德州儀器 (TXN) 2008 Q1 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the first quarter 2008 earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Slaymaker, you may begin your conference.

Good afternoon, and thank you for joining our first quarter 2008 earnings conference call.

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

For any of you who missed the release you can find it on our website at TI.com/IR.

This call is being broadcast live over the web and can be accessed through TI's website.

A replay will be available through the web.

This call will include forward-looking statements that involve risk factors that could cause TI's results to differ materially from management's current expectations.

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

Our mid-quarter update to our outlook is scheduled this quarter for June 9.

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

All of our financial results will be described for continuing operations, including historical comparisons, unless otherwise indicated.

In today's call we'll try to address the key questions that are on your minds.

I suspect at the top of the list is whether an uncertain and slowing economy is beginning to affect demand for semiconductors.

We'll provide our perspective and we'll also break down demand into specific markets that we address and product lines that we sell.

Next, many of you have undoubtedly noted an increase in our inventory in the first quarter.

We'll discuss the causes for this build and our plans to reduce inventory in upcoming quarters.

Finally, we'll address questions about the impact that slowing demand might have on TI's profitability and margins.

At the top level we believe the first quarter's results again demonstrate the progress that we're making in analog and the benefit that a stronger mix of analog products provides to TI's profitability.

Notably, TI revenue was up 3% from the year-ago quarter while operating profit was up 19%.

At the same time, unseasonably lower sales into the cell phone market, especially for high-end cell phones, weighed on our revenue in the quarter.

As a result, semiconductor revenue was down 8% sequentially.

So let's break it down.

As a reminder, the sale of our DSL CPE product line in July of last year caused a decline in revenue of about $55 million compared with the first quarter of 2007, or a negative impact of almost 2 percentage points of growth.

Since most of these products were mix signal technologies, they mostly affected our application-specific analog revenue over this period, although there was also some DSP impact.

Analog revenue of $1.32 billion in the quarter increased 6% from a year ago.

The increase was driven by another solid quarter of growth in high-performance analog, which was up 20%.

High-performance analog, or HPA revenue, grew strongly in all of the major product categories.

Amplifiers, power management, data converters and interface.

Outside of high-performance analog, the remaining analog revenue, which is comprised mainly of application-specific analog products, declined 4% from a year ago.

The decline was due to the sale of the DSL product line as well as lower revenue from cell phone applications.

These more than offset gains in other areas including hard disk drives, automotive, as well as battery management products used in a wide range of portable applications.

Sequentially, our analog revenue was down 4%.

HPA was about even with the fourth quarter, consistent with the seasonal average over the past five years.

Beyond HPA, the remaining analog revenue declined 7% sequentially mostly due to lower sales of application-specific products into hard disk drive and cell phone applications.

Both of these areas are typically down in the first quarter, although this decline was more than usual.

Even with the below-seasonal first quarter, our hard disk drive revenue was up over 20% compared with a year ago.

As we've said before, we believe analog will be our most important growth driver in the years ahead.

To achieve this we need to sustain our outperformance in HPA that we've achieved over the past five years.

Just as important, we also have actions underway that, if successfully executed, should accelerate our revenue growth in application-specific analog.

The potential for market share gains, combined with the higher margins and lower capital investments that characterize a well-run analog business, support our belief that we're pursuing what is likely the best opportunity in the entire semiconductor industry.

DSP revenue of $1.12 billion declined 3% from a year ago, and 18% from the fourth quarter.

The declines were due to lower sales into cell phone applications.

Outside of handsets, our focus in DSP is to address opportunities across a broad range of customers, where those customers layer their innovations on top of our DSP platform in the form of software that they have developed.

The amount of innovation ongoing with DSPs is tremendous, although these results often are masked by changes in the much larger handset DSP revenue.

For example, in the first quarter, nonhandset DSP revenue was up almost 10% from a year ago, even with the negative impact that the DSL product line sale had on this comparison.

In sight of this revenue, wireless infrastructure, DSP revenue, grew about 16% from a year ago.

An example of an opportunity that is small in size today but we believe big in potential is security and surveillance, where our DSP revenue was up 63% from a year ago.

Total wireless revenue of $1.09 billion in the quarter was down 4% from a year ago and was down 18% from the fourth quarter, well below the average sequential decline of about 5%.

You will recall that in March we lowered our first quarter guidance because some of our customers had become more cautious about demand for high-end or 3G, cell phones.

Most of the sequential weakness was associated with lower than expected customer build plans, where our position is solid.

A small part of the weakness was due to the supplier transition underway at Ericsson mobile platform that we have discussed before with you, and that proceeded according to our expectations in the quarter.

As our customers became more cautious our wireless revenue was impacted, especially since our semiconductor content is much higher in a 3G handset than in an entry-level handset.

The 4% decline in wireless revenue from a year ago also reflects a similar mix story.

Although we had double-digit growth in unit shipments of digital base bands from a year ago, our total wireless revenue declined as low-end units represented a higher proportion of the shipments.

Pricing over this period trended normally.

The take-away is that total unit trends are not particularly relevant today as a predictor of results in the wireless market given the wide range of handset technologies and our varying content within those different technologies.

The remainder of our semiconductor revenue grew 6% from a year ago and 2% from the prior quarter.

In both comparisons microcontrollers were the biggest factor in increase.

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

Thanks, Ron, and good afternoon, everyone.

Gross profit was $1.76 billion in the quarter, or 53.7% of revenue.

This was up $119 million from a year ago as we continued to benefit from higher sales of more profitable analog products and to a lesser extent from higher microcontroller sales.

Gross profit declined $170 million sequentially, primarily due to the lower revenue number.

Operating expenses were slightly lower from the year-ago quarter and up $19 million sequentially as we invested in field sales and customer support, he is special in emerging regions of the world.

As a result, operating profit for the quarter of $807 million increased $127 million, or 19% from a year ago.

Operating profit declined $189 million sequentially.

Operating margin was 24.7% of revenue in the quarter, up 340 basis points from the year ago quarter and down 330 basis points from the prior quarter.

Income from continuing operations was $662 million, or $0.49 per share.

Earnings per share included a $0.06 benefit associated with discrete tax items in the quarter.

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 $641 million in the quarter, and we ended the quarter with $1.88 billion in total cash.

In the quarter we reduced our holdings of auction-rate securities which are based on pools of student loans that are guaranteed by the U.S.

Department of Education, by $473 million.

As of the end of the quarter we reclassified the remaining auction-rate securities which have a fair value of $551 million from short term investments to long term investments due to reduced liquidity for these securities.

In this process we recognized a $20 million temporary impairment in the value of these securities on the balance sheet that is included under stockholders equity.

No write-down has been taken through the income statement as we view the impairment as temporary with the underlying credit quality of these securities remaining sound.

In the quarter we also continued our share repurchases, buying back 28.6 million shares of TI common stock.

Inventory of $1.58 billion at the end of the quarter increased $169 million from a year ago, and $160 million from the prior quarter.

Inventory days increased to 94.

About one-third of the increase in inventory was the result of the unexpected build plan changes that we received from our wireless customers in the quarter.

As we explained at our mid-quarter update that product was already being manufactured when we received the changes so we carried more inventory of this product than we had initially expected at the end of the quarter.

Another third of the increase is tied to our changing perspective for demand in the second quarter.

When we started manufacturing that product we had higher expectations for second quarter demand than our more conservative view today.

As a result, we need less inventory to support this expected demand.

We began to lower production levels in early March to reduce our inventory at a measured pace over the next few quarters.

Although we could make the adjustments more rapidly we believe it is appropriate in this uncertain environment to move more deliberately to maintain our flexibility to support potential upsides in customer demand should they arise.

The final third of the increased inventory was the result of a planned build, especially in high-performance analog.

It was our objective to move this inventory level up to enable us to better service our customers and we plan to maintain it at this higher level.

TI orders in the quarter were $3.32 billion, an increase of $111 million from a year ago and a decrease of 164 million sequentially.

Turning to our outlook for the second quarter, in this economic environment we have approaching the quarter cautiously relative to our guidance and our internal operating plans.

This approach is driving our factory loadings and has been used to set our operating expense levels.

We chose this approach because it allows us to run prudent operating plans but still have the ability to react quickly to any strength in customer demand.

As a result, we expect total TI revenue in the rang of $3.24 billion to $3.50 billion.

Semiconductor revenue should be in the range of 3.08 billion to 3.32 billion.

This range represents a sequential decline of 3% to a growth of 4% compared with a seasonal average of about 4% growth for our semiconductor segment in the second quarter.

Education technology revenue should be in the range of 160 million to $180 million with revenue slated to more than double as retailers begin stocking for the back-to-school season.

Earnings per share are expected to be in the range of $0.42 to $0.48 in the second quarter.

To summarize, we are encouraged with our continued progress in analog.

This product line promises the opportunity for sustained market share expansion and revenue growth with higher levels of profitability and lower levels of capital investment than most of our other semiconductor product lines.

At the same time, we are becoming more conservative about the economic environment and near term demand.

We believe the flexibility that we have built into our manufacturing operations will allow us to adapt much more readily to changes in demand which was historically the case.

Without big swings in our profitability.

We also believe a weaker environment may present opportunities for us to bolster our strategic position in the analog market that simply are not available to us when demand is strong.

These can range from improved availability of analog engineering resources to purchasing used manufacturing equipment at attractive prices, to additional opportunities for targeted acquisitions.

Our financial goals remain unchanged and are as follows.

Grow revenue faster than our markets.

Grow earnings per share faster than revenue and continue our efficient usage of capital.

In addition, we believe that with our improving portfolio of analog and DSP products TI is capable of achieving gross margin of 55% and operating margin of 30%.

With that, let turn it back to Ron.

Thanks, Kevin.

Operator, you can now open the lines up for 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 John Pitzer from Credit Suisse.

Thanks for taking my question.

Just briefly on the calculator guidance going forward how much macro economic head wind have you factored into that?

What's normal seasonal going into the June quarter?

And how might have you discounted that?

Then I have a follow-up, thank you.

John, the normal seasonality is actually to approximately double revenues quarter over quarter, and the indications that we've gotten from our customers in that product line has been to expect the kind of guidance that we just gave you.

So we don't really have much in the way of macro events factored into that guidance.

John, I would just say very quickly, that tends not to be a discretionary consumer purchase though, generally if a middle school or a high school student is taking a particular math course they're required to have a particular TI calculator as part of that curriculum.

So again, consider it in that vein.

Then, guys, as my follow-up question, just as you look at gross margins for the June quarter and the different mixes of the businesses that make up the June quarter revenue guidance what's the expectation on the gross margin line?

Could we actually see modest improvement as you move more towards HPA or given the overall volumes is that going to be difficult to achieve?

John, we don't get into actually characterizing gross margins or guidance.

We just stick with revenue and earnings per share.

I would just remind, I think the point that you were probably driving at is that analog does continue and has been continuing to be an increasing portion of our mix.

In fact, if you look at TI over the last five or six years you can see our gross margins have consistently increased during that period as we have had a improved product portfolio and improved overall execution from a manufacturing strategy, as well as our foundry strategy.

And that's really the more important directional indicators that we think are happening.

But within the actual quarter itself we won't be providing any more details than what we already have.

Thank you, John, for your questions.

Let's move to the next caller, please.

Our next question comes from Glen Yeung with Citi.

Kevin, it's -- a question for you on your comments about OpEx as it pertains to revenue.

I think you made the point that your OpEx -- you were trying to adjust that based on your expectation for lower revenues.

You reiterated your R&D numbers.

So should we therefore expect to see your SG&A number for Q2 actually come down?

John, I think what we're trying to do is make sure that the overall spending does not get ahead of the change in revenue and from the overall guidance standpoint I believe our R&D for the year is guided at $2 billion.

We expect that to be achievable within the year.

Beyond that I won't get into more details as to the mix between R&D and SG&A but we have put together plans that actually try to keep the OpEx consistent with what we see as a different revenue environment that we thought three months ago.

Glen, one other thing I would just point out is with that $2 billion guidance for the year, if you look at our first quarter run rate anyway for R&D we were at 5.14.

And so with the range that you know, with the range that we have given for second quarter I think certainly one of the things we're trying to tell you is we don't expect R&D to be trending up.

If anything, maybe slimming down a little as we move through the year.

Did you have a follow-up, Glen?

I did.

It's on your inventories.

Can you give us a sense as to what in your inventory are chips that are fabbed internally by TI versus externally?

Yes, Glen, the -- about a third of that inventory growth I mentioned was attributable to the change in demand that we experienced in March in the wireless business.

You can pretty much assume that all of those wafers -- almost all of those wafers are sourced from foundries.

Most of the balance are sourced internally with about half of that balance, of course, being the planned build we were doing, principally for high-performance analog, and then the other half having to do with the fact that our outlook for 2Q is less than we thought at the time we started building that inventory.

Glen, maybe just another consideration, is that with the wireless inventory, a lot of that would be probably considered custom product.

You can assume, being custom product, we don't want to be carrying a lot of excess inventory so you will see us work to adjust that pretty quickly.

Much of the internally manufactured product tends to be more standard product, where the shelf life is long and the risk of obsolescence is low, and therefore we'll be moving more deliberately on reductions of that TI sourced inventory.

Okay, Glen, thank you for your call.

Let's move to the next caller, please.

Our next question comes from Cody Acree with Stifel Nicolaus.

Kevin, in your second point, your second element of reduction for visibility you said the change in demand since maybe last time we talked on the mid-quarter update.

Can you maybe give a little more update as to what visibly has changed?

Because then you were talking very specifically about this one wireless customer, maybe by applications or just what is it that's kind of led to this outside of macro cautions?

Cody, I'd say it's probably a bit more on the macro side of things in the context that we're seeing our customers be quite conservative in how they're choosing to manage their inventories and keeping their inventory levels quite well managed.

They're also not giving us a great deal of visibility.

So overall when we assess what the environment looks like we're approaching in a conservative fashion.

So there's no one area that we would point to.

It's more broadly speaking.

I would just remind you that coming out of first quarter, the high-end handsets and the wireless space did come in below what was previously expected, so obviously any movement forward from there is from a lower base than what would have previously been expected.

Do you have a follow-on, Cody?

I do.

It may be just in that same vein, then the change in orders quarter to quarter, can you quantify or give some qualification as to how much of that had to do with what we've just seen come out of the wireless space versus maybe what you've seen change in order linearity here just over the last few weeks?

Cody, I would say there's not -- there hasn't been a big change in order linearity.

So don't view this as deterioration in the last few weeks.

In fact, if you look at -- I think for both revenue and orders, basically February was the low point in the quarter, and then March actually was was the strongest month in the quarter.

I think if you go back to the mid-quarter, we were just describing at that point what we expected in the first quarter, and now is when we're rolling that out into the second quarter.

I think it's safe to assume that, even if you just line to what various customers have described in recent weeks, a lot of the same pressures that we saw in first quarter would generally be expected to carry over into second quarter as well.

Cody, thank you for your questions.

Let's move to the next caller, please.

Our next question comes from Chris Danely with JPMorgan.

Sorry to harp on the inventory so much but it sounds like you're going to take utilization rates down somewhat in Q2 and you're leaving the door open for the second half of the year?

Can we infer that if business doesn't get that much better then you guys will take them down again in Q3?

Can you give us a sense of how much you're going to take down inventory in terms of dollars?

Chris, we're going to use the next couple of quarters to adjust the inventory levels that we're carrying.

It's really just a function of learning from the lessons of the past.

That is taking inventory down too hard and then under calling actual demand has tended to hurt our customers in the past when we've done that so we're taking a much more measured approach over the next couple of quarters to take down that one-third of the inventory that I was talking about that we had built in anticipation of stronger 2Q demand.

From a utilization standpoint, obviously that means we'll be loading the factories a little bit differently but more than anything the loads that we put into factories will be more a function of what our customers begin to indicate to us demand might look like in the third quarter.

So therefore, I wouldn't be being honest with you if I tried to tell you what our utilization rates work out to be.

My follow-up, just to, I guess pinpoint you a little bit, your average inventory days in '06 were sort of high 70s.

Is that what you're shooting for, or would you be a little bit higher than that or a little bit lower than that, or can you give us a dollar amount of inventory you're shooting for?

Chris, I can't give you either.

I can just note that, as you've mentioned, in 2007 we were in the high 70s, I think this time a year ago we were about 82 days.

As we see analog and especially high-performance analog being a bigger portion of our inventory carrying value, that's what we've been talking about for a few years.

It will be higher than what you might have seen in years past but clearly 94 days is not what we were targeting this quarter.

We are trying to drive that inventory down.

Chris, maybe a different way to describe it, just let me reinforce what Kevin said, of the inventory that we've built, about a third of it was a very targeted build in, areas like high performance analog where we're comfortable with that higher level.

In hindsight about two-thirds of that build we would characterize today as being higher than what we desire.

So that may -- you probably can back down into some targeted -- targeted is bad word because it will vary from quarter to quarter depending upon what our demand outlook is but at least where we would have liked to have finished the first quarter at that will give you some means to get to that.

Thanks, Chris, for your questions.

Let's move to the next caller.

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

Kevin, can you give a little color on the high-volume analog business and the non, I guess, cell phone business in a miscellaneous bucket?

It appears that the only thing in that products group that was good was microcontroller.

What's happening to the outlook in the second quarter for that bunch of products in your portfolio?

David, in the high volume business we actually saw everything come in pretty much as we expected in the first quarter.

The only additional color I'd give about how the first quarter shaped up was that while we normally see storage products, the hard disk drive products decline in the quarter we saw that decline more sharply in the first quarter than we typically see in the quarter.

That's off of a year of very strong growth in that space.

So that may not be a real indicator that we can use to judge the future with.

Looking into the second quarter, we've really just given guidance that I indicated a few moments ago that's just designed based upon customer input, pretty conservative outlook based upon an uncertain economy and that's pretty broad across all of our customers and all of our markets.

So I don't really have any more color than that to give to you on that space, David.

I see.

That includes your out -- your better performing high performance analog and microcontrollers?

Microcontrollers is separate from the high-performance analog, but, yes, I think inside each of those pieces we're going to see some areas probably up and some areas not up as much but other than that we're not going to give a whole lot of color into the specific parts of our forecast.

Just the total semiconductor forecast.

Did you have a follow-on, David?

Our next question comes from Tristan Gerra with Robert Baird.

Are you where you need in terms of your fab outsourcing mix, and was there any meaningful change in terms of the mix of outsourcing and in-sourcing in the quarter sequentially?

Well, the mix -- the outsourcing actually in hindsight was the change in demand that we had from our wireless customers, probably more than we needed.

That's that third of the inventory growth that we talked about.

As we adjust for that in second quarter there may be a lower mix on that as we bring that inventory back in line.

But broadly speaking, over a longer term period, we're very comfortable and actually quite pleased with the mix internal versus external from a foundry versus internal capacity standpoint.

Did you have a follow-on, Tristan?

Sure.

Are you seeing any change in raw material costs which could impact your gross margin over the next few quarters based on current trends?

Well, yes, in fact, we are seeing changes.

I think most people are aware, for example, that gold prices have moved up quite a bit in the past few quarters, and that's an important component in the manufacture of semiconductors.

So that's clearly something that is an increasing cost element for us.

But it's one that we're managing with the best efforts that we can.

We're probably also seeing transportation costs increase given that many of our products ship around the world, what with higher fuel costs and so on, but once again, we are working to manage those costs in an effective fashion.

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

Our next question comes from Ross Seymour with Deutsche Bank.

The range you had down 3 to up 4 in your semi business can you just walk us through some of the puts and takes that gets you from one end to the other if there's anything specific beyond just the macro conservatism?

Ross, I don't think -- again, in the spirit of not trying to break down our outlook into individual products or be above and beyond the assumptions, clearly if the macro economy does better that's probably one part of the range, if the does worse, that's another part of the range.

If you look at what have historically been swing elements for TI, certainly wireless would come into that category.

But specific assumptions we probably don't want to go into.

Did you have a follow-on, Ross?

Sure.

Completely different topic.

Kevin, on the interest income line given what's going on with rates, can you give us any color on how we should think about that as that can be a reasonable percentage of your net income?

Yes, Ross, you probably noticed that was actually down in first quarter versus prior quarters given the Fed's significant cuts in interest rates, and short of them increasing those any time soon, I would expect that that trend will continue until we begin to see a change in the Fed's posture on interest rates.

You add that to the fact that our cash balances are a bit lower than we've had in the past few quarters and those two elements will come together to drive that interest income down some.

Ross, thank you for your questions and next caller, please.

Our next question comes from David Wong with Wachovia.

Thank you.

OMAP, can you tell us what that was factored in terms of year-over-year growth?

Oh, David, in terms of year-over-year growth, well, let me start with sequential, just to make some general comments.

As you might expect, OMAP is also -- basically we sell two core functions into a 3G handset, the digital base band as well as the application processor.

In some cases we also very well may sell other, what we call connectivity product such as Bluetooth or GPS.

So all of those would have been affected by the mix that we saw when we went from fourth quarter into the first quarter, given just the comments we already made about cuts on the 3G side.

That generally is the same trend that we saw from a year ago, in that OMAP revenue is down from a year ago, and again, a lot of the unit growth that we saw from a year ago goes back to the strength in low-end units as opposed to 3G.

Did you have a follow-on, David?

Yes, thank you.

What percentage of your current analog revenues are application-specific analog, please?

The revenue mix -- and this is probably a 2000 number as opposed to a first quarter number -- is 45% high-performance analog, and that would leave 55% for the remainder, and not all but almost all of that remainder would be considered application-specific analog.

David, thank you for your questions, and next caller, please.

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

A couple of questions.

First one, Ron or Kevin, could you give us a sense of exactly what percentage of the overall DSPs is now nonhandsets?

Is it about a third?

Is that number too high, too low?

In the context of growth, per se, other than wireless infrastructure and surveillance and security, what are the growth drivers for that particular business and the growth rates we should be thinking of?

And then I have a follow-on.

Sumit, about 75% of our DSP revenue is handset.

Was that your question?

Did I get that right?

Right.

Then what was your follow-up?

Well, as part of the same question, how do we think about growth within general purpose DSPs?

I mean, you highlighted a couple of areas which have grown well for you, but not general purpose but nonhandset DSPs.

What else can we latch onto given that the wireless DSP business has been performing at less than optimal (inaudible)?

Okay, so I will -- operator, please, we'll allow him an additional follow-on since I missed the first one.

In general, I don't know how to project growth other than you probably, if you look at the market analysts generally probably call total DSP growth which includes the handset business as probably somewhere in the low teens to mid teens type of outlook.

I think if you look at again, sort of a forecast, let me just go back to the data of the current quarter.

I said 10% was the year on year growth for nonhandset DSP.

And again, that was negatively impacted probably -- I believe it was about 5 points by DSL revenue that was DSP that we had in the prior quarter, or the year-ago quarter that was impacted by the sale.

So that would say somewhere in the 10 to 15% range, if you look at it without DSP -- without DSL over that year on year period.

Okay, what was your follow-on, Sumit?

The follow-on is, one of the things that you had talked about, call it a year, year and a half ago, was asked the Street not to focus on the base band business, per se, but your increasing share of wallet it is a it relates to the wireless opportunity.

Can you update that -- us on how that's progressed and in particular in which particular segment or category those share gains are really showing up?

Because it doesn't seem that obvious to me on the surface.

Sumit, I'm not following your question it.

You're saying share of wallet meaning share of wireless handsets and your view that that is going up, is that correct?

I think one of the things you talked about was despite some share losses in basebands there were other avenues where you had gained share from a silicon content perspective, Bluetooth, or wireless LAN or what have you, or analog content with enhanced (inaudible).

I'm trying to understand, where, if at all, that's really starting to show up in your financials?

Okay.

And maybe you misunderstood me.

I wasn't necessarily trying to say we had gained share.

I was trying to underscore that there's a very significant content difference for TI in a high-end or a 3G handset versus a low-end handset.

I'll be happy to illustrate that.

But whether that translates to overall share increase or decrease when you look at share on a dollar basis of overall handsets will depend largely on is growth more pronounced at the low end of the market or at the high end of the market.

But if you consider, for example, at the low end of the market, probably a typical content for TI, which would be an integrated base band type of product probably is in $4 type of range, on average.

On the other hand, if you go to a 3G handset, a typical content for TI where we would have the digital base band and an OMAP application processor would be in the 15 to $20 range, and then depending upon our level of participation with functions like Bluetooth or GPS or Wi-Fi, our content can be well above the $20 level.

But again that will vary handset by handset.

But again, the point I was really trying to just make was our content in high-end or 3G handsets is much, much richer than at the low end.

And so in a quarter such as we just saw, where there was weakened demand on the high end side, that disproportionately affected TI's revenue versus what, say, the handset units maybe would have indicated otherwise.

Does that clarify?

Okay, and with that, Sumit, we'll thank you for your question and move on to the next caller.

Our next question comes from Amit Kapur with Piper Jaffray.

Amit, are you there?

Can you hear me?

Yes.

Please go ahead.

Just in terms of your macro caution, what's your view of channel inventory at analog distributors?

I think in general, to our understanding, distribution inventory is in pretty good shape.

I don't have it broken down by individual product line, but in general, if you look at our trends, resales grew a little bit sequentially.

Our shipments into the distributors grew a little bit, and inventory may have been up a little bit, but with those trends, obviously the change was pretty minimal.

So in general, and again, this is overall, not specific to analog, inventory levels at distributors are in the eight to nine weeks.

Generally they've been in that range probably over the course of the last year or so.

And we think the distributors are comfortable running at those levels.

So again, we don't see that as an issue right now.

Did you have a follow-on, Amit?

Sure.

Just a quick one.

In terms of the commentary that you had used, further weakness as the opportunity to buy some used equipment, would that be more a reallocation of your current CapEx budget or would we see maybe a little bit of an uptick there?

Amit, it could be either, quite frankly.

It just depends on what equipment might become available.

Right now we don't have plans to increase our CapEx budget but if an attractive opportunity presents itself we will not let that budget get in the way of pursuing a good opportunity.

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

Our next question comes from John Dryden from Charter Equity.

Thanks for taking my questions.

Question on wireless.

For customers on demand hub are price cuts annual, by long-term contract, or highly variable?

And is there a difference based on the product that you deliver or the phone tier?

Boy, John, probably yes to everything you said.

They vary with a lot of different variables.

I think time would be one variable.

Volume would be a variable.

Technology, meaning the relative maturity of that technology and that product would be a variable.

Generally the price curves are understood by TI and the customer when we engage on a new program, and the end result of that is we know the path that we need to follow in terms of cost reduction to be able to support the price changes that we've built into those programs, and we just need to invest and execute accordingly to be able to make sure that the margins on those business stay where we believe they would be.

Did you have a follow-on, John?

Yes, switching to analog FAEs, can you provide percent headcount increase for 2007?

Last quarter you gave us the 2006 increase.

I'm looking at Kevin and he's got as blank of a look as I do so I guess the answer is we don't have that data here with us, John.

So I apologize.

With that let's move to the next caller.

Thank you for your questions, John.

Our next question comes from JoAnne Feeney with FTN Midwest.

Thanks.

A couple questions.

One, I was hoping you can get a little bit more in capacity utilization.

In particular, do you have room at this point to reduce your use of foundries or are you at your contract minimum?

So if revenue shipments, and wafer starts do fall off it really is going to start to hi your gross margin more severely?

JoAnne, we have a lot of flexibility with our foundries and we are well within site of all the boundary conditions that we are in agreement with on what we can take (inaudible).

Do you have a follow-on, JoAnne?

Yes, I do.

And then, on the analog side which hasn't gotten as much attention here today, do you still see analog growing this year as a share of your total revenues?

And what are your -- what are you pointing to as the main sources of progress?

Is it the high-performance analog, and within that is it power management, and do you need to take share in order to make that kind of progress?

JoAnne, I'll go ahead and give you some answer on that.

And I think Ron may have some additional comment.

We won't necessarily predict the year but just to show you what we've done so far this year I believe if you do the math on what we reported there, about 41% of our semiconductor revenue was analog.

Last year I think we averaged somewhere around 40% or so, so it continues to increase.

And clearly with high-performance analog growing as strongly as it has, as we mentioned earlier, up 20% year-over-year, and even quarter over quarter, we would expect that to be an important contributor.

The area that we're targeting to accelerate the growth even faster is really in the high-volume analog.

We have talked in the past year or so about some adjustments we've done over there from reorganizing some of the efforts underneath that particular area, putting new management team in place and pursuing new markets with a lot of agressiveness.

So we would hope to begin to see some contributing to the growth as we move forward in time.

But over the long haul, we would expect analog to be an increasing proportion of our revenue quarter by quarter and year by year on average over time.

Okay, JoAnne, thank you for your questions.

Let's move to the next caller, please.

Our next question comes from Jim Covello with Goldman Sachs.

Thanks so much.

First question, relative to handset demand, as you think about how you want to manage the inventories down in a very sort of cautious sense, how do you determine if the issues we're seeing on the demand side are cyclical or secular?

And when I say that what I really mean is the replacement rates that we need to have in the emerging markets now to keep us on the same kind of demand trend line need to start to get close to the replacement rates that we've historically seen in the established markets.

So is there a risk that we're sort of trending down on handset demand because that replacement rate in the emerging markets isn't going to be as good?

Jim, I don't know that, I mean, what you're describing is something that would be considered on a longer term basis, but certainly what we're seeing here now is continued good demand from the emerging markets.

The issues just -- that we saw, and that we're facing in the near term probably are more at the high-end handset which is you can argue whether that's a question of are replacement rates, not in the emerging markets, but the developed markets starting to slow, or is it just that consumers maybe not spending as much on just from an economic consideration on high end handsets, or you probably can come up with other theories as well.

All we know is that first quarter we saw 3G demand well below our expectations, and our customers' expectations, but Jim I will also remind you that we also saw good solid 3G growth in fourth quarter.

So nothing is new that, in the wireless space, you'll have some quarters that -- upside our expectations, and other quarters that lag them.

Do you have a follow-on, Jim?

Yes, relative to the customer diversification and share, obviously you referenced the EMP and the impact that had on the numbers this quarter.

To the extent that your largest customer is choosing to second-source across the board when might that start to show up in your numbers so we're not surprised from a modeling perspective?

Jim, I think you'd probably best ask that customer for -- in order to get a real feed on it.

I think generally the, I think it's acknowledged by even the competitors that we face there the programs at the low end and the mid range that had been expected to be in production this year have both slipped, I believe both of them are now into 2009.

In the 3G, which is kind of where we saw the softness in first quarter, I believe the plan of record is 2010 at the earliest.

So again what we're seeing here now today has nothing to do with their moves toward supplier diversification.

It really has to do with just probably demand changes and responses to that change in demand.

Jim, thank you for those questions.

Let's move to the next caller, please.

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

Ron, you've answered a lot of questions but I think one of the biggest questions that the many investors are worried about is the weakness that you're seeing out there.

You've commented a couple things about order linearity.

I was wondering, has there been any change in terms of the recent -- any recent upticks or any characterization of the wireless side?

And in terms of the analog side, where would be the biggest area of weakness?

Just a little bit more color on what's happening up to date.

Thank you.

Are you -- is that question whether they've changed in the last hour since we provided you that guidance John, or -- no, actually, I don't know what to say, other than, and again, we didn't break our guidance down into individual product lines, but I would just say that it is what it is, and I'll not try to break it out beyond that.

Just overall, I would say what we've seen thus far in the quarters, in the current quarter in terms of orders and revenue trends, are consistent with the guidance that we've provided but let me not make any wireless-specific comments, if I can do that.

Did you have a follow-on, John?

Yes.

Touching on -- I know the wireless is a sensitive topic, but in the analog area what was the area of greatest weakness or is it pretty broad based right now?

What was the area of greatest weakness in analog you're asking?

Yes.

Okay.

Well, probably the greatest weakness is the revenue that was lost associated with the sale of our DSL business from a year-on-year basis.

Wireless also was down year on year.

Sequentially, and I think we said these in our opening remarks, the two areas would be both cell phones and storage products, which both were down, I think we commented that it's typical for them to be down the first quarter, but I would also describe both as being down more than what you would normally expect in a first quarter.

And then also, to offset the weakness comments with -- or to balance those weakness comments, let me remind you high-performance analog, again, up 20% from a year ago, even sequentially, and even as about the seasonal norm for high-performance analog.

Okay, John, thank you for your questions.

Let's move to the next caller, please.

Our next question comes from Steve Smigie with Raymond James.

Thank you.

I was hoping you could talk a little bit about market share in analog now that 2007 is concluded, where you guys think you wound up in sort of the major analog categories there.

Well, Steve, I believe we think we gained -- or we know we gained share according to the WFTS report, as you might suspect the standard category, or high-performance analog, is where it would be most pronounced.

I don't have for you the breakout by product category such as power or amplifiers or whatever.

I'm sure you will plan to be at our analyst meeting in a few weeks, and I suspect we'll have that level of granularity there.

But I don't have it with me here today.

On the -- on the application-specific side of analog, I don't know, relative to the market, what our growth -- how our growth compared.

I will say we're not satisfied with our growth in application-specific, as Kevin indicated before, that's an area where we are absolutely convinced we can do better in terms of growth rate, and where we're working hard to make that happen.

Did you have a follow-on, Steve?

Yes, along the lines of the ASSP stuff there, you've been talking for a little while about ticking actions to increase the growth there.

You talked about it a little bit more today.

Can you talk a little bit about the actions that you've been taking most recently, and do you think the lack of growth here is just the macro environment weakening, or is there just -- you haven't had the guys in the right places, and when you might expect that to start taking off?

No, I think there are some TI specific opportunities for us to accelerate that growth.

We're not just going to play victim to the market or to the economy.

A few examples.

One, hard disk drive, printer markets, we have a very strong presence and market share, but there are other areas where we believe we're significantly underpenetrated.

Some examples would be wireless, believe it or not, on the analog side we are underpenetrated.

Automotive and consumer.

So one of the actions that we have we have taken, just organizationally, instead of having a large application specific analog functional team, as in one big R&D center, we've basically broken it down into smaller teams, more focused accountability, and focus specific to those markets that I mentioned, there's a lot of activity underway also just to improve R&D efficiency from the perspective of reusing intellectual property for those application-specific projects, either that might have been originally developed in high-performance analog or elsewhere inside TI.

And I don't want to try to be overly anxious from the perspective that we know that those kinds of changes are going to take time to translate into revenue and revenue growth, but nonetheless, we believe the opportunity is really significant for TI, and we think we're doing the right things there.

So stay tuned, Steve.

And thank you for your question, Steve.

Let's move to the next caller, please.

Our next question comes from Tim Luke with Lehman Brothers.

Thanks so much.

In your guidance you're inferring a flat semi quarter in a quarter that's usually up, and the wireless industry is guided for the second quarter by your biggest customer to be up mid single digits in a quarter where they're expecting to take market share.

So one would have inferred that you would have had a sequential improvement in the wireless business, which you're essentially saying is not happening because you've got to work through this inventory.

I guess the question is, is it fair to suggest that the wireless business and the analog business would be expected to be below seasonal, or where the weakness is somewhat evenly balanced, or is it essentially more over wireless this year?

I guess I'll have to just reiterate that we don't break our guidance down by individual product area, Tim.

I think you're right that the assumptions you -- that you listed off, generally I would agree with.

The middle of our wireless -- or of our semiconductor range would indicate it would be about even from the fourth quarter.

The only thing, when you talk about a customer reflecting an outlook of up mid single digit, sequential growth in second quarter, I believe you're talking about units again.

And for all the reasons we just spent a lot of time talking about, you have to be really careful trying to translate units to revenue, because mix will matter an awful lot in terms of how that affects TI revenue.

So again, I think what we've tried to reflect is that we're taking a more conservative view on the second quarter and demand, and I'll probably just leave it at.

Did you have a follow-on, Tim?

Thanks, Ron.

Just as a clarification, is there any impact of the more subdued customers commentary on the lead times that they're expecting from you?

And as part of that also, you had an unusually strong other semiconductor segment, first quarter, usually down, it was up.

Can you just give a little bit more color on why it was up, and is there anything there we should expect going forward, to continue?

I'm sorry, the part you just said about -- I'm not sure.

What were you saying was up in the first quarter?

The revenue bucket that is other semis.

Oh, okay.

So, as you might guess with the inventory that we inadvertently built in first quarter associated with wireless, lead times for those specific products are short, but I don't know that that affected our revenue expectation in terms of demand.

But certainly if we get surprise to the upside, whether it's wireless or whether it's any area within semiconductor, given the inventory build that we just accomplished in the first quarter, you can assume we're probably going to be pretty well positioned to support those upsides.

On the other product category that you noted where we saw a lot of growth, you're right, it was mainly driven as we noted, by microcontrollers.

We've got really a pretty sweet little business inside of there.

A product line called the MSP 430.

It is an ultra low power microcontroller that is -- it's a catalog product, and it's just finding its way into lots and lots of new applications.

We're optimistic, this isn't a comment about second quarter, but we're just optimistic in general about where that product line can go.

You probably haven't heard us talk a lot about it in the past, but it has a great opportunity ahead of it, and we're going to ride it for all its worth.

So stay tuned on that one as well.

Thank you, Tim, for your questions, and let's -- operator, we probably have time for one additional caller, please.

Our final question comes from Mark Lipacis from Morgan Stanley.

Hello, Mark.

Mark Lipacis are you there?

Can you hear me?

We can hear you now.

Go ahead.

Thanks for taking my question.

If you look at the press release, the first paragraph talks about how great the analog business was, and the second paragraph talks about wireless not being so good.

And I'm trying to understand how strategic is the handset base band DSP business?

Could you review the framework that you've been using over the last several years to make decisions about divesting businesses like the Sensors and Controls business and whether or not that same framework could be applied to other large businesses?

And whether or not the handset base band DSP is considered to be strategic or exempt from that kind of a framework?

Thanks.

Mark, I'll go ahead and comment on that just by speaking, we really don't discuss any topics about acquisitions or divestitures of a specific nature, but you're talking about in the past, in portfolio a tuning effect that we've done.

There's a couple of things that have impacted and will continue to impact our margins.

Analog becoming a bigger portion of our total mix of revenue.

The fact that our CapEx has been down and continues to be down, so we've got moderating appreciation.

So therefore, as revenue grows, fixed cost gets spread over more products.

And then of course, one of the things we look at is portfolio tuning from time to time, such as you referred to.

From a tuning standpoint, as you mentioned, we sold the Sensors and Controls business about two years ago now.

We've also, within semiconductor, divested our DSL business last year, our LCD business a couple of years ago.

We keep looking at opportunities like that, but it's really a question of not only how they've been doing in the past but our perspective on their prospects in the future.

You've been hearing us talk a lot about analog and DSP being important to our future, and I think that can kind of take you to how important we see DSP in that total portfolio to the business that we see today and going for the future.

Mark, let me make just a couple of comments, I think Kevin certainly addressed the acquisition consideration, but just the importance of base band.

It is important.

It's a big part of our revenue today, and we have customers that place significant value on what we can bring to them in terms of developing specifically custom products and engagements, whether it be Nokia, whether it be Motorola that we've discussed, where we have a major 3G custom program, or even in the case of Ericsson mobile platforms where we have new design wins in place that in those cases will ramp revenue for TI in 2009.

That being said, as you see customers probably shift more over time toward standard products in the form of their modem function or the digital base band, actually the best opportunity that we see, and, in fact our strategy more and more in wireless will be led by is the OMAP application processor.

And I don't think I need to convince you, the growth -- the fastest growth category inside of cell phones is smartphones.

And more and more you hear customers talk about the importance of applications and services and how more of their own R&D investment is getting focused on those functions as opposed to connectivity to the network, and that's all about the application processor, in terms of what will lie underneath, or what will provide that capability to the customers.

And, I think there's no other way to describe TI's position in that market, other than we have an elite position, with our OMAP application process, and that's where we are here now today.

We're on the third generation of that technology.

We have engagements, I believe it's with all five of the top five handset OEMs.

They're even customers we have in that space that might be using, for whatever reason, a modem or a base band from another supplier, but they realize that where they're truly trying to differentiate their handset with the multimedia and application functionality, they're engaged with TI on OMAP.

So we think that's a great opportunity and more and more you are going to see that move front and center over time as that opportunity just gets bigger and bigger over time.

Mark, did you have a follow-on question as well?

No, that was it.

Thank you very much.

That's helpful.

Before we close up, let me remind you that on May 8, and 9, we are holding our financial analyst meeting.

I realize that many of you are already registered, and I thank you for that.

If you have not yet registered and plan to attend, please do that as soon as possible.

And thank you for joining us tonight.

A replay of this call is available on our website.

Good evening.

This concludes today's conference call.

You may now disconnect.