德州儀器 (TXN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thanks very much for holding and welcome to the Texas Instruments third quarter 2009 earnings call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ron Slaymaker.

Ron, please go ahead.

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

As usual, Kevin March, TI's CFO, 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 web site.

A replay will be available through the web.

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

We encourage you 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 December 8th.

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

In today's call, we will address the drivers behind our continued revenue growth and margin expansion and discuss what we see ahead on those fronts.

We will also discuss the investments that we are making that will allow us to accelerate our strategy in analog and embedded processing.

I'll start by noting that revenue and earnings for the third quarter exceeded the high end of our range of expectations for the quarter.

Even after we raised those expectations at the mid-quarter update.

The sharp declines we saw late last year and in the first quarter of this year have almost been matched by sharp increases in the third and fourth -- or the second and the third quarters.

Initially this redown was driven by normalization of demand, as our customers slowed their inventory reduction and our shipments began to increase to their level of production.

This quarter that normalization process has been complemented by production increases at our customers.

Overall, TI revenue grew 17% sequentially and was down 15% from a year ago.

We were especially pleased with the growth in our core areas of analog and embedded processing.

At 20% sequentially growth, analog was biggest driver of TI's growth once again this quarter with all three of its major business contributing strongly, high volume analog and logic, or HVAL, power, and high performance analog.

HVAL was again the biggest contributor within analog to this sequential growth with broad based increases.

Analog revenue was down 8% from a year ago, a performance we believe will compare very favorably to most of our analog competitors.

Notably, revenue from power management products has now moved above the year ago level.

Driving the growth in power management are share gains and overall strong demand in battery management, gauges, and chargers for notebooks and hand-held devices.

TI's investments over the past decade in power are paying off as we continue to gain share in what will likely prove to be one of the best secular market stories of the upcoming decade as portability and energy efficiency continue to drive innovation and growth.

Embedded processing grew 12% sequentially, due mostly to strength in catalog products.

Growth here came from a number of product areas, including microcontrollers for consumer applications, as well as industrial applications, such as air-conditioning systems in Asia.

On the DSP side, we saw growth in video security systems and high performance audio video receivers.

Revenue from embedded processing products for automotive applications also grew, including strength in high end automotive entertainment and information systems.

Embedded processing revenue declined 8% from a year ago.

Wireless revenue increased 12% sequentially and declined 26% from a year ago.

Base span revenue of $450 million in the quarter, declined to 16% of total TI revenue.

Base span revenue increased 10% sequentially and declined 33% from a year ago.

Excluding base span, our wireless segment ,which is focused on smart phones, grew 18% sequentially, and declined 7% from a year ago.

Conn activity products paced this growth.

In our other segment, sequential growth of 20% was driven mostly by a combination of seasonal growth in calculators and strength in DLP prompt projector products.

From a geographical perspective, growth continued to be mostly driven by the Asia Pacific and Japan regions.

Although growth in the US and European regions was slower, we are encouraged with the turn around in those regions.

Each grew revenue about 10% sequentially, following a four quarter slide in Europe and a three quarter slide in the US.

We are careful not to read too much in to the geographical data because it mostly represents where customers are manufacturing products, not in consumption.

Now let me make a few comments with respect to our distribution channels.

Resales, or sales out of our distribution channel, grew in excess of 20% sequentially and distributors inventory of TI products declined again.

Resales grew in every region in excess of 10%.

Now Kevin will review profitability and our outlook.

Thanks Ron.

Good afternoon everyone.

Higher revenue as well as higher factory utilization contributed to our gross profit increasing by 32% sequentially.

Gross margin increased 570 basis points sequentially to 51.4% of revenue.

Compared to the year ago quarter, gross margin increased 290 basis points on $507 million lower revenue and slightly higher utilization.

We are pleased with the gross margin performance as it reflects an improving product portfolio of analog and embedded processing along with sufficient manufacturing operations.

Operating expenses were up slightly from the second quarter, but declined $189 million in the year ago level level.

Operating expenses were below 25% of revenue if the quarter.

Although we will remained disciplined on these expenses in this uncertain environment, we generally have left them at a level we believe is appropriate for our business model.

Restructuring charges in the third quarter were $10 million, down $75 million sequentially.

Distribution of the charges across our segments is included in our earnings release.

Operating profit for the quarter was $763 million, more than double the prior quarter's amount, as revenue grew strongly utilization of factory assets increased and as restructuring charges fell.

From the year ago quarter, operating profit was up $17 million.

While on the surface this was a relatively small improvement, it was much more significant when you consider the revenue was down by over $500 million across that period.

The gain is attributable to our lower operating expenses as well as improvements in gross margin.

Operating margin in the quarter was 26.5% of revenue.

A 12.5 percentage point gain from the last quarter.

As a result of higher profitability in the second half of 2009, we have increased our annual affective tax rate estimate to 28% higher than the 27% rate we had previously estimated.

The third quarter rate was about 30% as we had to catch up our cumulative tax accrual for the higher annual affective tax rate and also add some discrete tax tax items in the quarter that had a negative impact.

Net income was $538 million or $0.42 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.

Almost all of the higher net income compared with the last quarter fell through to higher cash flow from operations, which exceeded $800 million in the quarter.

This strong cash flow has allowed us to increase our investments in manufacturing capacity, raise our dividend and repurchase more stock, while still increasing our cash and short-term investment balances.

Capital expenditures increased to $226 million in the quarter.

Most of this was spent in assembly and test to help remove operational bottlenecks that are associated with the significant increases in demand that we are seeing.

We used $251 million in the quarter to repurchase 10.5 million shares of TI common stock and paid dividends of $138 million in the quarter.

We increased cash and short-term invests to $2.83 billion in the quarter.

Our balance sheet continues to be strong and remains a competitive advantage for TI in this environment.

Inventory increased $53 million in the quarter, while inventory days held even with the prior quarter's level of 72 days.

Inventory days were 81 a year ago.

TI orders in the quarter were $3.11 billion, up 11% sequentially.

TI's book to bill ratio was 1.08 in the quarter.

Turning to our outlook, we expect TI revenue in the range of $2.78 billion to $3.02 billion in the third quarter(Sic-see press release) or negative 3% to positive 5% sequential growth.

As a reminder, this estimate assumes a seasonal decline in our calculator revenue of about $115 million.

This means that the range of sequential growth for our semiconductor product revenue would be positive 1% to 10%, better than the seasonal average.

From a year on year perspective, this would be our first positive growth comparison for TI since the first quarter of 2008.

With year on year growth expected in a range of 12% to 21%.

We expect earnings per share to be in the range of $0.42 to $0.50 cents per share.

This EPS estimate includes $0.01 per share negative impact resulting from expected restructuring charges.

In 2009 we increased our estimate for capital expenditures to about $800 million.

As we discussed previously we have purchased equipment from [Comonda's] bankruptcy proceedings that we will use to equip our fab as the world's first 300-millimeter analog fab.

Although we will need to supplement this purchase with some additional equipment, we believe that applying advanced manufacturing technology to the analog, at attractive cost, will provide TI an opportunity to accelerate our strategy and to extend our leadership position in the analog market.

We are also purchasing additional assembly and test equipment to alleviate the stress of current high demand levels for certain package types and placing on our operations and on our product lead times.

As is typical when equipping a new fab, there will be a short-term increase in spending levels after which we expect to return to lower levels again.

Our estimates for 2009 R&D and depreciation are unchanged.

In summary, we are encouraged that analog and data processing are driving today's growth, and the strategic investments we are making in R&D acquisitions, our sales network, and our manufacturing capacity will continue this momentum for the long-term.

Profit margins, both growth and operating, have recovered quickly, and substantially lower levels of revenue given confidence to strategic direction and the financial returns they can generate.

With that, let me turn it back to Rob.

Thank, Kevin.

Operator you can now open the lines up for question.

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?

Thank you.

First up today, we will take a question from Uche Orji at UBS.

Thank you.

Please go ahead.

Can you hear me?

Yes, we can, please go ahead.

Let me just ask you a question about the (inaudible) your bookings.

I wanted to understand post the mid-quarter updates, just the momentum in bookings and essentially what drove that.

Within that you can comment on Connectivity which continues to grow strongly.

Also what is driving that growth, that would be helpful.

Thank you.

I don't unfortunately have data for you on kind of month to month or week by week booking linearity other than the data we provided you where bookings were strong the the quarter, we had a 1.08 book to bill and certainly as we indicated we have an above seasonal outlook for our business overall.

But beyond that I don't have any input.

On Connectivity, I would say it's a combination of factors.

Certainly the fact that smart phones and other advanced hand sets are having a lot more connection options or features beyond just the cellular connection, these include of course blue tooth, which is highly penetrated in hand sets, but especially Wi-Fi and GPS functionality where TI has an especially good position as well.

It's combination of the feature set, pervading more hand sets, and TI gaining share within the features.

Combination there.

Did you have a follow on Uche, or was that your follow up?

Yes, I do have a follow on.

I follow on will be a slightly different question.

I'm asking about your acquired fab.

Operating margins for analog -- we thought in 2007, when you acquired fab, I don't know if you mentioned it, but what you need to do -- how will this help you drive the operating margin for the analog business?

Should we expect that to pick up higher than the levels in 2007.

And when should we expect this fab to become operational for you and just kind of walk me through thinking behind the acquisition of that fab and how it will drive margin, thank you, that's my last question.

Uche, I will go ahead and offer some comments on that.

As we announced, the equipment put in to r fab will be 300-millimeter equipment.

Up until this point in time,our analog products have all been on 2-millimeter wafers.

Generally speaking, we can expect probably 30% or better kind of cost efficiencies on that size of wafer.

In addition, we were able to acquire the equipment from Comonda out of the bankruptcy proceedings.

We got particularly attractive pricing on that equipment which will certainly lower depreciation burden on each dollar of revenue that generates versus buying new equipment.

One would expect that that will allow us to continue to generate improving profitability over time on our analog revenue.

Of course not to be forgotten, is that as analog and the data processing become increasing portions of our total revenue, that will contribute to expansion of our overall margins.

As to when that factor becomes operational, we are in process this quarter of relocating that equipment from the Comonda fab in to our fab here in the Richardson area, and we will begin to bring up a mini line later this year and expect to have that mini line operational by the end of the year.

By the end of this year?

By the end of 2010.

Excuse me.

Let me also add, your point was our analog operating margins are not maybe at some historical peek, but keep in mind we increased analog operating margin by 16.1 percentage points from second quarter.

Clearly that was a good step up and good improvement towards those historical margins as well.

Okay.

Operator, can we move to the next caller please.

Certainly.

That will be Tim Luke at Barclays.

Thanks very much.

Nice job on your quarter.

I wanted to ask with respect to your guidance outlook, Kevin, as you look at the semi business being seasonally somewhat stronger than the normal 10%, should we think about the continuation of analog and embedded business leading there, or might it be some other segment there?

And as you look to look at your inventory, it's obviously flat in terms of days, should we think about you trying to build a little inventory through the fourth quarter, or how should we think about that?

Okay, Tim, I will take the first part and let Kevin address as your follow-up question the question about inventory.

We don't, as you're aware, we don't break our outlook down in to individual segments, whether it be analog, embedded, wireless, or other.

But clearly where our investments are focused up, where our operating expenses are heavied up, you might say in terms of investments are in analog and embedded processing.

I think the best I can tell you over the long-term you have to assume analog and embedded processing become a bigger and bigger factor both in terms of our revenues as well as our earnings growth.

Kevin, you want to comment on inventory?

Maybe if you could broaden, how does that thought on inventory impact just some of the elements that may contribute to the gross margin outlook.

Those are the two elements I was trying to get at.

Okay, Tim, on the inventory, as you are familiar with, we don't typically give a forecast on that.

I would just note that if you look at what happened this past quarter, we actually did increase our inventory by a little over $50 million or about 5%.

And yet it remains very lean at 72 days.

Consequently, we have found ourselves in a need to go ahead and adjust some of the lead times on a few of our products because of the demand that we have had.

That's driven us to go ahead and acquire some additional assembly test equipment to expand our capabilities, to get to help us get inventory back to levels that help us meet our customer service indices.

We did increase our wafer starts through the quarter and we would expect the loads that we had coming out of the quarter to be continuing through the quarter, so that should help us get our inventory better staged to get back to customer service metrics that our customers are coming to expect from us.

Beyond that we will report on what that inventory actually turns out to be when we get to the end of the quarter.

It will be a function of the course of our outlook for the first quarter, as well as where our revenue actually lands in the fourth quarter.

In terms of impact on gross margin, of course, Tim, as you would know, if we build inventory, certainly it supports higher levels of utilization than if we don't build the inventory, it would be beneficial and the reversal of when we are reducing inventory.

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

That comes from Ross Seymore from Deutsche Bank.

Hello, Ross.

Hi, guys.

Congrats on a strong quarter.

Bringing the channel of inventory down again, you talked about what you are trying to do to stage that, etc.

Do you believe that it is sustainable at the dollar amount that we are seeing now, or is the next step beyond the staging process that you just mentioned actually increasing the channel inventory going forward?

Ross, recall that one of the things driving down the channel of inventory is the implementation of our consignment programs with our distribution customers.

Roughly 25% of the inventory now is in consignment, and so we are keeping that on our books, so of course that just mathematically drives down the overall level of inventory that our customers hold.

But addition to that, they have also had strong growth in their shipments out last quarter as we had strong shipments in, but our shipments in are below their shipments out as their inventory continued to decline.

Their inventory decline was probably about half attributable to the fact we put more of their material on this consignment, and about half because they shipped more out than we could ship in.

So far we are keeping up with their demands, and I think we will just have to respond to what their needs are and desires are as to how much inventory they what happened to carry.

We can only ship as much as they want.

So with the consignment being called a structural change, Ross, it absolutely.

that piece of it anyway, would be a sustainable change, and we would expect distributors to run now and in the future with lower levels of inventory than what they historically did.

Did you have a follow on, Ross?

Yes, just switching gears to the OpEx-side of things.

I know what you said for the full year with R&D, but if I recall right, with the restructuring actions you took earlier this year, you talked about total OpEx-being down about, if I recall, around $130 million from 4Q 2008 to 4Q 2009.

Is that still the right bogie as benefit from restructuring, and if not, what's changed?

Ross, we haven't changed that.

That's the right way to think about that.

Great, Thank you.

Okay, Ross, thank you.

Let's move to the next caller, please.

Next up from JPMorgan, we have Chris Danely.

Thanks, guys.

Just a follow up on the consignment with the (inaudible).

Is this almost like you guys are going to more of a sell through model than a sell in model with your revenue or can you just talk about the differences between the consignment model and the sell through?

Actually, that's a good analogy you are offering there, Chris.

To the extent -- traditionally in the past we were on a sell in model, that is, when we shipped product to our customers, we recognized the revenue and at some later date they would typically ship that product to their end customers.

As we move to a consignment model, we are effectively moving that inventory after shipping to those customers, to a sell in method, excuse me, to a sell through method.

That is, they are going to pull it only when they got a sale, at the time they pull it, we will recognize the revenue and they will ship it to their customer.

As I mentioned, about 25% conversion has been completed.

That is, about 25% of revenue and inventory that goes to the distribution channel is now on this consignment program.

Over the next year or so, we expect to continue that conversion, and we are probably reach half of the total shipment to that channel by the end of this year or early next year.

Okay.

Chris, do you have a follow one?

Yes.

Sorry, I was just scribbling down my notes.

Second is on the lead time extensions in all the back end capacity constraints.

Do you guys feel very confident that you will get all of these issues fixed this quarter?

Are these basically only on the HVAL product line or is it anything else?

Chris, this is -- the lead time extensions we are seeing are affecting multiple areas of our portfolio not just the HVAL.

It's in various areas across our segments.

It's difficult to predict that we will necessarily get it all reconciled this quarter.

We certainly -- part of our step up in capital spending in the third quarter was the acquisition of the assembly and test equipment to release on bottlenecks on certain package types to help get our through put up.

We will continue to do that this quarter and in to the early first half of next quarter, next year, to extend that capacity, particularly in the part assembly test sites we have in the Philippines and the test site we opened at the beginning of this year.

I suspect it may take us a couple of quarters to get this back in balance.

That's difficult to say based upon what we are trying to do today and what our customers actually want as we get in to the first and second quarter of next year.

And keep in mind, bringing all that in to balance is not just -- doesn't just consider our capacity, also considers what happens with demand, what we seen over the last couple of quarters is demand continuing to build faster than we and our customers forecasted.

So we generally understand the capacity side and our ability to bring new capacity on board.

But again, as long as we see continued unforecasted increases in demand that's a different factor in the equation.

Okay.

Chris, Thanks for your question.

Let's move to the next caller, please.

That will be Tristan Gerra at Robert W.

Baird.

Hi.

Does the trends that you show in the back to school spending suggest consumers are getting back to normal spending patterns, or was it stronger than initial expectation, any color you could provide on this.

That's it.

The only area where we could give you color on back to school would be in our calculator business.

We did see a seasonal up tick in the third quarter in our calculator business.

It was probably about flat for total revenues.

It booked a year ago.

Up about $44 million sequentially.

So it reflected a normal back to school pattern, if you will.

As to the rest of our products, I don't think we really have enough insight to give you any commentary or color to whether or not back to school is affecting that demand.

Do you have a follow up, Tristan?

Just a quick one in terms of any potential impact of the next few quarters of this migration to consignment.

Which I would assume could have a slightly negative impact on revenue trends.

You're talking consignment into the distribution channel, Tristan?

Correct.

Clearly as we make that conversion, rather than having, if you will, a snap back due to demand from shipping in to them, because we hold the inventory until they actually ship it to it their customers, there is probably going to be probably no more than a quarter delay on that proportion of inventory that we wind up holding in consignment versus shipping directly to them.

We have already been experiencing that in the past few quarters.

We began this process back early to mid last year.

Frankly, we think it's the best arrangement to get to given the interest we have in gaining share at our distribution customers.

And the interest that the distribution customers have that they want to measure themselves by.

Again, that's a question of timing; it won't actually impact our revenue with those distribution partners and customers.

Okay, Tristan.

Thanks for your question.

Next caller, please.

That is Glen Yeung at Citi.

Thanks.

You mentioned that you are seeing these lead time extensions.

To what extent do you think you are getting double orders because of that?

And then how are you able to discount that when you give us a revenue and order forecast?

Okay.

Glen, I guess how I would describe it is that we don't have any evidence of double ordering, but as we all know, we wouldn't really expect to see any evidence either.

I guess the way I would characterize is that our management team has been through many cycles in the past, we generally know what to expect.

And the way we are working through that is basically to work very closely with our customers, understand what they need, when they need it, and then do our best to support it.

I guess I probably don't have too much more to say beyond that.

In terms of a discounting factor on our outlook.

Our outlook is our most realistic assessment of what we believe we believe we will be shipping in the next quarter.

I would note that if you look in terms of backlog expansion in the third quarter, you will see our book to bill as we mentioned is 1.08.

Our revenue range of expectations probably shifted down somewhat below that based on if you look at where the middle of that range would be.

Again, we are just generally working with our customers, trying to understand their specific needs and then doing our best to be able to support those needs.

Do you have a follow on, Glen?

Yes, that was helpful.

Thanks for that.

Next question is on gross margin, and maybe for Kevin if you could walk us through specifically the elements of the sequential growth in the quarter.

Maybe help us to understand -- it's so strong if there is some expectation that you need to reset your target gross margins in the long-term.

Glen I would say if you look on a sequential basis, a sizeable portion of that was due to just revenue growth and following through to the bottom line.

We had a little bit of improvement on utilization as well as demand continually increased throughout the quarter.

And we also had the benefit of mix going on in there.

If you look at analog growing as fast as it has, it's becoming a bigger and bigger portion of our total revenue.

It does enjoy higher gross margins.

You have a couple things driving that.

As far as any adjustments to our goals again, referring to back in May of 2007, we had established profitability goals for the company, 55% gross margin and 30% operating margin.

We expect to achieve sometime in the next few years after that announcement date.

We are not there yet.

Until we get there, it really isn't appropriate for us, I think, to discuss any further thoughts on what those goals should be, we will keep aiming for those goals as announced.

Alright, thanks.

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

Next caller will be from CLSA, that's [Sweeny Pajury].

Thank you, Kevin.

A follow up to the previous question on the 300-millimeter ramp here.

I'm just curious, as you bring that capacity on line, do you have to redo some of your math, and if so, what are the implications for R&D side of things?

Also on an apples-to-apples basis, what kind of cost savings are we talking to once you move to 300-millimeter?

Sweeny, you are correct on the assumption on assets.

Obviously.

we are dealing with larger wafer here, so we will have to make some adjustments.

And also these are analog processes that we are bringing up, which take a little bit of tuning to get right.

We expect that tuning progress and that bring up process to occur during the calendar year 2010.

We will be, as I mentioned earlier in the call, bringing up what we call a mini line initially by the end of the year, so we don't expect to have all of that capacity available for full production.

That will probably flow over in to 2011 unless demand arrives sooner.

Just far as R&D is concerned, we intend to migrate existing products, high volume products, as well as new products that are released during that time frame on to those products, so it shouldn't be much in the way of incremental R&D for that purpose.

It is really just going to be some operating costs to bring up the new line as it relates to cutting new masks and so on.

Do you have a follow on, Sweeny?

Yes, quick one, Ron, for you.

The other segment that is picked up nicely in the last couple of quarters.

As we look out for the next few quarters, and there is a lot of puts and takes in there.

I'm trying to understand how we should think about the growth prospect.

Obviously, you said the LP is growing, capital is growing, but it also looks like the risk business declining here.

I'm trying to understand how we should think about the growth there.

Observations you made are certainly valid.

I don't know they have a whole lot more to provide in terms of projecting how those very pieces will move going forward.

I think in general we believe that the main thing that's predictable there in terms of -- at least that I should call out as the seasonal pattern in our calculator business.

Beyond that we think DLP now that we for the most part shaken out the DLP TV revenue, and what we have there today is the DLP front projectors and digital cinema.

It probably is stable to growing, and then and the other pieces will happen as they do.

But for the most part I think overall if you look at the other segment, we tend to think of that on over the longer term as kind of a low single digit type of growth outlook.

Again, that's a longer term type of projection not specific forecast over the next few quarters.

Okay, Sweeny, Thank you for your questions.

Operator, let's move to the next caller.

That will be Adam Benjamin of Jefferies.

Adam Benjamin, are you there?

Adam, you may be muted we can hear you right now.

Ron, shall we move on?

Why don't we, if Adam comes back in we will try to get him in.

We will move then to [Edward Schneider] of [Charter Equity Research].

Thank you very much.

Regarding the wireless, if you look at your base spend, business looks down substantially year-over-year leaving most of the other wireless flat, which is improving.

Is this mostly due do you think to the economic issues, or do you think we are playing out, getting out of a lot of the hand set models that you are supplying some of your biggest customers.

And then correlated to that is OMAP, which is in most of the hotter new smart phones out and coming out this quarter, should we expect that we see a rebound in wireless based on OMAP?

I'm not looking for guidance next quarter, but in general, if we are modeling for TI's wireless business out in to next year since smart phones are becoming a higher part of the mix and OMAP is a big part of those devices, shouldn't we expect to pick up some of the shares, percentage of wireless for a total?

Ed, was the first part of the question, was that specific to base spans?

Yes, the base span issue.

Are we -- your base span is down.

Everything else is about flat year-over-year.

Is that economic, or are you finally seeing yourself kind of fading out of the lot of the hand set models that you were supplying?

I think in terms of base span the biggest factor year on year would be a combination of just overall wireless market.

Still seeing weakness when compared with the year ago.

But then the other factor would be for the most part our base span 3G position transition out of the Sony Ericsson hands set.

Recall, we had a program with previously with Ericsson mobile platforms that we were moving out of but especially with their join venture with FT.

That program is now out of our revenue.

The other factor -- I wouldn't say we are out of most of the models, we still have $450 million of base span revenue in the quarter, most of that, not all, but most of that is centered up on a single customer, and again our outlook there is unchanged that generally we would expect that by the end of 2012, that revenue will have wound down as that customer brings on additional suppliers, and as we've now for the most part stopped investing in that base span business.

No change to that.

The remainder of our wireless business is, as you pointed out, focused on smart phones, both Conn activity side of that business and especially the OMAP side.

OMAP did see declines.

Sequentially, not this quarter, but earlier, such that we believe that business bottomed out in first half of this year and really is poised for growth for some period going forward here.

And that really is based on a very strong design in position that we have with a lot of different hand set makers for OMAP III product line, which will be some customers were in production, other customers that production ramp is still to come.

OMAP III we expect to be a good driver of revenue for our wireless business.

Do you have a follow on question, ED?

Yes, I did, actually.

The philosophy now, shared by a number of different former suppliers (inaudible) processors alone will maybe hold sockets and pull through Connectivity.

Seems to be playing out.

But the recession eclipse that whole trend.

What is your feeling now?

You are seeing Connectivity business pick up.

Is that tied, to a large degree, to the success in wins in OMAP or are you seeing Connectivity win without any other socket and hand sets and do you think that's going to grow on its own merits?

We believe it's growing on its own merits.

That you asked an interesting version of the question which is the -- call it the task between Connectivity and app processors.

The other question is the connection between the attachment between app processors and base span.

But we really see all three of those as pretty independent.

Our Connectivity revenue, as we said previously, is really leading growth currently.

We expect app processors to ramp pretty nicely, as I said, with OMAP III, and both of those are really independent of base span, just based upon the significant sign in positions we have both in Conn activity as well as with OMAP III.

Thanks for the questions, Ed.

We will move to the next caller.

We have Adam Benjamin back on.

Adam, are you there?

Thanks, guys.

Sorry about that.

Had a question in terms of digging in to a deeper on the 300-millimeter ramp, obviously you have those Comonda assets.

I'm just curious in addition to that what CapEx requirements will be needed, and then as we think about how you ramp up that fab, the time it takes to qualify new products on the 300-millimeter process with also [DMAS 6] dropping off late next year, and then that capacity, how should we think about utilization coming down to 200-millimeter, coming up on the 300-millimeter, and how that could impact both the utilization rates and gross margin and as likely the real tail wind is 2011, maybe even 2012.

If you could frame that that would be helpful.

If I can remember all that, Adam, I will try to frame it for you.

The step up that we have in capital spending for the next couple of quarters and especially for this quarter, not only includes the Comonda equipment but also some supplemental equipment we need to balance that line as we get ready to bring it into the Richardson fab.

So roughly speaking, probably half of what we spend this quarter we expect will be for fab related equipment for our fab and the balance of it for the assembly and test sites.

As relates to time to call, I mentioned earlier that we plan to bring up a mini line in 2010, and we expect that to qualify late next year.

Because it's a mini line, I don't expect it to have a impact on utilization or available capacity for purposes of utilization.

This is strategic acquisition, not a tactical one.

This for the longer term growth of the Company.

As relates to gross profit margins, we would expect it would continue to help us with our goals of driving our margins up given the fact on 300-millimeter wafers, quite simply, the cost per chip will be less to manufacture on those process nodes.

We should be able to enjoy continuing healthy and growing gross margins.

I think you had a question on DMAS 6, but I'm not sure what it was.

Maybe just as a follow up, not to pin you on this Kevin, but really we should be thinking about a gross margin tail wind on the 300-millimeter really in 2011-2012 or is it 2011-2012, that would be helpful.

Yes, Adam, as we think about it today, given the fact that we are bringing up a mini line, it's not going to be enough to really move the needle for us in 2010.

You're correct to think it's like 2011-2012 kind of additional tail winds for us.

I say that, not withstanding if we have a strong analog growth in 2010 that may cause us to pull those plans forward.

Based upon how the plans are right now, I think your statement is accurate.

But I think we also have the potential, I think Adam, one of the things you mentioned about DMAS 6, I'm not sure exactly what was behind it, you were talking abut a dropoff in DMAS 6 capacity or loading, I'm not sure, but the reality is we can load and have begun to load some analog in to DMAS 6 as well.

As -- for example, of wireless has lower demands for DMAS 6, that will be another source of capacity and very cost affective capacity for us to move -- for us to source analog products as well.

Okay, Adam, thanks for your questions.

Let's move to the next caller.

That will be Daniel [Barenbaum] at [RFUSA].

Hi guys.

Maybe just to wrap all these questions on 300-millimeter fab up and break it down simply for me, if a year -- fast forward to a year from now, taking new account the 300-millimeter fab and your revenue is the same, call it $2.9 billion with sort of a similar mix, what would what affect would 300-millimeter fab have on gross margin and OpEx, and maybe if you can answer that quickly fast forward one year and then if we fast forward two years.

Daniel, are you asking that in the context, sounds like we installed it but not using it is that the context you are getting at?

I guess the assumption is you would use it because your mix is shifting more to analog so effectively you're doing more production in-house, is that a correct assumption?

Yes, and it goes back to what Ron was saying a moment ago, if we saw a scenario like you described on flat revenue, analogs becoming a bigger portion, we would use the convertible equipment that we got available in DMAS 6 to support that.

Our plan is just a mini line for qualifying the process in our fab next year.

I wouldn't look to it having a -- our fab alone having impact on gross margins in 2010.

So much as I would the continuing mix change of analog in the data processing becoming a bigger portion of our revenue in 2010.

That's going to have a bigger bearing as to how the gross margins will go up.

Dan, let me also comment versus those scenarios as Kevin just said, we will modulate the pace at which we ramp our fab based upon what we see for demand.

But we are not rolling out our fab as a means to just lower our analog cost basis.

We are ramping out our -- or we are rolling out our fab to support analog growth.

And so it is mainly a strategy to allow us to meet our aspirations and goals for the size of our business and the growth rate of our analog business as opposed to just being a cost driver to bring down analog cost.

Now, it does have that nice side benefit.

They go hand in hand, but it is being done for us to grow our analog business.

Do you have a follow on, Dan?

Maybe to follow up on that, how much additional revenue generating capacity in analog would be 300-millimeter equipment that you already bought from Comonda or have available to you from wherever else, what's the incremental revenue generated capacity?

Think about it this way, Dan, again, we will talk about this first phase of our fab, which will be, by way, about 30 % of the our fab floor space.

And it will also be about just give another metrics 13,000 300-millimeter wafers of production capacity per month.

We believe that first phase will support more than $1 billion of additional analog revenue per year for TI.

Again, that's the reason we are making the investment.

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

Next is [Shanae Donda] at DOA Merrill Lynch.

Yes, hi guys.

Couple of questions, Kevin first on capital spending, it's going up a little bit this quarter, and you said it might say elevated for a couple of quarters.

Following that, should we anticipate a significant drop in the number, and the reason I ask this is because you talked about cap education being below depreciation, the reasonable comparable not quite there, so how should we think about that line item in the context of depreciation going forward?

We as -- did you mention there we will see elevated spending not only in the first quarter of this year but during the first half of next year and drops back down to what we call a more normal level.

If you look at the last three years of capital spending for us, it has fluctuated between 5% and 8% of revenue in the last three years.

And I would suggest for purposes of developing a model that you are trying to do for TI, that that's a good range to think about over the long term going forward.

We expect to come back down in to that kind of range as we move in to second half of next year based upon our current planning assumptions for 2010 growth.

Also, just to put in perspective, the comment on tail wind from depreciation, if you look over the last 12 months, our depreciation has been about 9.5% of our revenue over the last 12 months.

At the same time, during the last 12 months our CapEx has been about 4% of our revenue during that period.

So we continue to spend CapEx at lower than depreciation rate and even with this up tick I think that the longer term trend is that we are going to see CapEx in the 5% to 8% range, which means depreciation, rather than running around 9.5% of revenues, will begin to run less than that over time.

Did you have follow on?

Yes I did.

Correct me if I'm wrong, but you have some profit sharing plans that tend to kick in when your full year op margins hit 20% from the way you're guiding seems like you will be around that number.

Does the fourth quarter outlook incorporate that catchup bump that you might end up seeing if that is in deed the case?

The fact is that it kicks in a bit lower than that and then incrementally goes up.

That's actually -- accrues at profitability ranges between 10%, TFO, at the low end and 35% TFO at the high end.

So there is quite a wide range.

But clearly with our increase in outlook for the year versus how we started the year, we have already in the third quarter increased accruals for compensation purposes related to profit sharing and that higher run rate is now also built in to the forth quarter.

I would just mention that the third quarter means that not only did we increase but had a catch up for the year given improved outlook and forth quarter will continue at that higher rate.

So it's already in the estimate for fourth quarter?

Correct.

Thank you for your questions.

Let's move to the next caller.

That will be John Pitzer at Credit Suisse.

Yes.

Good afternoon, guys.

Thanks for taking my question.

Kevin, just really quickly, when you look at the mid point of revenue guidance for the December quarter, it's essentially flat, I'm just curious, when you take in to affect mixed pricing utilization, and what you want to do with your inventories, what kind of growth -- could we expect to see gross margins continue to grow sequentially on sort of flattish revenue?

John, just let me remind you, that flattish sort of revenue has our calculator business going seasonally down in the quarter.

About $120 million or so sequentially down in the quarter.

The rest of its being offset by continued expectation of some growth in the semi conductor products.

Because of that growth in semi conductor products, that means we will continue to run wafers to through the factories and utilization levels higher than what we saw in the fourth quarter, which of course had a favorable impact on our margins.

Beyond that, I won't give a specific forecast to margin, but you can certainly see the cross currents going on there.

Margins should be reasonably healthy in the fourth quarter.

Do you have a follow on, John?

Yes, well, just in your prepared comments you talked about your analog business being down 8% year-over-year and you thought that would compare favorably.

By our estimation it's going to be 300 to 500 basis points better than the industry.

Do you have any guess as to how much market share you guys think you are poised to gain here?

More importantly in what parts of the analog business do you think your best position -- are we starting to see some of the work you guys have done HVAL come through, or is this across the board?

John, I will leave to you the math of, what did you say, 300 to 500 basis points better, and what does that translate to market there, because if I try to do it in my head today, I'll embarrass myself.

But I can try to address where I think couple of areas that are notable, HVAL, as you pointed out, we noted that HVAL, once again, led the sequential growth trends for analog.

That's the second quarter in a row where HVAL has led the overall growth.

That's not the take away what HPA and power contributed because both of those areas did very well as well.

But I think most analysts would say that more applications specific side of the analog market tends to grow a little bit slower than the overall analog market.

So the fact that we're -- our growth is being led by that area, probably says that we are significantly gaining share in the more application specific side of the market.

The other area I would just note is the power side.

I think power has just -- this is not a two quarter trend this is a multiyear trend for TI where it actually culminated in us breaking that power product line out and making it a separate business inside of analog.

We have been growing exceptionally well in power.

We have the nice double impact of the power market itself is growing faster than analog as well.

And I think we are gaining share inside of power.

So a good combination.

There are probably other areas as well, but those would be the two that I would note.

Power and then also what we are seeing in high volume analog.

John, I guess that would be your follow-up question, thank you very much.

Let's move to the next caller.

We will move on to Doug Freedman at Broadpoint.

Hi guys.

Thanks for taking my question.

If you could comment on -- now that you are seeing strong growth out of the analog and embedded processing, are your expectations and should ours change for seasonal impact?

Then if you could help us understand the overall mix that that product is seeing by more of an end market, could be helpful.

Doug, Kevin, add if you will, but I don't know that analog and embedded processing itself would throw on a new seasonal trend for TI, but what could impact is that wireless is becoming a smaller part of our mix, and I think wireless historically had a pretty specific seasonal pattern especially for growth in the third quarter.

It's probably less analog and embedded having its own seasonal pattern and more a fact or of less exposure to wireless and base span specifically and the impact that would have.

Kevin do you have any additional --

I think you said it well there.

The only nuance inside there, and I doubt it would move the needle at the top is that high volume analog and logic tends to concentrate in certain end equipments you might see some seasonal variance in there, storage products, PC cycle, adjusts or in printers or in the automotive side.

I'm not sure it would move the needle at the top that much.

Do you have a follow on Doug?

Yes, I could move on and retouch on the target model question that was asked a little earlier.

How should we think about you guys trying to balance market share gains with -- versus the possibility when you get there of needing to move the target model?

Is it something you've given thought to yet?

Doug it's something that we have certainly discussed, but it's not anything we are willing or prepared to discuss in a public manner just yet.

Clearly there is a tradeoff there.

I would say though that we viewed as being very important.

We step up our top line growth.

And certainly that has to be balanced with any objectives that we might also set for profitability and make the proper tradeoff.

Certainly top line growth is becoming increasingly important as we are getting closer to reaching our model GPM and operating profit levels.

Nor do we believe topline growth is mutually exclusive with expanding margins.

I think if you look at your performance over the last couple of quarters, where as we layered on a lot of revenue growth you've seen a very significant margin expansion that matters a lot to us.

Again, those aren't mutually exclusive.

The other thing, Dough, I would lay on is we are growing in the right areas.

Analog and embedded processing are both well above the corporate average margins anyway.

So as we grow in those areas, we probably have to worry less about the refinement of where we are seeing growth inside of those spaces and more just focus on broadening the growth in analog and embedded processing and realizing that if we grow in the right areas, that growth will do good things for TI's gross margin, it will do good things for our operating margin as well.

Okay, Doug.

Thank you for your questions.

Let's move to the next caller.

That will be [Craig Berger] at [SCR Capital Markets].

Hi guys.

Thanks for taking my question, and great job on the results.

Do you have any concerns that inventories building downstream, not at your distributors, but beyond that at your OEMs, can you talk about maybe the timing of peak builds this year versus prior years?

Greg, I would say we talked earlier about, certainly our distribution channel being down 5% quarter over quarter, and I will remind you that we ship 30% of our revenue through distribution.

So certainly that appears to be quite lean.

We have a significant portion of our revenue that sells via consignment to large oem's based upon what we can see at their pull rates and so on I would characterize their inventories as also being well managed.

In other words, it doesn't appear to be accumulated in their warehouses.

As it relates to nonconsignment OEMs or contract manufacturers, we really have to wait until the public date before we can comment on them.

Certainly the channels where more than of the revenue passed through, inventories appear to be well managed if not in some cases relatively lean.

This is, as I said before, this is a time especially when lead times are extended somewhat where we really have to work closely with those customers and understand their requirements.

I think they understand that the stress the entire supply chain is going through, I really believe we are getting pretty clear insight into kind of what bottom line needs are, to the best we can tell we are not seeing where there is levels of inventory building.

They're ramping production, and there is likely some finished goods being built in anticipation of up the coming holiday season.

But that's very normal for this time of the year as well.

Do you have follow on Craig?

Any initial thoughts on Q1, should we think typically seasonal, what's typical for Q1 seasonality?

Thank you.

I can answer the second part of that in terms of what typical for Q1 seasonality for TI.

It would be that this is again, an average number of last five years, we would be down 3%, and that's pretty consistent both calculator business is generally flattish Q4 to Q1 as well as the semi conductor would follow that overall trend.

In terms of this Q1 specifically, I don't have anything to provide you in terms of outlook or guidance at this point.

Okay, Craig, thank you.

And Operator, we have time for one additional caller.

Okay.

That will be David Wu at GC Research.

Thanks for getting me -- taking me in.

Actually, can you quantify the lead times now for your analog business in the power management and the high performance analog, and then a follow up is really the wireless base span, I'm amazed that this is supposed to decline all year, and actually you had a sequential increase in Q3.

Does it ever go down?

Okay, David.

Let me try and address both those.

I don't have a breakout for you on lead times by product area.

What I can say is that given the rampant and unforecasted increase in our customer demand for analog and, frankly, a lot of other product lines, our supply is constrained in some areas.

As I said before, our factories have done an absolute outstanding job in terms of the rate at which they have responded and ramped our production again compared to those initial plans that we had coming in to third quarter or even when we came in to second quarter.

That being said, our customer service metrics aren't where we want them.

Including lead times and we are working very hard to address that.

But I don't have anymore specific for you.

On the base span trends, and you noted that base spans grew sequentially, we have given kind of the best overall just general planning number that we can provide, which is that the base span revenue generally will decline and decline, call it linearly, between now and the end of 2012, it will be lumpy.

There will be quarters where we are below that trend.

There will be other quarters where we are above that trend.

I don't want to try to pretend there is too much precision in that.

Some of the factors that are behind the rate of that decline will include things like the mix of 2G and smart phones, or in general high end or low end hand sets, how the overall market does.

It will include how our customers specifically do in the marketplace.

And then finally, it will include our competitors' execution and bringing on those alternative base span products for our customers to move into production.

You can go try to have various reads on each of those factors, but it is what it is.

The fact that we saw that sequential growth this quarter, that has good cash flow contributions associated with it, and we appreciate it.

Again, I don't have any revised guidance other than what we had previously told you.

Okay, David, thank you for your questions, and in general, thank all of you for joining us.

A replay of this call is available on our web site, good evening.

That will conclude today's call.

Thank you for joining us, and once more, have a good day.