德州儀器 (TXN) 2007 Q3 法說會逐字稿

Good afternoon.

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

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

All lines are placed on mute to prevent 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, Mr.

Ron Slaymaker.

Sir, you may begin.

Good afternoon and thank you for joining our third 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 Web site at ti.com/ir.

This call is broadcast live over the Web and can be accessed through TI's Web site.

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 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 December 10th.

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.

TI's third quarter results were in the upper half of our range of expectations.

This strong margin expansion demonstrates continued progress toward our financial goals of 55% gross margin and 30% operating margin.

It also underscores the importance of our focus on analog to achieve these goals.

As growth in analog continues to drive a better product portfolio and lower capital requirements, margins have expanded and cash flow has increased.

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.

TI revenue increased 7% sequentially on strong demand for analog semiconductors.

Back-to-school demand for graphing calculators was also a contributor.

TI revenue declined 3% from the year ago quarter when customers were building inventory.

In our Semiconductor segment sequential growth of 6% was largely driven by strong growth in analog which was up 10%.

DSP revenue was up a solid 6% sequentially.

Analog product revenue grew to $1.40 billion led by strength in high-performance analog.

High-performance analog revenue grew 13% sequentially and grew 10% from the year ago quarter.

Outside of high-performance analog sequential growth also occurred across most analog product lines, although was strongest in products sold into storage as well as printer applications.

Total analog revenue grew 2% from a year ago.

The 6% sequential increase in DSP produce revenue was driven by demand for DSPs and cell phone applications.

We are also encouraged by the very strong sequential growth rates we had in some emerging areas, specifically digital HD radio and digital video applications such as security and video conferencing, although these were from much smaller bases.

DSP revenue was down 4% from the year ago quarter, primarily due to weaker wireless revenue, especially wireless infrastructure.

Revenue from wireless applications grew 5% sequentially.

As we said in the mid quarter update last month, our wireless results were mixed by customer with demand from some customers significantly stronger than from others.

This was a bigger factor in our wireless revenue trend this quarter to end the dynamics of any particular market segment, although shipments in the quarter were skewed toward entry products due to strength in emerging markets.

A 7% decline in wireless revenue from a year ago mostly represented broadbased declines across handset customers with the exception of a single customer where we had solid growth.

In wireless infrastructure revenue declined about 5% sequentially and over 25% from year ago.

This primarily reflects a continued stall in 3G network deployments.

The remainder of our semiconductor revenue was about even with the second quarter.

Microcontrollers, standard logic, royalties and risk microprocessors grew while DLP revenue declined a couple percent.

From a year ago this revenue declined 10% with declines in DLP, risk microprocessor and standard logic revenue more than offsetting growth in microcontrollers and royalties.

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

Thanks, Ron, and good afternoon, everyone.

Once again, profitability gains this quarter continue to reflect the potential that we believe is ahead for TI as analog becomes a more important part of our product mix.

TI's third quarter gross profit was $1.98 billion and gross margin was 54.2% of revenue.

Gross profit grew $200 million in the second quarter as a result of the $239 million of revenue growth and included $39 million from the gain on the sale of our DSL customer premises equipment product line in the quarter.

Total operating expenses of $971 million were about even sequentially.

A slight increase in SG&A was offset by a small reduction in R&D.

Operating profit for the quarter was $1.01 billion, or 27.6% of revenue.

Operating profit increased $204 million from the prior quarter as all of the higher gross profit fell through to the bottom line.

Operating margin increased by 400 basis points in the quarter.

About a quarter of this increase in margin was attributable to the gain on the sale of the DSL product line.

Other income and expense was $53 million, down $3 million compared with the prior quarter.

Income from continuing operations was $758 million, or $0.52 per share.

This was a $0.10 increase from the prior quarter.

Compared with a year ago, earnings per share were up $0.07 despite lower revenue.

It might help if I summarized the third quarter's earnings transition from the $0.42 in the second quarter.

About $0.06 of the $0.10 increase was attributable to higher revenue.

About $0.01 of the increase was from higher margins.

There was also a $0.01 increase associated with our lower share count this quarter.

And finally, $0.02 were from the gain on the sale of our DSL-CPE product lines.

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 $1.53 billion in the quarter and we ended the quarter with $3.67 billion in total cash.

We also continued our share repurchases using $1.41 billion of cash to repurchase 40 million shares of TI common stock.

Inventory of $1.45 billion at the end of the quarter increased to $26 million although days of inventory were the same as last quarter.

Depreciation of $262 million in the quarter increased $6 million from the prior quarter and was $4 million below the year ago level.

As we had maintained a tight discipline on capital expenditures throughout the year, we have concluded that our pace of expenditures is appropriate for the remainder of the year.

As a result, we have lowered our forecast for total capital expenditures this year to about $700 million than the prior forecast of about $900 million.

TI orders in the quarter were $3.55 billion, an increase of 3% sequentially.

Semiconductor orders grew 6%.

Our semiconductor book-to-bill ratio was .99 in the quarter.

Turning to our outlook for the fourth quarter, we expect total TI revenue in the range of $3.40 billion to $3.68 billion.

Semiconductor revenue should be in the range of $3.33 billion to $3.59 billion.

Education technology should decline seasonally following the end of the back-to-school period to a range of 70 to $90 million.

Earnings per share are expected to be in the range of $0.48 to $0.54 in the fourth quarter.

Over the next two years we will be taking new actions to further improve efficiencies in our analog manufacturing operations by consolidating production from our Tucson, Arizona wafer fabrication facility into an existing factory in Texas.

This change will result in more efficient uses of our manufacturing capacity.

The consolidation will be done in phases beginning this quarter and completed by the end of 2009.

When fully implemented, manufacturing operations in Tucson will cease, although engineering development work will continue there.

We will incur total restructuring charges of about $35 million distributed across the consolidation period and we expect to achieve annualized savings of about $20 million when completed.

To summarize, we believe our investments in analog over the past decade and our increasing focus on the analog market are now beginning to substantially shape the financial results of our company.

We believe the fragmentation in this market today opens the door for continued market share gain opportunities for TI.

As a result, we believe analog will continue to be a driver of TI revenue growth in the years ahead.

When combined with analog's profitability and low capital intensity, we believe we can continue to show attractive earnings and cash flow results.

As our profitability and cash flow have expanded, we have continued to increase our returns to shareholders as evidenced by our September authorization for an additional $5 billion of share repurchases and a 25% increase in our dividend.

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) Our first question comes from Cody Acree from Stifel Nicolaus.

Please go ahead.

Thanks, guys.

Can you talk a little bit about your guidance for the semiconductor side?

Obviously orders are up a bit and your book-to-bill's kind of around one, but seasonally is there something going on to where you're seeing a little bit of softness seasonally especially coming off of last week's earnings calls where PCs are seeing such a strong outlook and now we're seeing guidance for kind of generally flat.

Usually semis would be typically up a bit.

Can you maybe give a little more color there?

Cody, what we are looking at there is that the kind of growth that we've seen for most of this year and with the normal seasonality across most of our products, we were expecting that to pretty much play its course in the fourth quarter.

The main area that we are expecting a little bit different than perhaps you may have seen in the past is in the wireless area.

In wireless, we're expecting that revenue to probably be about even with the third quarter.

And that's really being driven by two elements.

One, we believe that our customers will probably repeat what we saw them do a year ago, and that is they pull back on component deliveries in December as they keep their inventories quite tight.

And the second is the addition, or the shipments now beginning for a second supplier to Ericsson.

This was a supplier announcement that was made by Ericsson about a year ago last December and this quarter is when we're beginning to see those shipments pick up by that competitor and so we'll be sharing that revenue with that competitor during the quarter.

So you put those together and we're expecting wireless revenue actually to be about even with the quarter.

If you take a look over the last eight quarters and see what the average growth rate is for wireless, it's averaged about 8% growth rate in the fourth quarter, albeit with a wide variability, a low of minus 15%, a high as high as 28%.

- There's a lot of variability inside there but that's probably the main difference that we see in the fourth quarter.

Cody, let me also just remind that even though that competitor coming on board at Ericsson will likely pressure our revenue over the course of the next several quarters there, also recall that in July we announced that we had reengaged with Ericsson both on the custom digital baseband which is what's being affected now, but also on new design wins at Ericsson for OMAP application processors.

And OMAP, we previously had not had engagements at Ericsson before.

Nonetheless on those new programs it'll probably be second half '08 before we start to see any revenue that's a result of that recent engagement again.

Cody, did you have a follow-up?

Yes, and if I could use that follow-up maybe to just expound a little bit on that topic, the wireless market share trends.

Seeing Ericsson have some noticeable impact in Q4 versus all the things that happened seasonally and then going into next year having other OEMs that are starting to use other second sources, how does this all play out?

How should we look at '08 as a market share year for you given what you're doing with LoCosto and higher dollar contents and picking up some sockets at one guy and losing sockets another.

How does it all shake out?

Well Cody, I think that's a, of course, that's a popular question over the last probably three quarters that investors and analysts ask of TI.

I think one of the things that you have to look at going forward is you're right.

There are other customers that are similar to Ericsson I would say implementing, what I'll call, what we commonly call supplier diversification strategies.

Yet at the same time I think in many cases that represents opportunity as well as some risk for TI.

So if you look at just kind of the ins and outs for 2008, we've talked about Ericsson already.

At the same time we have other customers where we will have revenue, new programs that are ramping.

For example, Motorola, Motorola will start to engage the program that we announced, I believe it was in January of this year.

Will start to, you know -- we have historically been engaged there on the low end and with LoCosto.

Motorola will begin ramping with TI, I'd call it mid '08 on some of the EDGE products.

And then late in the years is when we'll have the custom 3G product that we're developing for them in the initial stages of ramp as well.

I think it's certainly gotten a lot of attention that Nokia has also announced some supplier diversification efforts.

I think they've described that the earliest of those which will be at the low end of the product line will have some initial production starting in first half of '08.

The mid range or EDGE products, I don't know that they publicly stated when that will ramp into production, but I think it's generally believed to have started later and will ramp into production later.

And then on the 3G side where, again, that's been a big driver of our revenue and I think a lot of Nokia's success in recent years, their additional supplier that they will bring on there will be, I think, they stated it as 2010 for the very initial production ramp there as well.

So again, those are the ins and outs.

I understand the interest in how it nets out, but I don't have a net answer for you at this point.

But again, that's what we view as the ins and outs over the course of the next couple of years.

Cody, thank you.

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

Our next question comes from Glen Yeung from Citigroup.

Please go ahead.

Thanks.

Ron, maybe just one last on the last answer you gave.

Do you think that in the first half of 20080 you can return back to normal seasonal growth patterns in wireless?

Glen, we're really not trying to forecast first half '08.

I mean, as you're well aware, our practice is to just take it a quarter at a time in terms of guidance that we would give.

So other than the statements I've provided on ins and outs, I don't want to at this point try to guide for what kind of wireless pattern we might have in first half of '08.

Okay.

Ron, and then just stepping back a little bit and looking at your broader book of business, what's your sense as to how much of an impact all the issues we're seeing in the macro is having on what you're seeing in your business?

Glen, I'll go ahead and give you an answer on that one there.

Right now we can't really point to anything that we would suggest to you that would be something tangible to point to that's affecting our business.

Like everybody else, we're watching it very closely but it is important to keep that about, more than 80% of our revenues come from outside of the United States.

And so we happen to be pretty diverse when it comes to the customer base that we actually ship into and therefore the economies that affect our overall revenue profile.

Now albeit some those products in Asia, for example, when they're finished and they get shipped back into the U.S.

ultimately, but still a considerable portion of the macro for us is the whole world economy, not just the U.S.

economy.

Anyway, kind of a long answer for you, but we really don't see anything we can point to right now.

We're paying close attention but we can't point to anything that gives us any cause for a reason to indicate there's a change due to consumer behavior.

Yes, I think the specific number is, what is it, over 85% of our revenue ships to regions outside of the United States so that's just a specific.

Glen, thank you for your questions.

Let's move to the next caller, please.

Our next question comes from Uche Orji from UBS New York.

Please go ahead.

Thank you very much.

Ron, can I just ask you about analog business?

I mean you had a significant growth in HPA and the obvious question I want to ask is how much of that do you think is just share gain within this quarter and how much of that is an element of pull in from Q4?

How should we think about the (inaudible) in HPA and I do have (inaudible).

Well, Uche, I don't think we completely know when you talk about Q4 pull in.

Probably the best indication there would be what we see in distribution.

And what I would say is, first of all, if you look at our sequential growth, it was 13% and about a third of that went to rebuilding inventory toward targeted levels in the distribution channel.

So you'll recall that back in July I think we described in the conference call that distributors in our mind were low in certain areas or lean in certain areas on their inventory so we have put in place a program to rebuild some of that during the third quarter.

We achieved some of that, but it's that, I don't know that I would characterize that as pull in per se, but certainly about a third of that wireless revenue, I'm sorry, that HPA revenue growth in the third quarter went toward rebuilding that distributor inventory level.

Did you have a follow-on, Uche?

Yes, I do.

If you just give me a few metrics like where lead times stand today now in analog, in HPA and also in terms of utilization rates just for me to calibrate that answer.

What our lead times (inaudible).

Okay.

Again, I can't -- given just the breadth and diversity of our product line, there's no single lead time.

But I would say in general lead times have remained stable in the quarter.

On the utilization question, again, we don't break out specific utilization levels but I would say that utilization was up in the third quarter compared to the second quarter.

Most of the increase, as you might expect, was on the analog side.

Given that with our foundry strategy we've generally been able to maintain the digital side, the advance CMOS side of our capacity pretty well fully utilized through the course of the year.

Okay.

And with that, Uche, thank you for your questions.

Let's move to the next caller.

Our next question comes from Jim Covello from Goldman Sachs.

Please go ahead.

Great, Ron.

Thank you so much.

Quick question on the inventory for Q4.

What would your goal exiting Q4 inventory be?

Up?

Down?

Flat?

Jim, we don't forecast what inventory's going to be.

We're actually -- we stage it for what we think the following quarter's demand's going to be.

But we would just say is that we will adjust that according to what our outlook is for the following quarter and I'll just leave it at that for now.

Okay.

If I could ask a quick follow-up.

In terms of the Q4 guidance, if I just kind of plug all the numbers into the model, the way that I get down to the EPS would be much lower share count.

I guess that'd be one way to get there.

Is that, am I thinking about that the right way?

Again, Jim, we're not forecasting anything beyond just the top line revenue and the bottom line EPS.

But you do know that we just mentioned that we repurchased about $1.4 billion, or about 40 million shares in this quarter, and of course to the extent that it remains accretive and the right kind of thing to do we'll continue to buy shares in the future.

What share count that winds up to be, it's too early in time for me to be able tell you right now.

Thank you Jim.

Let's move to the next caller, please.

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

Please go ahead.

Yes, great.

Ron, I was wondering if you can also clarify the quantity or the magnitude for an apples-apples comparison for the DSL business that you had sold for Q3 and Q4?

Okay.

In Q3 we had $18 million of DSL-CPE revenue during the month July and, again, we sold it, that sale closed on July 31.

So $18 million is what was in our financials during the third quarter and, again, that will not be there during the fourth quarter as you've noted.

And then the other consideration is that was generally operating at a breakeven level in recent quarters.

So there is some revenue there but not much profit to go along with it.

Do you have a follow-up, John?

Yes, so for the full quarter you're talking about you have a $54 million run rate but in the specific comparison for September to December it's about an $18 million step down.

That is correct.

Great.

Thank you very much.

Okay, John, thank you.

Next caller, please.

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

Please go ahead.

Yes.

Two quick questions.

The first one really has got to do with the analog business.

At this point would you say the historically the HPPA as a percentage total was about one-third of the total of the analog business?

Has it now gone to half the business now?

David, I think we've described that as closer to 40% of the total analog business and total analog is now about 40% of --

For the total company.

Total SC, yes.

Okay.

Great.

Kevin, while you're answering the question, a simple one.

If the tax rate is going to be 29% for the full-year, what does it mean for Q4?

Do you have any idea what -- give us some idea about '08 on the tax rate front.

I would expect both the full-year and the fourth quarter tax rate to be about 29%, David.

And then for next year as we become more profitable, the good news is we were making more money, the bad news is we get to pay more taxes.

So I would expect that tax rate would continue to climb gradually as we become more profitable.

We don't have a specific forecast for 2008 just yet.

But the statutory tax rate is, what 35%.

So as a first approximation whatever your model would imply for incremental profit you probably can assume that incremental profit is taxing at 35% until we come out with more specific guidance.

Is that fair, Kevin?

Yes.

Okay.

Thank you, David.

Let's move to the next caller, please.

Our next question comes from John Dryden from Charter Equity Research.

Please go ahead.

Yes.

Thanks for taking my questions.

With the respect of HVAL growth below total analog but still above the growth in total semiconductor, can you define the strength as just PCs or other areas of goodness versus your expectations in July and do you expect HVAL growth to continue in December?

John, I would say it's a good point you are making that our analog growth this quarter was very broadbased.

I mean HPA led it, as you've noted, but when we look inside the high volume areas, we saw multiple product areas that also contributed growth above the corporate average.

Also as you noted, and we said at the mid quarter update, some of the computing areas or peripherals areas, were probably the strongest and where areas that had upsided from our initial expectations in the quarter, and those specifically would be storage and printers, but I would describe the strength that we saw in high volume analog as broader than computing although those were notable areas.

Did you have a follow-on, John?

Yes, a follow-up for Kevin, please.

Expense controls resulted in flat op ex dollars this year.

How much is that attributable to the digital CMOS development outsourcing and can we still expect a $200 million savings next year?

In fact in the quarter, John, we'd mentioned back during the beginning of the year that we would be taking around 50, $55 million worth of restructuring charges attributable to that and those charges would be about even throughout the year.

So those are pretty much offsetting many of the savings that we're seeing as we're actually beginning that transition right now.

We'll begin to see those savings coming through, though, over the next few quarters and we do still expect to see $200 million a year for the total restructuring.

That's both the impact of the closure of our old digital fab here in Dallas, called KFAB, and also the outsourcing of the silicon process development.

Okay, John, thank you for your questions.

And we will move on to the next caller.

Our next question comes from Chris Danely from JPMorgan.

Please go ahead.

Thanks, guys.

So it looks like there's about $100 million in shortfall in DSP.

Can you quantify how big of the $100 million was due to the Sony Ericsson share loss and do you expect that to get even, to go even lower in Q1?

Chris, when you're saying $100 million shortfall in DSP, first of all, which time period and compared to what?

Sure, you said it's usually up about 8% sequentially in Q4 and it's flat so that's about a $100 million.

Okay.

So versus called a normal seasonal pattern or an average seasonal pattern in Q4.

Chris, I would describe it -- actually, I'm not going to try to break it out across various customers.

I would say the biggest seasonal anomaly is wireless Ericsson certainly will have continued impact in Q4.

But I guess I would say that a flattish type of outlook is what we're seeing from a broader base of wireless customers as well.

And as Kevin said, I mean what we saw last year was in the month of December a pretty sharp downtick in their demand as they basically had completed their holiday builds and were pulling back on inventory for the end of the year.

We're expecting that same type of pattern and that goes broader than just Ericsson.

Did you have a follow on, Chris?

Yes, and so that leads me to a follow-on.

Sounds like some of the decreases in December should we also expect wireless to be impacted in Q1?

I'm not sure what you mean.

It's in the month of December, again, as they're managing their year-end inventory levels.

But beyond that comment, we really are, as I said before, we're not trying to give any kind of guidance or outlook toward Q1.

So thanks, Chris, for your questions and we will move on to the next caller.

Our next question comes from John Pitzer from Credit Suisse.

Please go ahead.

Yes.

Thanks for taking my questions, guys.

First question.

Are you expecting the analog business to be flat sequentially in Q4 and if you are, what's kind of normal seasonal and how should we think about flat relative to sort of share gains versus just the inventory?

I would say that we're not really forecasting detail below what we've already talked about.

If we take a look at total semiconductor it's usually up 4 to 5% in Q4 and inside that you usually got wireless up about 8%.

So you can back out from that as to how the rest of the business usually shapes up.

Beyond that I think the rest of the business, actually, the forecast that we have in place actually is a kind of a normal seasonal pattern that we've seen over multiple time periods.

And you can (inaudible) the kind of growth that we've seen overall this year.

And, John, I should explain it.

Our normal practice on guidance to really just keep our commentary the semiconductor level.

This quarter because of the anomaly we're seeing in wireless we provided some wireless specific comments just to help you understand the context of the overall guidance.

But we're not going to take the remainder of that revenue and, or the revenue guidance and break it down product line by product line.

Did you have a follow-on, John?

Yes, I do.

When you look at the calendar third quarter, the handset vendor saw some ASP mix issues, lower end phones being sold.

I'm kind of curious as to how that impacted sort of your revenue growth in Q3 in your wireless business or your expected sort of lack of growth in Q4 if at all.

That's a good observation, John.

What you heard from the handset vendors was evident in our revenue as well.

We did see a shift toward lower end products in our revenue mix.

And there's no doubt that it takes a lot more units of low end handsets to make up the same amount of revenue that a 3G handset would provide for TI.

So on a blended ASP for total handset that would tend to average us down, but at the same time we'll take, you know, if it's at a low end we have a very strong position in low end handsets, at the same time we have a strong position in 3G handsets and we'll take the revenue growth wherever it comes from.

But in this third quarter, in this third quarter, it did represent a shift toward low end.

Okay, John, thank you for your questions.

We'll move to the next caller.

Our next question comes from Ross Seymore from Deutsche Bank.

Please go ahead.

Thanks, guys.

Kind of a dovetail off that last question.

Rather than a blended ASP dictated by the mix, Ron, when you have these markets share shifts, typically people will get a little more aggressive on pricing apples to apples.

Are you seeing that in this entire wireless space?

We didn't see any abnormal pricing trends in the quarter.

What we saw in third quarter, whether you look at it on a sequential basis or versus a year ago, was pretty much a normal trend on wireless pricing.

Blended ASP, trends were not impacted by competitive pressures, they were impacted by mix between low end and high end.

Did that answer the question, Ross?

Pretty much.

And then the follow-up is just like you guys gave average seasonality as we looked into the fourth quarter, what's the average seasonality in the DSP side in the first quarter?

I have wireless.

I don't know that I have DSP but normally in our first quarter we would see wireless, and I shouldn't say normally because as Kevin pointed out, the ranges are huge here.

On an average basis I think this is an eight-year average, our wireless revenue has been down 6% sequentially in the first quarter with a range of minus 30 to plus nine.

So you figure out how much value's in that minus six number.

Okay, Ross, thank you for your question and we'll move to the next caller.

Our next question comes from Daniel Berenbaum from Caris & Company.

Please go ahead.

Hi.

Thanks for taking my call.

So CapEx has been heading down pretty rapidly.

Can you give us an idea of what maintenance CapEx is and then also, what sort of capital intensity do you need just to maintain the share growth that you've been seeing in high-performance analog?

Dan, we think that we've seen our CapEx fall below 10% of revenue now and in fact we think that sustainable over a longer period of time is probably in the mid to upper single digits as a percent of revenue.

So we could actually see CapEx go back up a little bit as a percent of sales?

Is that a possibility?

Well, it may fluctuate a bit over time dependent upon timing of equipment install or factory builds and so on.

But I think over time we would expect to see that in the mid to upper single digits.

Maybe as a follow-up maybe a step back on a more broad question.

You said you're not seeing macro weakness but obviously it seems like we bottomed out of the semi cycle a couple of quarters ago or maybe a quarter and a half ago.

We haven't seen a rapid lift up of the, off of the cyclical bottom.

So in your perspective help us understand what's changed out there if there's not any macro weakness, what's different about this cycle than what we've seen before?

You're thinking, Dan, in terms of a snap back like we often times see I'm guessing.

I think the thing that we would probably describe that's a bit different this time is one, we have been successful ourselves in maintaining much richer mixes and levels of inventory than we have in past cycles.

That's allowed us to keep our lead times much more stable and so therefore gives our customers more confidence that we will be able to meet their demands and not cause them a shortage so they don't have to restock their inventory.

In addition, we're also finding as we've come through the course of this particular cycle versus past cycles, our distributors as a customer base overall have become much leaner in the amount of inventory that they're carrying, and so consequently, they're not building up inventory in that channel as well.

So we think those two combined are what's making this cycle a little bit different than what we've seen in years past.

Okay and let's move to the next caller.

Thank you for your questions, Dan.

Next question comes from Tim Luke from Lehman Brothers.

Please go ahead.

Thanks.

I was wondering, Kevin, if you could just clarify some of the different elements in your expectation associated with gross margin as you've seen more of an analog mix, how you see that trending and whether also you could just clarify where the lead times were this quarter versus last.

Tim, what we have talked about back in the May analyst meeting of this year is that we were looking to bring the margins of the Company to about 55% gross and 30% operating over the next few years.

We're beginning to make some steady progress against that objective.

We're going to get there, really, the way we have been getting there.

You've seen in this most recent quarter, for example, in the past couple quarters some nice analog growth.

That's a very profitable business mix and it falls though very nicely.

We would expect analog to continue to be an increasing mix of our revenue in the quarters and years to come.

In addition to that within analog, the high-performance analog margins, which are already quite good, still have room to continue to improve.

And as I mentioned to Dan on a previous call, our CapEx appetite is much more modest than it has been in years past and we expect that's probably going to be, as I mentioned, in the mid to upper single digits which translates into lower depreciation as a percent of revenue over time.

So those things brought together are the sort of things that we believe will help us continue to drive to our 55 and 30 gross and operating margin goals.

Did you have a follow-on, Tim?

Maybe on the lead times but I'll say just for Kevin, why you see these fluctuations in wireless, for example, with Ericsson and this in the fourth and potentially the first quarter or in the first half?

Do you think that the gross margins in the DSP area remain broadly stable or would they fluctuate with the revenue?

Actually, the short answer, Tim, is that we have worked into our expectation these kinds of wireless fluctuations.

They may cause a quarter-to-quarter adjustment from time to time depending on how the exact mix shakes out but over time, over longer periods of time, we have worked in the facts that wireless has a pricing environment like it does that changes over time.

Analog is much more stable in its pricing environment but the nature of those products.

So when we talk about 55 and 30% type of goals for the Company, it has taken those realities into consideration.

On the lead times standpoint, I think we mentioned earlier that the lead times have remained quite stable.

There's always a few parts that may move in or move out but generally speaking, across the broad portfolio lead times are quite stable and we think that's been evidenced in our order pattern and our book-to-bill being fairly stable at around one.

Tim, I would also say when you look at DSP areas outside of wireless, catalog DSP products have gross margins that are much more similar to what you would see in, for example, high-performance analog products and what you would see in wireless.

So thank you for your questions, Tim.

We'll move on to the next caller.

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

Please go ahead.

Yes, Hi.

Kevin, I just wanted to follow-up on the implied EPS guidance again for Q4.

I know you've given sort of the revenue and the EPS number per se, but is it fair to assume that at least some level of reduction in G&A given a flat R&D and perhaps a bump up to gross margin given possibly a more favorable mix in Q4?

Sumit, I may not have said it well during the earlier question on that, but we are beginning to see, we still had the restructuring charges occur and pretty much evenly across the quarter having to do with those earlier announced actions earlier this year.

But the costs do begin to come out as we wind up the end of the year here, and so in fact that will benefit, begin to benefit us in fourth quarter and certainly begin to benefit us more fully as we move into next year.

And that's more on cost or G&A [expense]?

Or evenly on both?

I'll just leave it at the overall cost and not try to get in more detailed than that, Sumit.

Other than to remind that one of the actions that we talked about for the advanced CMOS development was an R&D action and I'll also point out in third quarter in our release we noted that some of the lower R&D number that you saw in third quarter was also associated with that advanced CMOS.

The implementation of our advanced CMOS strategy whereby we work more [claritivly] with foundries.

Okay, Sumit, did you have a follow-up question?

Yes, I did.

You know, just longer-term is where thinking about your core businesses here, the DSP segment for the first time in six years is going to have a down year following 2001.

DLP doesn't seem to be seeing a lift on any kind of a sustained basis.

So really, as you're thinking out longer-term as you're doing strategic planning within TI, what's sort of the secular growth rates you've ascribed to both these segments especially within DSP which is clearly seeing a more competitive landscape?

Sumit, in the DSP area, all the market reports that we see suggests that over the next three or four or five years the expectation is that will continue to grow in the mid teens kind of rates.

DLP has a very attractive space in front projectors and a growing position in large venue like movie theaters.

The TV space has been very competitive and we'll have to see how that unfolds over the next few years but I would remind you it's a fairly smaller piece of both DLP and an even smaller piece of TI.

What's very attractive to us is the growth opportunity in analog and especially the high-performance analog space.

We've been articulating in the last few quarters the observation that not only is that market expected to grow in, call it, 8 to 10% kind of range over the next few years, it's also a very fragmented market.

And by that what I mean is that while we had number one market share in the analog space in 2006, that was only 13% market share and we had been successfully gaining share for each of the last few shares.

We believe that that presents a tremendous opportunity both from just the underlying growth of the market itself plus our ability to continue to accelerate our own growth by acquiring more market share.

So we put it all together and we're really pretty enthused about what the future looks like for us because that turns into some really nice margin opportunities and some great cash flow opportunities.

That's a good point you made, Kevin, and I want to underscore.

I mean if you look at, and I know everybody on this call is primarily interested in dissecting our growth rates and revenue for the third quarter and the outlook, but if you look, for example, that 13% HPA growth in third quarter is nothing new.

I mean basically we have been gaining share in high-performance analog for every year since 2001 at this point.

So you saw it once again in third quarter.

Okay, Sumit.

Thank you for your questions and we'll move on to the next caller.

Our next question comes from Doug Freedman from AmTech Research.

Please go ahead.

Thanks for taking my questions.

Ron, can you talk about the percentage of your business that you're presently doing on sort of a consignment sale and if there's been any changes to any of the revenue recognition the way in which you're conducting your business?

I'll take the first part of that question and Kevin, if you'll handle the latter one.

The consignment revenue in third quarter roughly for total semiconductor about 30% of our semiconductor revenue was in the form of consignment inventory programs at major customers.

The most significant product area, even though there are quite a few that participate in any program that is high volume and where the customers have the capabilities at their factory to run that type of system, we have a breadth of.

But in our wireless revenue it's about 70% of our wireless revenue that runs on consignment.

And just one consideration for you on consignment programs is that those programs do not run on typical order backlog.

Basically orders come in about the same time revenue is recognized which is when the customers are pulling that particular component out of their consignment inventory, out of our consignment inventory.

So in essence all of that consignment revenue operates effectively on a 1:1, or 1.0 book-to-bill type of program.

Kevin, regarding the revenue recognition?

Yes, Doug, I think that Ron kind of answered the question there on the consignment side.

That is we recognize the revenue when the consignment customer actually pulls that inventory from the bottom of the warehouse which is at their location.

As relates to revenue recognition for other channels that we sell them to, no changes to report there.

We recognize revenue and distribution on a sell in basis with appropriate reserves.

We're expecting returns and so on and with all other customers we recognize at the point the title transfers.

Okay, Doug, thank you for your questions and we'll move on to the next caller.

Our next question comes from Srini Pajjuri from Merrill Lynch.

Please go ahead.

Thank you.

Kevin, on the gross margin side, how much of the benefit would you say is mixed related versus utilization?

And then as you move into the first half of next year, obviously, your utilization is probably going to come down a bit but it looks like the mix is going to improve.

So my question is, can the gross margin sustain its current levels as you head into the first half of '08?

Srini, we need to kind of keep in mind what affects our gross margin kind of levels.

Ron mentioned a little earlier in the call that we have been able to keep our digital fabs pretty fully loaded for most of the year and that's because we install less capacity internally than what our total demands are.

That's how we use the foundry to supplement our capacity.

That also happens to be the most expensive capacity and so to the extent that we keep that well utilized, it has a neutral effect on gross margins.

And so we will continue to use that moderation of our loadings to the foundries to keep our internal factories loaded and keep a neutral effect on gross margins.

As to the analog side, those tend to be in older, more fully depreciated factories.

And to the extent that loadings fluctuate in those, they have relatively little impact on gross margins because they tend to be a older and more fully depreciated.

So it's a long way to say that we actually think that if you put those together and short of some dramatic changes, unexpected changes in revenue profiles, we would see gross margins being fairly stable to what you've seen in the past year and continuing to improve over time as we get analog to be bigger piece of our mix.

Did you have a follow-up, Srini?

Yes, just quickly on Ericsson, Ron.

Sorry to beat up a dead horse here, but I was wondering if you can give us a bit more color as to what exactly do you supply?

I mean there are a lot of moving parts here, 2G, 3G, baseband, and processor.

What exactly do you supply to Ericsson?

And also as we look out to the next few quarters, how long do you think the share losses will continue for?

Okay.

It's not a dead horse topic at all.

In fact, again, let me reiterate.

Our expectation of our relationship with Ericsson and that revenue potential is very, very significant over the course of time.

There will be several quarters of impact.

That is specifically in the 3G digital baseband area.

As you're well aware, there's a group within Ericsson called Ericsson Mobile Platforms that develops 3G chip sets.

We have historically provided the digital baseband as well as the analog baseband functionality in there.

They have, as of last December, their announcement was they were bringing on an additional digital baseband supplier.

We will continue to be the analog baseband supplier.

And then as I said earlier in July, we announced that we had won that digital baseband back as well as application processors.

But that's kind of, all that discussion is specific to that 3G, EMP chip set.

Sony Ericsson also uses chip sets basically merchant solutions from TI in some of their GSM, GPRS, EDGE space as well.

So that has been an expanding business and we expect it to continue to be an expanding revenue stream for TI in those non-3G areas.

But we will see some pressure for a few several quarters here in 3G digital basebands.

Okay, Srini, thank you for your questions.

We'll move to the next caller.

Next question comes from Steve Smigie from Raymond James.

Please go ahead.

Great, Thank you.

I was wondering if you could give us a little bit of color within analog whether it was power management or single pass areas that you saw particular strength or whether it was pretty much broadbased?

It was broadbased although certainly power management was the strongest area of growth inside of high-performance analog for us.

But all of the major standard linear product areas grew for TI as well, but sort of the power management was most significant.

Do you have a follow-on, Steve?

Yes, just for the analog gross margin in general, I know one of your stated goals is to have the high volume analog grow very quickly.

Clearly, the high-performance piece helps gross margin but I was just curious how much of a, I don't know if a negative impact, but at least neutral impact high volume would have and how you think about working on the growth of those different pieces of your business to ensure that gross margin continues [to] advance.

Steve, the high-performance analog, as you point out, does have the ability to operate at quite high gross margins.

The high volume analog business tends to operate at lower gross margins but also has a lower cost to get to market.

In other words, its selling cost is quite a bit lower.

Its R&D cost are much more focused.

So the result is the operating margins that those two businesses deliver are actually quite similar.

So while high volume will be below high-performance analog, the operating margins for those two businesses will actually be quite similar over time.

And Steve, what I would suggest is think of the high volume gross margins pretty close to where we run corporate meaning roughly 50% or so in terms of gross margins.

But as Kevin said, operating margins think of both of those product lines in the 30s.

So we'll leave it with that.

Thanks, Steve, and we'll move to the next caller.

Our next question comes from Tristan Gerra from Robert Baird.

Please go ahead.

Hi, guys.

When do you see the (inaudible) or OEMs shifting demand for a single shift based application processor outside of Japan and at what point does the market for standalone processors like OMAP start shrinking potentially?

Tristan, I don't think we have a definite point of view on which way the market will transition.

I think there are certain areas, for example, eCosto, our single chip product for EDGE, is a single chip product that includes both the baseband or the modem function, and the application processor in a single chip.

But there are very sound arguments for why customers might also want to keep their application processor separate.

And even inside of TI you have different points of view as to which way the market will go.

I guess what I would say is we are positioning to take advantage of whichever way the market directs.

If it's a single chip type of capability, whether it's GSM, GPRS, EDGE, WCDMA, we have that modem capability and certain have the capability to integrate that with OMAP application processors, but if the customer base chooses to keep those discreet, then certainly we're prepared to service that opportunity as well.

But we don't simply know which way it will go and even if it does shift towards single chip, what the timing of that will look like.

Did you have a follow-on, Tristan?

Sure.

A quick one.

Regarding the Hollywood shift that perhaps was pushed out a bit, could you give us an update on your plans for that technology and when you expect to ramp for TV broadcasting in the mainstream market in cell phones?

Yes, Tristan, I think the issue there is not so much our chip, it's more when that market opportunity develops.

We have Hollywood.

We've had Hollywood and it's simply a matter of when that market opportunity takes off.

And certainly versus a few years ago it's taken longer than we and I think most of the players and analysts would have projected in that space, but again, that's not a question of when is the chip ready, it's simply a matter of when the market deploys.

And seeing how we didn't call it very well a couple years ago, we'll probably just hold off on trying to call it at this point and when it happens we'll let you know.

Okay, Tristan, thank you.

We'll move to the next caller, please.

Our next caller is David Wong from Wachovia.

Please go ahead.

Thank you very much.

Can you tell us a little bit about merchant 3G chips and what your plans are there?

What you're seeing in terms of business in the merchant space.

And this is 3G question?

Is that right, David?

That's correct, Ron, and specifically baseband.

Okay.

Well, certainly, I think as you're aware, our initial shot out of the gate was for 3G was focused primarily on servicing the custom opportunities at our large OEM customers and that was a very simple strategy of basically following the money.

That's where the early market opportunity was and that's where we engaged.

We will compliment that opportunity or the custom work we're doing with a, in fact, it's in development, a DRP based.

Let me just state that a little more clearly.

A single chip 3G product that includes both the modem, or baseband function, as well as the RF transceiver and that, again, will be a merchant solution.

If you look at where most of the revenue that we have in 3G today, which by the way, is about 40% of our handset related revenue is in 3G thus far this year.

That's really been driven by our strategy to pursue the custom opportunity.

Our view of the merchant solution rally hasn't changed, or our merchant opportunity really hasn't changed much over the last couple of quarters, and if you look at the customers that are engaging 3G merchant chip solutions, they're really the players in Korea and it's really limited to Korea.

And at least today Qualcomm has been the incumbent in that place, or in that marketplace.

So again, we will do it, but our priority certainly has been the custom side which is a bigger opportunity.

And by the way, I should also point out that strategy focusing on custom is what's driven TI to a market position where we hold over 50% share in 3G or WCDMA base band modems today.

So it was strategy and it's played out well for us.

Did you have a follow-on, David?

Yes.

Thanks, Ron.

Given the competitive shifts in the customer space, does this impact your R&D investment going forward for wireless chips or does it remain pretty much as it's always been?

David, I would say that the bigger impact on R&D going forward was the change that we announced back in January having to do with the silicon development that we're now working with our foundries on.

And we've talked about that will save us probably about $150 million on annualized basis starting next year plus another $50 million for the closure of the KFAB.

As it relates to R&D on specific projects, we'll constantly look at refocusing R&D dollars and wireless is no exception.

We do that across our portfolio.

We invest in various areas and to the extent they play out we continue to invest and if they don't, we stop and redeploy and that will be true here also.

Beyond that there's no specific plans that I could tell you about inside wireless.

Thank you, David.

Let's move to the next caller.

Our next question comes from Amit Kapur from Piper Jaffray.

Please go ahead.

Great.

Thanks a lot.

Given the importance of 3G to your handset revenue, maybe you can talk about your outlook for 3G is going into 2008?

You're saying for the industry overall?

Yes, exactly.

Just when you're talking to your customers.

Yes, I think and, again, this is not a TI specific forecast, we keep that internally, but where most of the marketing analysts are looking is that 3G or WCDMA handsets next year probably $190 million, $200 million, something like that.

And if you look at this year, it's probably more 170 to $180 million something in that range.

So it continues to grow.

Thanks.

Maybe just a quick follow-up.

Following up from your comments regarding analog share gains, what are some of the key drivers for continuing to gaining analog share and where do you think that share can go longer run?

On the analog share gain, I think what we're seeing is the advantage that we have over pretty much all of our competitors from an extremely large sales force coupled with a large field applications force in support of that sales force.

So that we not only have a lot of players, a lot of sales people on the ground but then we couple that with a very large portfolio of part numbers from an analog standpoint as well as other parts that many customers typically need when they need when they need analog parts, such as digital parts, microcontrollers, logic parts and so on.

We believe coupling that together makes TI an attractive vendor when we show up at various customers.

So that served us well the last couple of years.

We're going to continue on that.

It's broadbased into where it goes.

Some areas where we're going to be focusing more on the custom analog side will be in wireless where we, there's a lot more market there for us to go after, as well as continuing to expand our focus in the automotive section.

Amit, let me also go back and add some clarification.

What I gave you before was just what I'll call baseline WCDMA.

If you look at the HSDPA piece, that's actually going to see much more significant growth in 3G.

Our estimate there is that will be about an additional 70 million units to what I gave you before so that the total cost baseline plus DPA market will be $260 million units and that's probably the HSDPA piece of it this year is in the 10 to 15 million unit range.

So let me just provide that clarification.

Did you have a follow-on?

I guess that was your follow-on, Amit, so let's move to the next caller, please.

Next question comes from Krishna Shankar from JMP Securities.

Please go ahead.

Given that you say the analog market is quite fragmented and you are the largest player with [13%] market share, what does it take for TI to accelerate your market share gains in terms of acquisitions?

Do you feel that the analog properties out there that you may be willing to acquire are richly valued or what does it take you from accelerating your market share gain through acquisitions?

Krishna, we focused in the last few years and it served us well, really, on making sure that we've got a large sales force, large field application support and a large broad catalog internally, but we've been supplementing that catalog with acquisitions and they've served us quite well.

That focus tends to be more smaller acquisition focused on specific technology areas that we may lack internally.

Really the way we take a look at it is where does a market seem to be headed and do we think we'll be able to intersect that organically.

If we don't think we can then we'll look for an acquisition that might supplement our ability to intersect the market.

And again, our bias has been with the smaller acquisitions because quite frankly, they're a lot easier to actually successfully integrate and turn into a successful strategy.

Big acquisitions can be distracting and can be very time consuming.

And so what we've been doing works well and we'll continue to do that.

Did you have a follow-on, Krishna?

Yes, also on the dividend side given your decreased CapEx requirements, it seems that there's a lot of room here to increase your relatively modest dividend and that could, I think, improve the stability in your stock price.

What are your thoughts on increasing your dividend?

Well, since the fourth quarter of 2004 we've actually increased our dividend five times to where it is now about $0.40 per share per year.

We would agree with your observation that the lower level of Cap Ex and the increased stability of our cash flow certainly supports us being able to return more cash to our shareholders over time.

And the way we've been doing that the last few years has been through a combination of stock repurchases as well as dividend increases.

So I won't predict too much about the future but I would certainly agree with your assessment that our stability and cash flow certainly bodes well for the future.

And, Krishna, just some additional color.

I mean recall in April of this year we doubled our dividend and then in September we just announced that we were taking it up an additional 25%.

So certainly as Kevin said, the dividend has been increasing.

Let's move to the next caller.

Thank you, Krishna.

Our next question comes from Gurinder Kalra from Bear Stearns.

Please go ahead.

Thanks.

Most of my questions have been answered.

Just one question.

What are the competitive pressures and the ASP shows you're seeing with your OMAP business and does that change with the OMAP 3?

I don't know that when you're talking about competitive pressures, there certainly are other application processor players in the marketplace.

But I believe in terms of market share TI really stands head and shoulders above those other players and so I don't know that I would look at any single player.

And again, I'm not trying to minimize that those players certainly to look at the opportunity as we do and realize the aggressive growth opportunity that's there.

But I wouldn't say there's necessarily any single player that is particularly gaining traction.

Was there somebody specific that you had in mind, Gurinder, that I'm maybe not addressing?

No, I was just talking about this pressure from the other, I guess, 3G vendors as well as developing their own application processors as well as the graphic companies developing applications processors.

Yes, and again, I think there's no shortage of players that want to be engaged with this market, but again, as I described, I don't think there's anyone that we view as having a significant traction at this point.

And therefore your point on ASP is I wouldn't say there's undue pressure on OMAP ASPs, I mean it's a competitive marketplace but nothing out of the ordinary for a wireless market.

Okay, Gurinder, thanks for your question.

And operator, I believe we have time for one more caller.

Certainly, sir.

Our last question is Allan Mishan from CIBC World Markets.

Please go ahead.

Hey, guys.

Quick question on the PC related strength that you saw.

As you look into Q4, do you worry that perhaps things grew a little bit too quickly in Q3 and maybe that stuff has to take a breather?

I'm not sure if that's something comprehended in your semiconductor guidance.

Was curious to your thoughts there.

Allan, we did give a good range on our guidance and it certainly includes the possibility that the PC was stronger than it should have been in third quarter then that would still fall inside our guidance.

But the fact is we see a lot of other areas also that it's a very broad set of customers we're selling into and we see a lot of other opportunities for us to be able to achieve the revenue in our guidance.

Do you have a follow-on, Allan?

Have you had any specific comments from those customers so far regarding the PC business, perhaps having shipped a little bit too fast or as this one is it just sort of speculation that goes into your normal range?

I think that we've seen some of the same speculation in the media that you might be talking about, Allan.

I would just also point out that we have been pretty successful with several of our customers in being able to secure good market positions and that certainly serves us well, as well, independent of what's happening with the actual underlying growth rate or if the market's grown too fast last quarter.

Okay.

Thank you, Allan, And with that, we'll wrap up this call.

Let me remind you that the replay is available on our Web site.

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.