you don't have to pay the price to the same extent when you get to the softer part of the next cycle.

I like the picture you're describing.

Okay, and then maybe my final question, it would just on the analog side, you guys are obviously doing a terrific job picking up share.

You talked at the analyst meeting in very clear terms about the strategy for doing that and a lot of the share gain is kind of coming from that third bucket you described at the analyst meeting, the smaller customers, where you have the scale and mass to go after customers that maybe your competitors don't have the same scale and mass to go after.

What kind of competitive response are you expecting from the rest of the analog industry as they try and stop you guys from--on your continued share gain path?

Thanks a lot.

Yes, Jim, I guess I would comment on that, that the--we have already been seeing competitive response, but I think the difficulty for our competitors, again, has to do with the scale, that is we have a sales force that is such that we can just simply touch a lot more customers than any of our competitors can touch at any one point in time.

You add to that the breadth of our total product offering that we have and we can literally solve almost any problem that a customer may have on a particular board that they may be designing, which allows them to really solve their problem fairly quickly with solutions that we have as opposed to having multiple vendors in.

Those are probably two elements of the position that we enjoy today and will enjoy in the future, that we would expect to be quite difficult for our competitors to really be able to overcome.

So we remain confident that our objectives to growing our position in analog are really pretty, pretty solid and are within our reach.

And, Jim, before we declare a success in how TI managed its way through this upturn, let me just remind you that we're only one quarter off the bottom, so we still have a ways to go before we can fully prove that thesis there, but we appreciate it, nonetheless.

Let's, let's move to the next caller.

Operator?

Our next question comes from Ross Seymore from Deutsche Bank.

Please go ahead.

Hi, guys, just back to the high volume analog side of things, Ron, it sounded like you mentioned that you guys were looking for profitability improvements over growth in recent quarters.

Is that something that's going to occur for a while, or how should we think about the balance between growth and profitability in that sub-segment?

No, actually we have not emphasized profitability over growth recently.

What I was really trying to characterize is if you look at where that business is operating, and frankly where it has been operating over the last year, profitability is not a challenge, that business is fully consistent with our objective for that business on a profitability perspective, and for example, I think what we've--what we've said is we believe that type of business should be able to drive gross margins maybe a little below the corporate average, but probably in the mid to upper 40s and then probably with below the line expenses, maybe somewhere in the 10 to 15 points, thereabouts.

In any case, the operating level above 30 points.

My point is, it's running at that level and it has been running at that level.

So profit is where we want it.

What we would really like to see is more revenue growth from it, and that's where we're going to probably put more emphasis, it's not about cost reduction, it's not about trying to improve profitability, it's accelerating the top line, is the clarification.

Did you have follow-on, Ross?

Yes, kind of a two-part one, if I can fill in there.

What specifically can you do for the growth there?

As I look back, it looks like this is about the first, second quarter this decade where that hasn't grown, so I wondered if there's something specific going on or something specific where you expect the growth to accelerate, and then margins in the HPA side would be the follow-up on that.

Last quarter you said that they were just sneaking up to the bottom end of your target range, I wondered if they got over that bottom end in this quarter.

Okay.

I'll take the first one, let Kevin address the second.

In terms of what we can do, I would say combinations of even organizational structure, where we are allocating resources, what opportunities we're allocating resources, and again, specifically, what opportunities--what opportunities we're addressing.

Beyond that, I probably don't want to go into detail.

In terms of high performance analog profitability, Kevin?

Yes, the profitability in high performance analog has been on a steady journey improving over a number of years now, and in fact, continues to get stronger as we go through time and that's really on the gross line, on the gross margin line.

It still has--while it's approaching where we would say we want it at the lower end, it still has some room to go, in other words, we're not satisfied with the low end of that range, we want to move it up comfortably inside that.

So that's going to be a continuing effort as we continue to introduce new products, as we have been doing, 400 to 500 per year and we see those products being accepted by the marketplace and they become a bigger portion of our overall mix, that slowly shifts that gross profit margin up and brings it up to the kind of performance we think that business is entitled to.

Okay.

Thank you, Ross, and we'll move on to the next caller, please.

Our next question comes from David Wu from Global Crown Capital.

Please go ahead.

Yes.

Can I ask the question on margins--on gross margin, first one, very simple thing, depreciation, since your capital spending number's coming down, what should we--how should we think about depreciation expense, which is running at about $1 billion run rate in Q2?

Would it be coming down in Q3 and Q4 and into calendar '08, and if I could also follow-up quickly.

At this point, I got the impression at the analyst meeting there are significant digital capacity available at TI, and which presumably could be used for leveraging your gross margin further as the recovery take place and I assume the same is true for your high performance analog business.

How much higher can your margins go?

Well, David, the short answer is that of course we're shooting towards 55% gross margin and we just turned in a quarter at 52%, so we're on our way there and we mentioned that we should be able to achieve that in a couple of years, so that's kind of--I guess the short answer to that part of the question.

Our depreciation plan for the year, we expect about $1 billion of depreciation this year, and as you pointed out, we're on a run rate to that.

We haven't forecasted next year just yet, but clearly with our capital expenditures moderating versus what we've seen in years past, that bodes well for our relatively stable depreciation over the next few time periods.

On the capacity front, I think you mentioned that you thought you had heard that we had open digital capacity, in fact what we're really pointing to is we have open analog capacity.

Recall that we outsourced most of our digital, oh, excuse me upwards to half our advanced lithography which is where our advanced digital capacity is at.

We outsourced that to foundries, so when demand drops, that's the first place that we pull back on loadings which generally allows us to keep our internal factories relatively loaded, won't have some line balancing issues, but generally speaking, they'll be relatively fully loaded.

It's on the analog side where we have quite a bit of capacity, especially as we can convert that older--as digital capacity ages, we can convert that over into analog, which constantly gives us additional capacity as we move through time.

That's where we see the leverage, as we begin to continue to have top line growth and we can spread that revenue across those relatively fixed assets, that in turn gives us additional margin opportunity.

As well as just the fact that high performance analog tends to run higher gross margins on average anyway versus where the corporation runs.

So as growth is happening in that targeted area, that tends to blend up the corporate total on average.

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

Our next question comes from Chris Stanley from J.P.

Morgan.

Please go ahead.

Okay, thanks, guys.

Just a different gross margin question, sounds like DLP and HPA were up pretty strongly in the quarter.

Do you think that mix had anything to do with your gross margins going up, or was it all utilization rates?

Well, Chris, it was probably a combination of those.

I mean clearly just the fact that we saw 5% growth in revenue and the kind of revenue outlook that we've given for second quarter, that alone has increased in our utilization, especially on the analog side a little bit, but in addition to that, you're also getting some mix, as you point out between DLP and HPA, but it's important to mention that we had growth pretty much across the board, DLP is a fairly small portion of our total revenues.

Recall what Ron had mentioned earlier, that wireless grew 6% quarter-over-quarter, that's a fairly sizable portion of our revenues.

HPA grew 6%.

DLP, as Ron mentioned, was about 20% or so growth quarter-over-quarter, but a much smaller portion of our total revenues.

So I wouldn't really say that it was mix, per se, it's a combination of the two, but utilization was fairly important as well.

Chris did you have a follow-on?

Follow-on, yes.

On the use of cash you guys had a little bit of a buyback, but your share count stayed roughly flat--the dividend was roughly flat and your cash is starting to creep up towards $4 billion again.

Can we expect more cash usage in the second half of the year, either dividend or buyback?

Yes, I think, Chris, we used about $742 million, as I recall, repurchasing shares in the quarter, and actually our dividend was up quite a bit.

We used $115 million on dividends in the quarter versus roughly $60 million or so in the last few quarters because we doubled our dividend this past quarter.

So in fact, we are using more cash for means of returning to shareholders.

The share count didn't change all that much because part of what we repurchased, you also have activity with employee exercises and so on and those two have to net out and you have some of that activity just occurring and it's causing some noise in the share count as you go through the quarters.

So will we see cash continue to go up on the second half of the year?

Well, I won't forecast cash, because that's going to be certainly a function of what rate we buy back and so on, but I would just point out that we do still have at the end of the quarter about $3.8 billion of remaining authorizations from the board to continue our repurchases, and to the extent that we have been able to execute on that in the past, we plan to continue to do that in the future.

Okay.

Thanks, guys.

Thank you, Chris.

Next caller, please.

Our next question comes from John Lau from Jefferies & Company.

Please go ahead.

Great, thank you, Ron.

I guess I'm going to circle back and state this quite bluntly.

People are already starting to fear the end of the semiconductor cycle already, and I'm wondering if you can come back and address a couple of things again.

You mentioned that you're only one quarter off the bottom and we're still early in the cycle, but just to refresh us and reemphasize that point, what do you see in terms of lead times and any double ordering?

Thank you.

Lead times are stable from where they were last quarter.

I would say pretty stable really from where they have been for sometime.

Double ordering, boy, I mean given what we just described in terms of our orders, the order rates, the lack of extended orders that customers are giving to us, none of that sounds like double ordering to me, that sounds like customers that are still coming from--off of a period where they were reducing inventory, they are cautious about not moving back into a--an excessive inventory position, and they have lead times from their suppliers, TI, as well as other suppliers in general that doesn't force them to place backlog out beyond what they can--they can force--forecast their business.

So we would, I guess we would feel pretty strongly that we're still at that early stage of a cycle and we see no signs that this thing is going to turn back over again.

Kevin, did you have any additional comments?

Yes, the only other reminder I would put in there again is when we take a look at areas where we can see inventory in the distribution channel, for example, it continues to be quite lean at about 8 weeks or so, and as I mentioned earlier, we actually saw where their inventories reduced a little bit quarter-over-quarter.

So it doesn't feel to us like there's any buffer or excess inventory available out there that needs to be burned off, and in fact, if there's much of an increase in demand versus what our customers have laid in for their plans, they are going to have to rely on the inventory that the component companies such as TI are actually holding to try to fill that gap, so I think that we're well staged to deal with that and we really don't see any signs that would point to the observation you made, John.

Did you have a follow-up question, John.

Yes, and in terms of--in terms of support for any upturn, unexpected upturn in demand, you mentioned that you have additional analog capacity that you can put in line and is the cycle time--is the manufacturing cycle time now changed over the last several years so that your reaction time to these upside orders is quicker?

The thing we've done on that, John, is not so much the manufacturing cycle time itself has changed, it's how we approach it logistically.

We have staged, as I mentioned earlier, more of that analog inventory, especially the catalog inventory into finished goods, as well more into what we call dye stock, which is really the completed dye just before it goes to assembly and test, that essentially allows us to pull the dye, and within three to four weeks have it shipping out to a customer.

So between more finished goods inventory and a larger dye buffer, we believe we're in a position to be able to respond, should there be sudden upturns such as you described there, and keep from letting lead times adjust and then therefore causing our customers to be alarmed.

Great, thank you.

Thank you, John.

Let's move to the next caller, please.

Our next question comes from Uche Orji from UBS.

Please go ahead.

Thank you very much.

Can I just go back to the guidance, if I may, please?

Just to understand how much impact the [sports] business had, within the June quarter, can you tell us how much of the June quarter revenues is DSL business, sorry the the DSL business that was sold to Infineon?

Uche, last year, it was about $225 million annual business.

Okay.

So roughly say--call it around $50 million or so, maybe a little bit more than that.

We figure about one month's worth of that revenue will be in the--in the quarter and that's what we included inside our range because we expect to close on that by the end of July.

Okay.

So the balance will not be--we did not put the balance into our forecast and so you need to adjust your expectation for that.

And Uche, that number is about where it has been running in first half of this year.

So it's--we didn't see a dramatic change from that into 2007.

That's clear.

Ron, just maybe I misheard you, but in your characterization of the wireless market, it seems like you're saying the lower end is less robust than the higher end than at 3G, is that a correct statement of how you characterize it to your markets?

I think that's--yes, that's a fair characterization for what we saw in second quarter.

Is that a statement for the entire market, or is that a statement of the fact that some of your customers walking away from (inaudible - highly accented language) and placing more on profit side and does that imply that you lost share in that segment of the market?

That's a comment specifically on TI, and at the same time, I would have to say that when it comes to the low end of the market, I would say our customers represent the vast majority of that marketplace.

So what I think it really comes down to is maybe some quarter by quarter noise associated with a particular build plans from customers inventory they may have in their channel they needed to work down, things like that.

I think the low end segment of the market overall and the importance of those emerging markets to TI going forward is unabated, but I think you're just seeing some noise that would be more customer specific noise over the course of--well, specifically in second quarter.

Right.

In terms of your ability to address what I may characterize as oddities of the markets in places like China, with a solution like (inaudible - highly accented language), how much progress are you seeing with customers, say, outside of TI (inaudible - highly accented language) to the TI three segments of the market?

Is there any color you can give us to how successful you have been with those segments of the markets?

I think I would say we have been successful with that product quite broadly.

I think, you know, of course we and certainly investors focus on the largest customers, but at the same time, I think LoCosta, we have engagements with 15 different customers at this point.

We've talked about our expectations by the end of 2007 that more than 50 phone models, using LoCosta will be on the market and today, we already have more than 20 handsets that are--handset models that use LoCosta that are on the marketplace and of course that marketplace is still highly concentrated with a few of our customers representing the biggest volume, but our customer base actually is quite broad, so if for some reason that were to shift and the Taiwanese manufacturers or the local China manufacturers became a much more significant factor going forward, we believe we are very well positioned with those--those handset vendors.

And with that, we'll thank you for your call today and we'll move to the next caller.

Our next caller comes from Manish Goyal from Crest Investments.

Please go ahead.

Yes, hi.

I have two topics, one on wireless and then one on Sun Micro process.

Let me start with Sun.

As you scale down your capital spending, what--what do you think will be the future of Sun business, what is the value you are providing to Sun as a foundry that they have to keep that business with you and they perhaps don't go directly to foundries?

And then I have a follow-up on wireless.

Well, Manish, what we have done historically and will continue to do with Sun is that we work very hard on delivering them high performance process technology and actually ramping their products to volume on those advance technologies.

It's what we've done, it's what we'll continue to do and which factories we choose to run those through as a result of these changes is relatively irrelevant, it's more a question of actually bringing these things up at the velocity that Sun requires when they introduce their new devices.

I would just point out we've had to work hard to win that business every day for many years now, and we'll continue to do that in the future, but we're quite confident that we can meet Sun's needs and we have taken all action that we can to make sure we do meet their needs going forward.

So this change in how we go about developing our process technology, we do not believe will have any material impact on our relationship--our ability to support Sun.

Manish, you said you had a wireless follow-up?

Yes.

Ron, I was wondering, today's press release with Erickson, are these products likely to hit the market sometime, and I mean the semiconductor devices, sometime in 2000 late, 2008 or early 2009 timeframe?

Is that the right way to think about this?

Well, I think in what we have said and what we've said was that in second half '08 handsets will be on the market using those products.

So you might assume that earlier it's going to be more standard product.

So for example, it might be a standard O-map device that EMP is folding into--Erickson Mobile Platform's folds into its chipset, some of the connectivity products or whatever, but then over time, certainly the two companies will work aggressively to optimize the implementation and the integration of their base band, as well as our applications processor.

So we will get to the market relatively quickly, meaning second half '08, but, again, the integration and the revenue, we would expect to continue to ramp over time beyond that.

So just one last follow-up, you had a sole supplier relationship at Sony Erickson, if I am remember correct, EMP, I should say.

Do you think you will maintain sole supply relationship for 3G base band shipping in 2008?

Actually, we have not been the sole supplier.

I believe it was last December Erickson had--I don't know if it was Erickson or ST Micro, but basically there was a release went out that FT would be providing base bands to Erickson, so we have not been the sole.

I think you will find Erickson continue to maintain a diversity of suppliers, but at the same time, we also feel very good that the work we're going to be doing with Erickson through this joint engagement not only on O-map, but also on the base band processor will allow our penetration to start moving back in the right direction on their base band product.

So, again, we have not been the sole.

We hope that this will translate to increased penetration for TI at Erickson going forward.

And with that, Manish, I'll thank you for your questions and let's move to the next caller, please.

Our next question comes from Joseph Osha from Merrill Lynch.

Please go ahead.

Thanks, guys.

Listen, the share count has been dropping pretty consistently by about 100 million a year here, if you look over the past couple of years.

Can we still think about you all maintaining that trajectory as we go forward?

Yes, Joe, what we've been doing as you pointed out there is a pretty consistent type of repurchase, a what we would describe as a measured approach to our repurchases that we are doing over a period of time.

We believe that has served us well and will serve us well in the future, and to the extent that we continue to have authorizations from the board, we will execute on that.

Whether it will wind up being 100 million net reduction per year or something different from that, I can't quite forecast.

That's going to be a function of price and employee exercises and a host of other things.

But it is certainly our intent to continue repurchases when the price--prices are attractive and we continue to make accretive purchases on the Company.

Well, okay, but for modeling, is there a number, or is it $50 million, is it 25 not to be pedantic, but neutralizing employee options exercises is not a buyback in my eyes, so what I'm trying to understand is if you're going to be out buying back stock, to what impact that's going to impact share count?

I think if you take a look already for the first half of this year, our diluted share count is down about 30 million shares.

Against the second, and so we can at least think about that trajectory maintaining itself to some extent?

I think you can model something to that effect, Joe, but again, it's kind of hard.

I understand the challenge you have trying to model that in, but it's the same that we have, it's a function of price and volumes that we can actually purchase at in the future, but we do intend to use the authorization the board has given us to continue repurchases, ideally we're bringing the share count down over time as you've seen in the last couple of years.

Okay, and may I ask a follow-up?

Sure.

Can you talk in aggregate about your utilization, actually not an aggregate, on this EMOS side of the business, clearly you're keeping internal facilities loaded, but how is your manufacturing activity this quarter trended relative to last quarter, if we just set the analog aside and look at the leading (inaudible) EMOS stuff?

Well, our utilization levels have picked up, actually on both sides, I mean coming out of the correction where we pulled back on load-ins starting in the fourth quarter and going into, adjust and start going up in the first quarter, that effected all of the factories, but clearly as we have seen the revenue grow in second quarter and our outlook for third, we've continued to pick up our load-ins in all of our factories.

The digital factories as you mentioned are already very heavily loaded and the analog factories are picking up on utilization and continue to have quite a bit of available capacity for us to expand on.

And again, that was a second quarter statement, we won't talk about utilization in third quarter, the current quarter, until we complete the quarter.

Okay, thank you.

Okay, Joe.

Thank you.

Let's move to the next caller, please.

Our next question comes from JoAnne Feeney from FTN Midwest.

Please go ahead.

Hi, thanks.

Question, a little bit more on the wireless side.

You remarked that there was some customer specific noise in the second quarter and I guess I'm wondering, where do you see that in the second half?

Is this really a timing of model development and release for TI, or is there something more fundamental about the market that you see developing at the low end?

I think, again, it's very customer specific.

I think just even thinking back on their conference call, they talked about model development, things that they needed to do to get to cost points that they wanted to--that they wanted to be able to address that marketplace.

And then also just some decisions they are making on--on profitability and, which--which areas they target their resources to drive the business model for their company.

But again, all of that discussion is very customer-specific.

So I don't think at all it's a statement about the broader market necessarily as much as a particular customer's strategy.

Do you have follow-on, JoAnne?

Yes, just a quick one.

You remarked that you thought the dollar content in cell phones would rise, even as your customers diversified their supplier base.

Do you see that happening now or expect it to continue?

Well, I think this announcement with Erickson is a great example.

I mean basically historically we have manufactured different parts of the modem for them, functions like power management, at times the digital base band and so I think what you see in--in an announcement such as this is inclusion of products such as O-map, inclusion of connectivity products, and I think that trend is very representative of what we're seeing on a much broader base across our handset OEMs, and again, it's no longer just manufacturing a custom digital base band for a customer, it's moving into some of these more far reaching areas that in general will tend to drive our content up.

So, yes, we feel pretty optimistic about the opportunity there, and of course, when more and more of this functionality is integrating into fewer and fewer chips the customers need to be looking at suppliers that they believe over the long-term have all the various pieces and the technology to be able to integrate those various pieces together and I think--I think we feel good about our position and our ability to support those customers.

With that, JoAnne, I thank you for your questions and let's move to the next caller, please.

Our next question comes from Doug Freedman from AmTech Research.

Please go ahead.

Hi, guys.

Thanks for taking the time.

Kevin, if I could start at a very high level, the new operating model targets, can you help us understand which you think you're going to achieve first?

Should we expect gross margins to get there first, or is it the operating margin target?

Doug, I don't think I could really give you much more commentary on that other than to say that we expect that those two go hand in hand on average over time.

Whether one arrives a quarter sooner than the other, I would be probably misleading you to think I have that much precision in my forecasting capability.

All right, I was just trying to figure out if one was more dependent upon the revenue growth than the other.

Well, the revenue growth is certainly important, because it allows us to leverage the fixed assets that we have, and then you add to that just changing mix, which takes time, but that's making analog a bigger portion of our total revenue over time.

So those two things are the biggest contributors to gross margin, and that will fall through to operating margin.

All right, and then if I could, my follow-up, Motorola clearly struggling in the wireless space right now, very well known, many suppliers really missing numbers.

You guys are a supplier through a couple of different channels.

Can you talk about the impact that that has had on your business and then the outlook that you have for their business going forward?

I know you've got a bunch of programs going on to actually increase your share there.

Well, certainly, Doug, Motorola is impacting their business, as we are a supplier into them, we're a supplier especially into the low end, part of their handset segment.

Our outlook for that--I'm not going to comment other than you've seen trends over time with various handset manufacturer that at any time one may doing better than the other, we do not count any of them out and we see some good things coming out of Motorola going forward as well.

So beyond that, we shouldn't comment.

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

Our next question comes from Sumit Dhanda from Banc of America.

Please go ahead.

Ron, first question I have for you, back to the expanded Erickson lines you highlighted today before your call, you talked about O-map and connectivity solutions.

Anyway you can help us quantify other than whatever market growth you would have seen through Erickson mobile, how much more growth do you think you can layer on top of that, is it 10% more than you would have previously anticipated, or you could help quantify how much your dollar penetration in a handset would increase with Erickson versus your previous expectations?

Sumit, I can't, and the issue is that, for example, there's the core modem that will go into every handset, although depending upon what they do with their supplier strategy, we may not have 100% of that, although certainly that's our objective, but at the same time, then you have the applications processor, but once you start getting out to the connectivity solutions, that's highly dependent upon what--what the end handset manufacturers choose to configure for a particular handset model.

Not every handset will record GPS, not every handset will require wireless LAN, certainly a high percentage of handsets hopefully will elect to implement Bluetooth.

But, again, we're talking a couple years out and trying to understand an exact mix is difficult, but what I can say is that we feel very good that this represents a significant content increase for TI, but exactly how significant we'll probably be able to characterize better once--once that time has passed.

Did you have a follow-on, Sumit?

Yes, I did actually.

The benefits that you had previously talked about to OpEx from your restructuring actions, have we seen any of that start to flow through yet?

You talked about a $200 million benefit on a normalized basis annually, but has that started to trickle through yet, or is that mainly a late '07, early '08 phenomenon?

Sumit, that's going to be pretty much an '08 phenomenon, but it will begin trickling in, it already is, but you really don't see it, because at the same time we're having to record restructuring charges along with it which are kind of netting themselves out as we actually complete those activities and wind those down here in the second half of this year, but we'll see those coming through at a very nice fashion, certainly as we move into 2008.

Just to clarify then, Kevin, the restructuring charges that you are incurring, that's reflected in your operating expense guidance?

Yes, it is.

Okay, Sumit, thank you for your questions, and operator, I think we have time for one--one more caller, one more question.

All right, sir.

Our last question comes from Louis Gerhardy from Morgan Stanley.

Please go ahead.

And Louis, I didn't mean to imply we won't give you a follow-up.

Just in terms of Erickson, is there any exclusivity in any way, either time or otherwise, and just who is going to manage the customer in this case?

I think in general, Louis, the way to think about it is we are basically winning design position, especially with O-map, and EMP's reference design, and so there, in general, they will lead the marketing effort for getting that reference platform deployed to various handset manufacturers and then we'll--we're viewing EMP, of course, as the design customer here, although when it actually comes to operating support and manufacturing, the ultimate handset manufacturer will be our customer as well.

Did that answer the question, or did you have something else embedded in there, Louis?

No, that answered it, and then my follow-up would be, I think you said HPA was up around 6% sequentially.

Is that around 510 then with the balance of analog HVAL?

Boy, Louis, let's see.

Yes, it's actually, it's actually probably more a little bit above that number, but over 500, yes, a little bit, and I'm sorry, what was--with the balance of what?

The balance of analog with the HVAL, is that right?

Yes, no, that--that was up as well, but certainly I would characterize that growth as flat to slightly up, whereas HPA was--was the driver of growth in the quarter.

Okay.

Louis, I thank you for your questions and with that, we'll wrap up the call.

I remind you that the replay is available on our website.

Thank you, and good evening.

Thank you, everyone.

This concludes today's conference call.

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