德州儀器 (TXN) 2008 Q2 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 Texas Instruments second quarter 2008 earnings 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.

Ron Slaymaker, you may begin your conference.

Good afternoon and thank you for joining our second 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 September 9.

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.

In today's call, we'll address key questions such as what is driving the continued weak demand, why revenue and earnings were in the lower half of the ranges that we recently provided at our mid-quarter update.

Also, we'll discuss why our inventory continued to increase this quarter, despite our earlier projections that it would decline.

At the top level, we believe the second quarter's results illustrate the significance of the opportunities that we're addressing in analog and embedded processing.

Revenue in both of these areas grew sequentially and was up 10% from the year-ago quarter.

At the same time, we had some disappointments.

Notably, results landed in the lower half of our range of expectations.

This was mostly the result of distributors not replenishing inventory to the level that we had expected.

You will recall at the mid-quarter update we said that we expected that our sales into distributors and the resale of TI products would both be up a little, and that distributor inventory would remain about even.

In fact, resales into the quarter a little stronger than we had expected while our sales into the channel declined as distributors reduced inventory.

The end result was that our revenue tracked below our expectations in June.

Let's look at it by product category.

Analog revenue was $1.29 billion in the quarter, up 10% from a year ago, and up 2% from the first quarter.

In both comparisons, high performance analog was the driver of growth.

Embedded processing revenue of $436 million was up 10% from a year ago, and was up 4% from the prior quarter.

Catalog DSP and microcontroller products were the primary drivers of growth in both comparisons, although communications infrastructure also contributed solid growth.

Wireless revenue of $903 million declined 12% from a year ago, and was down 2% sequentially.

Phased in products were the reason for these declines.

Other revenue of $720 million declined 14% from a year ago.

Most of these product lines were down over this period, although I should remind you the decline also included the impact of the sale of a DSL product line in July of last year.

Sequentially, other revenue grew 8%, driven by the seasonality of graphing calculator sales which more than offset weakness in risk microprocessors.

On our website you can find some additional historical revenue data by the new categories.

We've included revenue by quarter beginning with the first quarter of 2007.

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

Thanks, Ron, and good afternoon, everyone.

Gross profit was $1.75 billion in the quarter, or 52.2% of revenue.

Gross profit was down $35 million from a year ago due to lower revenue.

Gross profit was about even with the first quarter, although normally it would have been expected to be up, given the higher revenue level.

The shortfall was due to a number of factors that drove manufacturing costs higher, such as decreased absorption of fixed costs as a result of the lower factory utilization levels that resulted from our reductions in wafer starts in the quarter.

Manufacturing costs were also impacted by expenses associated with converting capacity at our DMOS 5 wafer fab from digital to analog, higher costs on commodity raw materials such as gold, and the rate of exchange impact on expenses such as labor in regions where we compensate currencies other than US dollars.

In addition, we continue to incur expenses associate with transferring equipment from our shuttered K-fab factory to increased capacity at analog wafer fabs around the world.

Although none of these items individually was particularly significant, the cumulative effect was noticeable.

Operating expenses were down 6% from a year ago, and 3% from the prior quarter.

Lower R&D expense was the biggest factor in both comparisons.

As a result, operating profit for the quarter was $833 million, up $24 million from a year ago, and up $26 million sequentially.

Other income and expense declined to $17 million due to a combination of lower interest income and lower earnings from investments.

Income from continuing operations was $588 million, or $0.44 per share.

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 $520 million in the quarter, and we ended the quarter with $1.65 billion in total cash.

We also continued our share repurchases using $433 million to buy back 14.1 million shares of TI common stock and paid dividends of $132 million in the quarter.

Inventory of $1.65 billion at the end of the quarter increased $227 million from a year ago and $73 million from the prior quarter.

Inventory days declined to 93 from 94 last quarter.

The increase in inventory was primarily due to higher manufacturing costs as I previously discussed, and the lower than expected revenue in the quarter.

Although we've reduced wafer starts throughout the quarter, work in process continued to build as previously noted wafers moved through the production lines, and as other manufacturing costs increased.

In addition, about a third of the inventory increase was built to support the upcoming back-to-school season for our education technology business.

TI orders in the quarter were $3.46 billion, about even with the year-ago quarter, and an increase of $143 million, or 4% from the prior quarter.

Turning to our outlook for the third quarter, we continue to remain cautious relative to our guidance and our internal operating plans, given the changing demand environment and the overall uncertain economic environment.

We expect that total TI revenue in the range of $3.26 billion to $3.54 billion.

Earnings per share are expected to be in the range of $0.41 to $0.47.

To summarize, we're encouraged with our progress in analog and embedded processing.

We believe these areas will become the primary drivers of TI's financial performance in the years ahead and offer significant revenue and profit growth opportunities for TI.

At the same time, the broader economic environment and its impact on near term demand have our attention.

As a result, we will continue to be cautious in our operating plans and our forecasts until we have better clarity on demand.

With that let me 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) We'll pause for just a moment to compile the Q-and-A roster.

And your first question comes from the line of John Pitzer with Credit Suisse.

Thanks for taking my questions.

Just a couple questions here.

When you look into the September quarter can you give us a sense of what kind of gross margins we should be expecting and how much of the margins in the quarter are going to be negatively impacted by sort of utilization rates coming down in order to control inventory?

John, we won't be forecasting gross margins specifically, but I'll give you some other numbers to kind of work with.

We've already given the range on revenue and earnings per share.

I should mention that we still expect our R&D to be about $2 billion for the year, and our depreciation to be about $1 billion for the year, with CapEx continuing to be about $900 million for the year.

So you can work into the math there what that may constitute on how you model our revenue expectation.

But with the continued efforts to reduce our overall inventory we continue to expect the wafer fabs to be less than ideally loaded, and so that will put some pressure on our gross margin moving forward.

Did you have follow-up, John?

Yes, just quickly, any targets for inventory exiting the September quarter?

No target specifically.

I would note that the inventory that we just left the second quarter with was higher than desired.

Roughly in the $100 million to $150 million kind of range.

We do build our inventory and expectation of what we expect our next quarter's revenues to be, and consequently with our revenue expectation cautious right now, we have more inventory than we desire to support that revenue expectation at present.

John, thank you for your question.

Let's move to the next caller.

And your next question comes from the line of Jim Covello with Goldman Sachs.

A follow-up to John's question, along similar lines.

You commented the last couple of quarters that you didn't want to cut production too aggressively for fear you could get caught with a shortage if demand snapped back.

I didn't hear that on this call.

Are we kind of beyond that point and to the point where you just have to be more aggressive in managing -- cutting utilization and managing the inventories down?

Jim what we talked about last quarter when we came out with the first quarter earnings results was that we would spend the next two or three quarters working the inventory down on a measured manner.

Frankly speaking, we had anticipated having a quarter lower than what had just closed at.

The fact of the matter is, it was higher, and it was higher really for a couple reasons.

One was the increased manufacturing costs, as I mentioned earlier, that we actually saw roll through to the P&L in the quarter, and that's continuing to roll through into our inventory.

And the other was that as Ron mentioned during the call, distribution customers chose to reduce their inventories more than we expected late in the quarter, and consequently, our revenue came in below where we thought it would be at, leaving us with more inventory than we expected.

So we will continue to work down the inventory over the next couple quarters along the lines we mentioned earlier.

Did you after follow-on, Jim?

Yes, I guess, a lot of the questions that we're asking here are focused on your internal production.

How about the external production in terms of wafer start requirements to the foundry, for the wireless business?

Well, as we mentioned during the last release, we had pulled back the loadings and the foundries at that point in time to begin to bring those inventories down, because you may recall that we had late demand reductions at the end of first quarter in the wireless space.

We've progressed on that front, and have loaded the foundries in order to support our expectation for revenue in the third quarter now.

Okay, Jim, thanks for your questions.

Let's move to the next caller.

And your next question comes from Uche Orji with UBS.

Just very quickly, if I look at your Q3 guidance how should I expect to break that out between wireless, analog, and embedded?

Is it fair to assume that wireless will be flattish to down in Q3?

Uche, we don't break our outlook down below the level that we've provided, which is TI.

I think you can probably look at the quarter we just reported and note that wireless was certainly unseasonably weak in the second quarter.

In fact, it was unseasonably weak in the first quarter as well.

But we don't specifically break our outlook down into various product lines.

Did you have a follow-on?

Yes, I do.

If I look at this current quarter can you just give me some more insight as to what happened to mix within wireless?

Specifically, how much of the sales this quarter was 3G and how much was OMAP, if possible, and any comments on ASP business units, that will be helpful.

Uche, I can, and when you're saying this quarter, I assume you're referring to the quarter we just reported, second quarter.

What color I can provide is that -- actually very similar in terms of mix as to what we even said we expected at the mid quarter.

In that 3G rebounded somewhat from the very low level that we had in first quarter, and the only point I will make on that was consider that first quarter was very weak specific to 3G, and then the more legacy products the GSM, GPRS, and probably EDGE, if you just take those in combination, were the areas that declined, both sequentially as well as year on year.

So again, mix improvement in terms of stronger 3G sales in both comparisons, but at the same time, weaker legacy products sales in both comparisons as well.

Okay, Uche, thank you for your questions.

Let's move to the next caller.

Your next question comes form Chris Danely with JPMorgan.

Kevin, you said your outlook remains cautious, but I think on the last call you said you expect utilization rates and inventory to trend down throughout the end of the year.

So can we assume that there's going to be a big slowdown in utilization rates and inventory in Q3, or should that spill into Q4 like you guys talked about last quarter?

Yes, Chris, we expect the utilization to continue to decline in a measured way, if you will, again over the next quarter or so.

Fourth quarter is a little bit too far out to call just yet.

In fact, it did decline a fair amount in second quarter as well, and it began a decline in first quarter, although it's fairly modest by the time that happened.

Again, recall that what drove our inventory increase this quarter, roughly a third of that was education technology, which is a seasonal build for the calculator sales.

About a third of that was due to cost growth that we're seeing, then roughly the remaining third was due to the fact that the distribution customers chose to reduce their inventories unexpectedly in the quarter.

Then as a follow-up, in terms of the guidance, your leading customers seemed to give fairly positive wireless trend guidance, and you guys seem a little more cautious than that.

So can you just give us any hints as to what's going on out there?

Is it pricing?

Is it share loss?

Is it you expected Motorola to come through in the second half and they're going to sleep?

Can you give us a little insight there?

Chris, I probably can in terms of the second quarter performance, maybe more so than the outlook as I previously discussed.

But, I think if you look at the quarter we just reported and the decline in wireless revenue, which we'll note certainly was below seasonal, you heard from our largest customer, Nokia, last week.

I think our shipments and our revenue, our business levels with Nokia were fully consistent with what you heard from that customer.

However, Nokia is not our only customer and I would just say possibly or most likely the other customers did not fare as well as Nokia in terms of sales for their own products.

As far as share, probably the one caveat I would say is that we've discussed the loss of the 3G program Ericsson mobile platforms.

That, as we've said before, we expect to decline until it bottoms out, oh, call it roughly the end of this year, stabilize for about a year, before growth returns there on the next generation program that we've won.

But that would probably be the one case in terms of a program where there's a share loss consideration for TI.

Outside of that one program, we believe that our share is stable at those various customers, and our results really are reflecting the varying performance levels of our customers in their marketplace.

Okay, that's probably about all I can really add in terms of color there, Chris.

Why don't we move on to the next caller, and thank you for your questions, Chris.

Your next question comes from, Cody Acree with Stifel Nicolaus.

Maybe, guys, you can talk about order trends in wireless.

You said orders picked up, maybe DISK-D versus wireless, order trends picking up, and then if you can make any comments of the makeup of those orders in the distribution channel, assuming those aren't to your OEMs -- or to wireless.

Cody, I think you're right.

There may be some distribution support of wireless but for the most part the comments we're talking about distribution are much more broadly based than any particular end segment.

I don't know that we made comments on distributor orders previously, but what I can say is distributor orders did increase in the quarter.

Our backlog with distributors increased in the quarter.

In fact, our book to bill with distributors is probably at the highest levels it's been in a year.

We saw as we described already, resales increase at distributors even more than what we're expecting back in early June.

So everything at distribution sounded good with the exception of our revenue went down as they reduced inventory.

So I don't have a lot of insight as to exactly why they chose to reduce inventory, other than the observation that, in fact, they did, and that represents the gap in what we were expecting back at -- in early June and what we actually closed out the quarter.

Did you after follow on, Cody?

Yes, I do.

I guess the question then is what's in that distribution inventory that they're cutting back?

Is it catalog analog?

Is it high-performance analog?

Where is the makeup?

Cody, best I can tell at this point is it was pretty broad-based.

So it wasn't specific to any particular product area in terms of focus or concentration.

It was pretty broad-based.

Just as a reminder, distribution represents about 30% of our revenue.

It would be predominantly products such as the catalog DSP and microcontroller products, the high-performance analog products, and the standard logic products.

Those are the type of products that we moved.

I can't tell you it's totally uniform in terms of their inventory actions across those areas, but neither was it concentrated in any single product area.

Okay, Cody, thank you for your questions.

Let's move to the next caller.

Your next question comes from Glen Yeung with Citi.

Ron, you make the point that your June month saw a slowdown.

What's your sense as to how July has been, and are you getting any indications about -- from your customers on direction?

Glen, probably the best I can say is it's very consistent with the guidance that we're giving.

And so the guidance has the range, but generally if you look at the middle of the guidance that we're issuing, it would be flattish in terms of semiconductor and what we've seen thus far in the month of July would be consistent with that type of outlook.

Nothing that we've seen in July is causing us to question whether that guidance should be moved one direction or the other.

Did you have a follow-on, Glen?

Maybe this is for you, Kevin.

To the extent that this is a downturn that lasts a long time here, is there room for you to cut costs, both on the OpEx side, particularly given that you haven't lowered that number for this year, and also, on the gross margin side, is there still room here for you to tighten up the model a little bit?

Glen, there's always room for us to continue to improve.

Let me start with the gross side.

The biggest benefits that we have still coming to us on the gross side is the increase of analog as a percentage of our total mix, especially high performance analog, which, as you know, delivers very generous gross profit margins.

So as we see that mix continue to change and become proportionally larger over time that will give us a boost.

As well as we expect to see depreciation continue to be modest, if not even going down a little bit.

The last couple of years our CapEx has been -- last year and this year our CapEx running below our depreciation, so it's only natural to assume that depreciation will continue to moderate.

In fact, if you look over the last four quarters or so, depreciation has been running, if you added the last four quarters worth of revenue, depreciation has run about 7% of that, and CapEx has run about 6% of that.

So that gives us a bit more head room also on the gross line.

On the OpEx line, as we see certain markets changing, we will clearly make the changes consistent with the timing of those market changes, and that will be speaking like large programs, or large markets that may be shifting, where we'll shift resources accordingly or invest in those areas accordingly.

So I would expect that the OpEx lines will reflect the changes that we see and a fairly close timing to any outlook that we have for the respective businesses and changes for their futures.

Okay, thank you, Glen.

We'll take the next caller, please.

And your next question comes from Srini Pajjuri with Merrill Lynch.

Thank you.

Kevin, the inventory, I am just curious as to what's in that inventory.

As I look out to the next few quarters, I'm just trying to value the risk of any potential write-downs here.

Well, Srini, the inventory on the custom side is pretty tightly managed.

In fact, our biggest custom exposure is on the wireless side, that you may recall.

We, in fact, worked quite hard during the second quarter to bring that more in line with our customer demands there.

So our view is there is very little risk to the value of the custom inventory.

The catalog inventory tends to have very long shelf life.

So the only risk there is the timing at which that inventory will sell.

It tends to not be too at risk from a price standpoint.

It tends to be just a question of when it will actually sell.

So we do not foresee inventory valuation risk at our current levels.

Did you have a follow-on, Srini?

Yes.

Kevin, for you again, just a follow-up to the previous question.

Obviously the business has been weak for the past few quarters, but looks like you're sticking to your expense and depreciation forecast.

I'm just wondering at would point would you say, okay, we're going to take another look at R&D and SG&A expenses here and maybe resize that business a bit?

Srini, we talked about in the past what we would do if the turns out that we're dealing with a softer overall business climate than I think people are hoping for.

Really what we would do is take advantage of the position that we have, both from a cash position as well as a market position.

In other words, from a cash standpoint, if we did see continuing softening going on, we'd probably take the opportunity to go ahead and try to continue to acquire used manufacturing equipment that we can get much cheaper in an environment like you're describing.

And from a overall market standpoint, we'll continue to deploy a sizable sales force to sell to as many of our competitors' customers, as well as our own customers as possible.

So we'll continue to be fairly aggressive in our approach to the market.

That being said, of course, we won't have our head in the sand we will be paying attention to costs and where it makes sense for costs to be he removed, again, consistent with changing fortunes for the businesses that we may be in we'll go ahead and make those adjustments.

Right now I don't have anything specific to predict for you.

But, Srini, let me also just remind you our OpEx in the quarter we just reported is down 6% from the year-ago quarter.

So, in fact, those changes are ahead of revenue.

Revenue was down 2% over that same period.

Okay, Srini, thanks for your questions, let's move to the next caller.

Your next question is from David Wong with Wachovia.

Just a clarification of your answer to Glen's question.

So have you seen orders weakening since the end of the June quarter, and is your current run rate at a back to bill of 1 or is it below 1?

Oh, David, I don't know that, in terms of book to bill, looking at it on a weekly basis, is meaningful.

What I can say is that orders in the month of June declined from what they had been running previously, and you might expect that, just by nature of a lot of the distributor business that did not occur was in the form of turns business that we had expected to occur.

So with that turns business turning down, or those orders not coming in place, just as the revenue turned down from our expectations, the orders turned down as well.

In response to Glen's question, I was not indicating a trend for the month of June other than saying, I'm sorry, for the month of July, other than saying what we are seeing thus far in the month of July is fully consistent with the guidance that we gave, and the guidance that we gave as the middle of that range would be flattish with what we saw in the June quarter.

But I'm not trying to provide at this point the first three weeks of July trended direction X or direction Y.

Did you have a follow-on, David?

Yes, thanks.

Further, on that sort of general idea, then, you're basically cautious on September, are there any segments that seem to be weaker than others, or is your caution broad brush across the board?

David, I guess I would just say, similar to what we've said before, that we're not breaking the guidance out by individual product lines, probably the best we could say is look at the quarter's results that we just reported, what was weak, what was stronger, and make assessments that you might on the third quarter based on that.

But we won't break our caution or our enthusiasm down into individual product areas.

David, thank you for your questions.

Let's move to the next caller.

And your next question is from Tristan Gerra with Robert Baird.

you mentioned that your market share was stable outside of E&P and wireless.

Would you have the same comment for analog?

And specifically, are you seeing anything abnormal in terms of pricing or competitive action including in the E&P sales into the second half?

Again, you're saying broader analog, not analog in the handsets; is that correct, Tristan?

To be honest, at this point we've seen none of our competitors report.

So it's really difficult for us to make an assessment of did we hold share or did we gain share in analog overall.

So, I don't think we're aware of any significant moves that would indicate a share issue, and again, if you look at our year on year growth in analog, it was up 10%.

You probably have an assessment, but I don't know that we believe the analog market is tracking up 10% this year.

So I would say the longer term trends are what you've seen in the past in terms of share gains for Texas Instruments and analog, but again, I don't have any specific data from competitors at this point to provide much substance behind that speculation.

Did you have a follow-on, Tristan?

Just a quick one.

What's your inventory in weeks at distribution currently?

It's generally tracking between eight and nine weeks, as it has been over the last year.

What I would say is, it's moved toward the lower end of that range with the action that they took in the month of June, but generally it's been tracking eight to nine weeks, and at the low end of that range currently.

Tristan, thanks for your questions.

Let's move to the next caller, please.

And your next question is from Ross Seymore with Deutsche Bank.

Just a question, again, on the [DISD] side of things, what are your expectations for your [DISD] business heading into the third quarter, either on sell-in or whatever metrics you can provide?

Ross, we don't have that level of detail to provide on the outlook.

What I would say is, given they're running on the lean side of their historical trends and inventory if their resales pick up, likely they will need to move inventory in the same direction.

But we're not guiding specific to our [DISD] expectations.

Do you have a follow-on?

The follow-on would be the inventory impact of all that.

Even if I back--.

Operator, it sounds like we lost Ross.

So if -- Ross, if you come back into the queue, we'll try to let you in.

Otherwise, let's move to the next call, operator.

The next question is from David Wu with Global Crown Capital.

Ron, can you help me on this thing?

Because when I look at your -- the products that were strong in the second quarter, they were all distributor related, and yet you had a revenue shortfall in a sell-in basis in the month of June.

And I was trying to reconcile why was June so bad, and yet the stuff that was good would all go through distribution.

In the quarter ended in June.

That's a -- that's an interesting observation.

All I can say, David, is that what that translates to is back in early June, clearly we had expected those various areas to do even better than they had.

And at least on a resale basis, in fact, they did, but again, we got caught up in some distributor inventory actions, even in those high-growth areas.

Did you have a follow-on, David?

Yes.

If we finish the inventory balancing act by the end of this calendar year based on what we -- the trends we have seen thus far, do you think that gross margin won't be sequentially or year to year higher as we go into '09 because both depreciation will be down and also your mix should be richer?

David, I agree with your assessment, because we are at an inventory adjusting phase, and therefore underloading the factories, presuming that in fact we do see some reasonable upward movement in revenue growth next year then clearly we will have tail winds on mix, depreciation, and utilization.

Okay, David, thanks for your questions.

Let's move to the next caller.

And your next question is from John Lau with Jefferies & Company.

Thank you, Ron.

I may have missed it, but just to recap on the flex manufacturing model, you indicated that the utilization internally has gone down, but the outsourcing was supposed to buffer that.

Is the internal loading down tick more of a mix issue, and I guess the bigger question is how much flex can you manage with the mix constraints that you have?

Thank you.

John, the loadings with the foundries are primarily on the advanced CMOS or digital wafers, and, in fact, that is where we have flexed our load-ins up and down, our internal load-ins, and those internal capacities have actually remained quite well utilized throughout this period.

It's on the analog side, the analog loadings are the ones that we've adjusted a bit more to accommodate these changes in demands.

John, just as a reminder, so where we utilize -- where we use foundries is primarily in those advanced logic areas.

Almost all of our analog production is done in-house at TI as opposed to a combination of TI and foundry partners.

Did you have a follow-on, John?

Yes, I did.

With that clarification, thank you with the digital, what is the overall utilization rate that you have internally now?

Thank you.

John, we don't publish our utilization rate.

Suffice it to say that it has been down for a couple of quarters as we have pulled back on our factory starts in order to work our inventories back to a more desirable level.

John, thanks for your questions, and operator let's move to the next caller.

And the next question is from Sumit Dhanda of Banc of America Securities.

Hi, Kevin or Ron.

I'm having a little trouble reconciling your outlook for the September quarter, which is barely up on a semiconductor-only basis.

And I guess my issue is, given that your inventories are ostensibly now at the low end of the range within the distribution channel, why guide so far below what would be your seasonal norm here both in terms of your wireless business and your core analog?

Sumit, the reason that we're guiding is really it's a cautious approach to the market, as we described earlier, given the fact that we saw very late and unexpected demand changes, late in June.

We're using that as just a point of reference to be cautious in how we approach the third quarter.

The order -- the backlog that we have, the order patterns that we've seen support the range that we've got out there.

The distribution, of course, is at the low end of the inventory.

Weeks on hand that Ron talked about.

Not sure if the distribution customers are going to continue to operate at that level, or to increase it.

We're not counting on that.

Consequently, that all comes together to the forecast range that we've delivered to you.

Okay.

And then a separate question to follow up.

On the R&D line, it came down fairly significantly sequentially, down significantly on a year over year basis, your restructuring obviously helping, can you highlight some areas which would allow you to sustain this level of R&D reduction going forward, or are the businesses that you're now currently involved in going to require a fairly sustained level of R&D investment at current levels going forward?

Yes, Sumit, the R&D is down, as you pointed out, year over year, and that's largely a reflection of the change to our advanced lithography development that we announced at the beginning of last year where now we're working in conjunction with the foundries on that.

So we're realizing the reduced expenses on a year-over-year basis there.

Quarterly, our OpEx was down, largely a function of compensation costs coming down.

We have given a guideline of $2 billion for the year.

We're actually right inside that.

So we should be just fine at this spend rate, or at about this spend rate on the balance of the year.

Again, to the extent that we continue to adjust program development costs based on what (inaudible) programs that will have an impact on those numbers going forward, but I don't anticipate at this point in time anything significant to talk about.

Oh, thank you for your questions, Sumit.

Let's move to the next caller.

Your next question is from Tim Luke with Lehman Brothers.

Thanks.

Kevin, you talked about shorter lead times, or the ability to fulfill with shorter lead times being a factor, could you just frame for us what the shorter lead times are, and if you could also just remind us how linearity has usually shaped in the calendar quarter?

That would be helpful too.

Tim, on the lead times, we have generally had reasonable lead times for most of our products.

Some are still a little bit long.

By and large they're coming in a little bit as we're positioning more inventory internally, and consequently our customers don't have to carry as much as they may have and we believe that's part of what we're seeing here.

That they have more confidence in us being able to deliver more quickly, as they're well aware that we have ample inventory to meet most of their near-term demand requirements.

What's the change there, Kevin?

It's gone from what to what?

I'm sorry, Tim, the change in--?

In lead times.

Where are they now.

Tim, I think if you look at the broad base you don't see a substantial difference in overall lead times.

The cases where we've been able to pull lead times in were probably in areas where there were more, call it outlier type of lead times.

We've been able to get more, those lead times more reduced consistent with probably the overall lead times, that, I don't know, probably -- we have so many different product lines, probably lead times overall would range anywhere from six to 12 weeks on average.

So again what we've managed to do is pull in the outliers into that range, and at the same time, we've also notably increased our delivery performance in terms of our delivery schedules and actually hitting the lead times that those customers were expecting.

For example, where, in saying that, the shorter lead time, better delivery, where would we point to as being the biggest area of difference on that?

In some of the -- this is more of an example, as opposed to a specific, -- where the math of it would occur.

But for example, in some of the analog products, we had some product previously that lead times were out, oh, even greater than 20 weeks, which clearly is not something that we want to sustain on a long-term basis, and we've been able to pull those back into 12-week range.

So that would be just an example, Tim.

Not necessarily a high volume or representing a significant part of our revenue.

The follow-up question, Tim, that you asked was with respect to linearity in third quarter.

What I would just say is, from a revenue perspective, linearity tends to be, in every quarter, the last month of the quarter tends to be strongest.

I guess if I think about -- there's different weightings.

In some cases there's more strength in the -- in that third month than there are in other quarters.

I would say it's reasonably pronounced for TI in the third quarter, meaning September is the strongest month.

But even there, Tim, think of -- we don't have quarters that shift 50% of our revenue.

When I'm talking about something being pronounced, it would probably be more in the upper 30s as opposed to a straight 33% across each month of the quarter.

So again, September would be the strongest month, but we're talking a few points off of a straight linearity.

Okay, Tim, thank you for your questions, and let's move to the next caller, operator.

And your next question is from Allan Mishan with Oppenheimer.

Yes, Allan, are you there?

Okay, operator, why don't -- Allan, if you can requeue in, since we can't hear you, operator let's move to the next caller.

The next question is from Krishna Shankar with JMP Securities.

Can you tell us again in terms of the cell phone market caution that you have do you see more weakness in the low, mid range cell phones or in the high end 3D phones?

And with respect to Nokia do you feel that you have developed your presence there in terms of the market share?

Krishna, in terms of Nokia, we continue to ship into essentially all of their handsets.

So I don't believe that Nokia there has been any noticeable impact on base band products or application processors in terms of other competitors.

And again, what I tried to characterize was that our shipments into Nokia in the second quarter were very consistent with what you heard that customer describe in terms of their business last week with their own earnings release and conference call.

If you look outside of Nokia, that's where there's been probably customers that just have not been performing as well in the marketplace.

And I think those customers have reported, or will report their own results, and I will probably just need to leave it at that.

Do you have a follow-on, Krishna?

Yes.

Listening to high-performance analog, [if this were] set up for an extended downturn, slowing in the global economy, how do you expect your high-performance analog business to respond, under soft macro conditions?

Krishna, I guess what I would just offer there is that we continue in that product line to introduce 400 to 500 new products each year.

We continue to expand our sales force on the ground around the world including our field application engineers, and between those two things, we have been discovering a lot more of customers, and are gaining a lot more share over time.

So if the macro market slows down, it's difficult to predict what that might do to our growth rates, but I believe we would still be quite confident that we would continue to take market share independent of what happens to the macro environment.

And certainly HPA as the marketplace is going to move up or down, depending upon the macro environment.

It is so well diversified, and even our own revenue in there, the largest segment inside of high performance analog is industrial.

So is it's clearly macro sensitive, but again, we would -- we measure our results on a relative basis versus our peers, despite the overall environment.

Okay, Krishna, thank you for your questions.

Operator, next caller.

And your next question is from Steve Smigie with Raymond James.

Can you hear me?

Yes.

Go ahead.

Sorry about that.

Was hoping you could comment a little bit on the high volume analog and how you are performing there relative to your hopes of getting that going and just a general comment on the traction there.

Steve I would say, if you look at high volume analog, again, I think our characterization in the current quarter was that -- or in the second quarter was that the analog results were driven predominantly by high performance analog.

I think we had, oh, let me just say some small growth in high volume analog from a year ago, which says that it's doing okay, but certainly not consistent with where we expect that it has the potential to go going forward, and I think as we've talked about, even at our analyst meeting in depth, probably the biggest single marketplace that we believe has the potential to drive that turnaround will be inside the wireless handset, where we have been seeing that revenue decline over the last few years.

I think you can expect that it is in the process of stabilizing, and then I think what we've described is that in second half '09 is when we expect that wireless handset revenue for analog, or for HVAL, to move back into growth mode again, and again, that's not based on just wild hope.

That's based upon design programs that we have in the pipeline and are well into the execution of.

So think of it again, stabilization for a while, and then second half '09 is when that specific segment will turn back into growth.

Did you have a follow-up, Steve?

Yes, sure.

Looking for some more color on the 3G, 3.5 G design wins for base band and apps processors.

Is there anything going on there that might lead to you believe that you can have some potential to capture some share in that market, or maybe not capture share.

Is there any dynamic there that you can comment on a little bit?

Steve, I think probably the best that I could lead you to on that one is, again, and I'll set the Ericsson program aside.

Outside of that I think we're going to perform consistent with our customers.

The one new program is the custom 3G program at Motorola, and that will be 2009 before it moves into production.

The program at Ericsson where, again, it's kind of hurting us now, but we said will move back into growth mode again, think of that as second half '09, late '09 before that translates into share gain.

So again, for a period of time, we'll move with the marketplace, and then once we get into 2009, some of those new programs at customers will have the opportunity to start translating to -- call it above market growth or share gains for TI in 3G.

Steve, thanks for your questions, and let's move to the next caller.

Your next question is from JoAnne Feeney with FTN Midwest Securities.

A question one more time on the gross margin front if we could.

You remarked on a few one-time costs in manufacturing that contributed to its decline, so I guess I'm wondering, with those going away, presumably next quarter, how much greater head wind might there be from utilization rates falling?

Secondly, are you seeing any increase in your cost of wafer processing with your foundry partners?

And finally, how much is the decline in risk revenues contributing to that decline in gross margin, and how much further could it fall because of that one factor?

JoAnne, I'm going to try to hit the manufacturing cost elements.

In fact, we anticipate continuing to see some manufacturing cost increases as we go into the quarter.

And really we talked about a number of different things that are driving that.

There is obviously the utilization rate that we talked about, and that will continue to be a head wind as we drive our inventories down some.

We had also described rate of exchange, cost of certain raw materials such as gold and so on, and redeployment of some of our equipment as we expand our analog capacity internally.

We expect those costs to continue.

They move through inventory, and they make their way into the P&L, so there's about anywhere from a eight to twelve-week lag from when those costs are incurred until when they actually come into the P&L.

So those will continue to be something of a head wind for us.

On the RISC microprocessor, that really is one customer that we're selling to there, and that is a fairly sizable decline.

Partly a delay to a program ramp, and also just that customer's outlook in the market which they serve as they are quite dependent upon certain customers such as financial institutions and so on for their products, and that will tend to have an impact on the kind of demand that we would expect that they would put into their products in the end.

Then JoAnne, on your question about foundry price increases, what impact that would have, I would say zero, we're not seeing price increases from our foundries.

Their prices are still too high, but we're certainly not seeing increases from them.

Did you have a follow-on question?

Quick question on the high-performance analog.

Can you tell us how much just high performance alone grew quarter to quarter?

And then specifically in power management you've made some strong efforts there.

I'm wondering if you could describe perhaps, how successful those are looking these days?

JoAnne, you're right.

Power management has been a great story for TI over the last several years.

We expect it will continue to be.

If anything, we're intensifying our focus on the power market.

In terms of specific growth numbers for HPA, again with our new breakdown of revenue we're providing specific revenue growth numbers for analog, and we'll use the trends inside of that between HPA and HVAL to explain the overall analog, but we're not providing growth rates specific to HPA or HVAL on a go forward basis.

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

Your next question from Mike McConnell with Pacific Crest Securities.

Ron, I'm just trying to understand this, so the book to bill was above 1 at [DISD], your backlog is higher, orders were up 4%.

So it was just that in that June the pulls were not commensurate with the bookings, and that's why we're getting more cautious with the guidance for Q3?

Is that it in a nutshell?

That's pretty close.

The only thing I would say is the pulls in the month of June, certainly they didn't place orders for what they didn't pull, either.

So we saw -- I don't know if we saw -- I don't know what the [DISD] specific trend was in the month of June, but overall orders trended down with the revenue -- call it the gap in revenue as associated with that.

But basically what you've described is correct.

So when you guys, at the mid quarter, the orders were higher on a percentage basis, and now they've come in?

That's correct, yes.

Okay.

And then last one from me, specific to I guess the industry versus TI, this dynamic we saw with the distributors working down inventories, was this more -- do you think an industry-wide phenomenon, or that more being driven by the fact that you've -- maybe either distributors have more confidence that your lead times are going to be lower going forward, or some dynamic with that?

And the last one would just be, any region in particular where you saw this occur?

Mike, I don't -- I don't know that we have the insight as to whether distributors pulled back across the board or whether it was more specific to TI.

I will say, I know distributors are pleased with the delivery performance that they're seeing from TI, and certainly we have enough inventory on our balance sheet to support their demand in third quarter on pretty short order, but whether they took just their inventories down more broadly than just TI I think we probably need to wait until they report their own results for us to be able to say that specifically.

Kevin, do you know whether there was any weighting by region in terms of just -- did Asia pull back more so than North America or Europe?

I don't recall that.

It was fairly broad.

Asia being our largest region, it was most noticeable, but it was broad across the regions.

The only region we didn't really see it was Japan.

Mike, thank you for that.

That did you -- I guess -- do you have a follow-up question?

That probably was your follow-up.

Thank you, Mike.

Let's move to the next caller.

The next question comes from Tore Svanberg with Thomas Weisel Partners.

Thank you.

Going back to your -- you mentioned that you saw a late June decline in sell-in orders.

Did you see that same element for sell through as well?

No, Tore, it was the opposite in terms of resale.

Let me repeat what I said in the prepared remarks.

When we gave our mid quarter guidance, I think I even said on that call that we expected both sell-in and sell-out to be up a little on a sequential basis.

And what ended up happening, the sell-out increased more than we expected, and our sell-in to distributors actually declined in the quarter.

So there was an acceleration in sell-out, and a deceleration in sell-in.

Did you have a follow-on, Tore?

You talked about the eight to nine weeks of inventory at [DISD], and we're probably at the lower end of that now.

How does that compare historically, let's say over the last six to eight years?

Tore, I think over the last -- if you look at it over that period, we probably -- last I looked at it, the longer term historical inventory level for TI distribution had been closer to 11 weeks, so they have been trending down over a number of years in terms of the level of inventory that they hold and, in fact, as is evident from our own balance sheet, that trend over that time period, you've seen more of that inventory move upstream to TI.

And I think in general that's a trend that we appreciate, just from the standpoint of it gives us better visibility, we don't have -- we don't have multiple buckets of inventory all through the supply chain that makes it -- makes the marketplace more volatile in general.

But there has been a trend over the last -- the time period you're referring to for our own inventory to increase and our distributor inventory levels to go down.

Thank you.

Okay, thank you, Tore.

Operator, I think we have time for one additional caller.

And your next question comes from Doug Freedman with AmTech Research.

Can we get a little bit of detail on your wireless infrastructure business?

I know TI has got a fair share in that market, and what you saw and what you expect to see in the back half of the year there.

Well, I can tell you what we saw, which was growth in both year on year as well as sequentially.

I think, again, wireless infrastructure is now being described as part of our embedded processing revenue category, or product category, and was a nice contributor to that growth in both comparisons.

I think if you look at what we've said is certainly the bigger piece of that pie, as well as the bigger part of the growth driver, was the catalog product, both catalog, DSP, and microcontrollers, but we saw very nice growth out of COMS infrastructure as well.

As you're well aware, we have a very good position there, both -- well, most noticeably with our digital signal processors, and probably most noticeably there or most pronounced in the advanced infrastructure, such as 3G.

So as 3G deploys, as TDS CDMA deploys, as any of those advanced technology deploys -- technologies deploy in the marketplace, TI will benefit with those deployments.

Did you have a follow-on, Doug?

If I could move over to Kevin for a question, Kevin, looking at the dividend, in the past the Company has been pretty quick to increase the dividend.

We're still at a low percentage of total earnings.

Was wondering what the Company's thought is about increasing the dividend, and improving the yield here?

Doug, you're talking about the dividend.

We've increased it five times in the past few years to the point now where it's almost five times what it was when we started the dividend increase back in late '04.

The Board, of course, has final say as to whether or not there's a change in our Company's dividend.

As we've talked about in the past, we do look for ways to return cash to our shareholders when we believe we have more cash than is necessary to run or invest in our business, and we do that primarily through stock repurchases and also through dividends.

So both of those continually get reassessed and reviewed with the Board on a periodic basis, and I expect we'll continue to review that.

I can't predict any conclusions what those reviews would be at this point in time.

Doug, thank you for your questions.

And with that we will wrap up.

Thank you for joining us.

A replay of this call is available on our website.

Good evening.

And this concludes today's Texas Instruments second quarter 2008 earnings call.

You may now disconnect.