德州儀器 (TXN) 2009 Q4 法說會逐字稿

Good day and welcome to Texas Instrument's fourth quarter and 2009 earnings call.

Just a reminder, this call is being recorded.

At this time I would like to turn the call over to Mr.

Ron Slaymaker.

Sir, please go ahead.

Good afternoon and thank you for joining our fourth quarter and 2009 year end conference call.

As usual, Kevin March, TI's CFO is with me today.

For any of you that missed the release, you can find it on our web site at TI.com/IR.

This call 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 managements 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 March 8.

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

In today's call, we'll address growth, what's driving it, and is it sustainable?

We will also address inventories and provide our perspective on where they stand today in the supply chain.

Finally, we'll discuss actions that we are taking today to support continued growth in the future.

Revenue in the fourth quarter was near the high-end of our range of expectations.

Earnings exceeded the top end of our range of expectations.

Sequential growth began in the second quarter of 2009, as our shipments normalized to customers production levels, following a sharp inventory correction.

We believe growth is now being fueled by expanding production at our customers.

Inventories through TI's and our customers supply chains are lean, and growing end demand is stressing the entire supply chain.

Let's start with breaking down the fourth quarter revenue trends.

Overall revenue was up 4% sequentially, or 21% from a year ago.

Sequentially, our calculator revenue seasonally declined by $116 million.

Our semi-conductor revenue, therefore, grew about 9% sequentially.

Our analog, embedded processing, and wireless segments all contributed to sequential growth, while the other segments declined due to the lower calculator revenue.

Analog revenue grew 9% sequentially and was up 27% from the year ago quarter.

Again, this quarter we had good contributions by all three of our major analog product areas to this growth.

I described last quarter our high expectations for the long-term opportunity that we have in the power management area of analog.

Power was the fastest growth part of analog for TI this quarter, as we penetrated new opportunities, and gained share.

Specifically, growth was strong in power supply for computing applications; an area where our share is rapidly expanding in a strong market.

We also had strength in displays, specifically LCD TVs, as higher frame rates, LED backlighting and power efficiency become more important.

As we saw strength in notebooks and smart phones and for TI, these are products such as white LED drivers and battery gauges.

In HVAL, automotive was the fastest growing area sequentially, and in HPA, low power wireless products were the fastest growing.

Embedded processing revenue grew 5% sequentially and was up 21% from a year ago.

Catalog products were the biggest driver of this growth, followed by automotive.

Embedded processing should continue to benefit as the Industrial market strengthens.

Wireless revenue grew 8% sequentially, and 13% from a year ago.

Baseband revenue of $465 million grew 3% sequentially and was even with a year ago.

Most of the wireless growth was driven by applications processors and connectivity products.

These products collectively grew 19% sequentially and grew 46% from a year ago.

Other revenue declined by 9% sequentially due to the seasonal decline in calculator revenue and grew by 17% compared with a year ago.

DLP was the biggest factor in this growth and more than offset a significant decline in risk microprocessors from a year ago.

From a geographical perspective, while sequential growth was fastest in the US and European markets, all regions grew.

Compared with a year ago, all regions were up except for the US market.

Turning to distribution, resales were sales out of our distribution channel increased sequentially in the quarter as well as from a year ago, distributor inventory was about even in the quarter and remains lean compared with historical metrics.

Now Kevin will review profitability and our outlook.

Thanks, Ron, and good afternoon everyone.

Our gross profit continued to expand this quarter as revenue grew and utilization increased.

Gross margin increased 150 basis points sequentially, to 52.9% of revenue.

Compared with a year ago quarter, gross margin increased 890 basis points.

Operating expenses were down slightly from the third quarter and declined $90 million in the year ago levels.

Operating expenses were 23% of revenue in the quarter, well within our planned operating model.

Restructuring charges in the fourth quarter were $12 million, about the same as the third quarter and down 242 million from a year ago.

The distribution of these charges across our segments is included in our earnings release.

Operating profit for the quarter was $875 million, 15% higher than the third quarter, mostly due to higher gross profit.

From the year ago quarter, operating profit was up $824 million, primarily due to higher gross profit as well as lower restructuring charges.

Operating margin in the quarter was 29.1% of revenue.

The last time we approached this level of profitability was the fourth quarter of 2007, when TI's operating margin was 28% of revenue.

It is noteworthy that revenue was 18% higher in that quarter.

Today's improvement performance reflects the potential of our business model that is now focused on analog and better processing.

We expect the benefits of this strategy to continue to accrue to TI and our shareholders in the years ahead.

Net income in the fourth quarter was $655 million or $0.52 per share.

Net income includes $16 million of benefits from discrete tax items.

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.

All of the higher net income compared with last quarter fell from higher cash flow from operations which was $1 billion in the quarter.

This strong cash flow allowed us to increase our investments in manufacturing capacity, pay a higher dividend and repurchase more stock, all while increasing our cash and short term investment balances.

Capital expenditures increased to $436 million in the quarter.

This included our purchase of the Qimonda fab equipment as well as continued elevated expenditures to expand our assembly and test capacity.

As we discussed before, the Qimonda equipment is going into our 300-millimeter analog factory called RFAB.

We have the initial pilot line in place today, and have begun to process initial wafers.

We're on track to achieve full production qualification before the end of the year.

We used $351 million in the quarter to repurchase 14.8 million shares of TI common stock and pay dividends of $149 million in the quarter.

We increased cash and short term investments to $2.92 billion in the quarter.

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

We were able to increase inventory by $86 million in the quarter, almost all in finished goods, resulting in inventory days increasing to 76.

This will allow to us continue to improve our customer service performance levels.

Our delivery performance has been improving since mid-November.

Even so, our inventory remains lean in this strong demand environment.

TI orders in the quarter were $3.26 billion, up 5% sequentially.

TI's book-to-bill ratio was 1.08 in the quarter, the same as last quarter.

Turning to our outlook, we expect TI Revenue in the range of $2.95 billion to $3.19 billion in the first quarter, or negative 2% to positive 6% sequential growth.

This compares favorably with our more typically seasonal decline of about 5% in the first quarter.

We expect EPS to be in the range of $0.44 to $0.52.

This EPS estimate includes the negative impact of a higher annual effective tax rate which we estimate will be above 31% in 2010.

The increase in the tax rate includes our estimate for higher profits as well as the impact of the expiration of the federal R&D tax credit at the end of 2009.

For 2010, our estimate for capital expenditures is about $900 million.

We expect these expenditures to be weighted towards the first half of the year as we continue to expand our assembly and test capacity and install equipment in our 300-millimeter analog fab.

Our estimate for 2010 R&D is $1.5 billion, but even with our 2009 level.

We estimate depreciation will be about 900 million this, about the same level as 2009.

In summary, as the recovery continues to develop, we are seeing the results that we expect from our focus on analog and a better processing.

We are investing to position TI for growth in these strategic areas, as evidenced by our investment in the industry's first 300-millimeter analog fab and our assembly and test capacity expansion, as well as our continued investments in the planned field sales and application resources into the regions and markets that we expect to grow the fastest.

And we are well positioned in electronic markets that we expect to drive growth.

For example, our position in base stations is strong, and continued data traffic increases should drive accelerated deployments of wireless infrastructure.

Also, our products are well-positioned in the Industrial markets that are still in the early stages of recovery.

And there's a lot of pent up demands for PC upgrades, especially in emerging markets, for which we will benefit from well-positioned products such as our analog power management as well as products sold into hard disk drives and other peripherals, all which have gives us confidence there is plenty of opportunity for TI and our shareholders ahead.

With that let me turn it back to Ron.

Operator, you can now open the line 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).

The first question comes from Uche Orji with UBS.

Can you hear me?

I sure can.

A couple questions on lead time.

There is some talk in the industry about lead times coming down.

Can you just give us some color as to what's happening to lead times across the various products that you have in areas of shortness and tightness, any color would be helpful.

Thank you.

Okay, I can't break it out product by product but what I would describe is that our operations have responded aggressively to meet what's been some pretty strong increased demand across the last few quarters.

But with that increased demand our lead times have generally moved out as that demand has out paced our supply.

And that said it moved out fourth quarter overall relative to third quarter.

And that's very similar to what I think, how I describe it back in the December update.

We are certainly investing in manufacturing equipment to relieve these operational bottlenecks, especially in our assembly and test areas, and to get the lead times pulled back again.

To this point I would describe fourth quarter generally lead times moved out relative to third quarter.

I will note what Kevin said in his prepared remarks, that our delivery performance has improved since the mid-November time period, but we are focused on getting delivery performance improved before we start pulling lead times back in.

Do you have a follow on, Uche?

I do.

You made a point, Kevin, about gross margins, and the fact that revenues are lower than December levels, that you thought December levels of gross margin of 2007.

2007.

If I look through the rest of the year can you walk me through what would be the key drivers of gross margin?

It would be attrition rate, demand, mix, any color that you can give us as to ho to think about gross margin, maybe this quarter and also the rest of the year if possible.

Thank you.

Uche, actually what I mentioned was operations had reached a new high versus where we were at in late 2007.

On the growth margins we did turn in a solid quarter of about 52.9%.

As we look forward as we discussed in prior calls, we would expect that trend to continue to work its way up, really as we move forward on a higher mix of analog and data processing as a proportion of our total revenue.

From a utilization standpoint, we are getting back closer to more normalized utilization levels.

And so there's probably a little bit less to be expected on that front as we go forward.

And really it's going to be much more driven by a higher mix of analog and data processing.

I would add to that that we would expect to see some benefit also as we put in place low cost manufacturing.

And a good example is 300-millimeter analog fab that we just opened in Richardson.

Okay.

Thanks for your questions.

Let's move to the next caller.

Next question will come from John Pitzer with Credit Suisse.

Good afternoon, guys, congratulations, a couple questions.

First, Ron, when you look Q4 above seasonal, your guidance for Q1 above seasonal, to what extent do you think this is true demand pull versus the supply chain trying to refresh some inventory in the March quarter?

And I guess how comfortable are you that you can tell the difference?

I don't know that we have great visibility into our customers and their customers and their supply chain.

I think we commented that our view is if you go back to fourth quarter, and this is more anecdotal versus direct measurement our view is that the supply chains truly all the way to end demand are lean on inventory.

I think customers would have liked to have built inventory, but to this point they are pretty much hand to mouth, ramping their production to be able to support higher levels of demand.

Where we can measure is our own distribution channels and I'll just repeat what we said in the prepared remarks, inventories there were pretty much unchanged from the third quarter on resales that were higher.

So, again, our distribution channel inventories are clearly lean by any historical metric.

Do you have a follow on?

We are all hyper focused on lead times and when they might come in and what that might signal.

I guess when we look at the data, you guys have done a great job gaining market share despite pretty tight back end capacity.

How would we think about your ability to gain share if you were able to grow back end capacity going into Q2 or do you think you will leave that bit of business on the table right now?

John, I think if you look at most of our products, they are proprietary or they are differentiated products that customers don't have a lot of fungibility across different suppliers.

I know there are some suppliers, especially in the analog place, marketplace, that have been vocal and crowing about their short lead time.

But I'll also note those are the same analog suppliers that for the most part are not growing.

And I think although some of the analog competitors and suppliers are starting to show some sequential growth again, I don't think any of those, any of our major competitors in analog has posted anywhere close to the 27% growth that our analog business just did from a year ago.

So to that extent, and that is not a statement that says we are satisfied with our, all aspects of delivery and customer service levels.

You've heard us say we are doing a lot of investment to try to fix that.

But I'll also note that to a large part we were, especially when it comes to the analog space, I'm not aware of too many suppliers that added capacity both fab capacity as well as assembly test capacity all the way through the downturn the way TI did.

So I think what you're saying in terms of lead time from TI simply reflects the demand that customers have for our products and to the extent that there's anything left on the table, it really comes about because our customers may not be able to fully get everything they want in the near term, that they would maybe desire from TI But, again, I think if you look at the investments we're making and generally the relationships we have with our customer base, it's pretty clear to us that they like where we're headed.

They are like where we are headed long-term with the capacity investments we are making and I believe TI Is the analog supplier they want to bet on for the long-term.

Next, Tristan Gerra with Robert W.

Baird.

Hi, do you see the potential for higher wafer pricing at foundries this first half and what is your strategy this year for insourcing versus outsourcing?

Tristan, our foundry agreements generally tends to be long-term so we don't see anything in the way of short term price fluctuations on that front.

As far as our foundry usage going forward, we are going to do more of the same that we've done in the past that is increased product of our advanced CMOS, advanced digital capacity will come from foundries, and we will source pretty much the majority of, if not almost if not all of our analog internally with a little bit of external.

Do you have a follow on?

How would you characterize US OEMs ordering patterns post christmas?

Do you think we are back to normalized ordering patterns or do you see yet a sense that people are pretty cautious in the way that they are ordering?

I would just offer up that our book-to-bill came 1.08 again, that's the second quarter in a row it's 1.08, it's been positive almost all year, so what I think we are seeing from OEMs in general is that they give us visibility into their orders as little bit further out in time, the back bar was extended, so that could suggest an increasing level of confidence.

It's given us the better ability to actually plan for their needs as well.

Tristan, one other thing I would add, there are orders which basically about 60% of our revenue is supported by, and then separately, we have consignment programs where those customers, they provide us visibility into their needs based on rolling forecasts from their MRP Systems.

So, again, 40% of our revenue on consignment.

And for that revenue, basically order entry occurs at the same time as the revenue is recognized.

So from an investor standpoint or externally, you see that as all kind of turns, what looks like turns business because the order comes in inside the same quarter that we're shipping.

But from a visibility perspective, their forecasts provide us a more detailed visibility.

Thanks for your question.

Let's move to the next caller.

Next will be David Wu with GC Research.

In terms of a very unusual first quarter, can you talk about what will have sequential revenue increase in Q1?

Are they the same kind of things that we saw in Q4, or are there other drivers for Q1?

2010?

I think in Kevin's prepared remarks, he talked about some areas that we expect to be longer term drivers.

But what I would say is that inside of Q1, we don't physically try to break out forecasts out but we have some areas that typically are seasonally down that we expect to be seasonally down in first quarter.

And we have other areas that, for example, industrial, I think you've heard from a lot of suppliers that Industrial usually tends to be seasonally strong in first quarter.

Industrial was an end market that came on later in terms of its recovery and a lot of that strength is still ahead of us.

So I would say inside of that first quarter outlook, you have a range of some areas seasonally down and other areas that are still kind of ramping, driven by a recovery and there's going to be a range inside of that.

Do you have a follow on?

Yes, can you talk about the wireless business?

The baseband business, I guess, has been perplexingly robust or stable throughout calendar 2009 and I was wonder what's your visibility into 2010?

And can connectivity and application processor increase at a seasonally tough first quarter?

You're right that seasonally wireless is an area that is typically down in first quarter, so, again, I'm not going to try to forecast specifics about that segment or product lines inside of that segment.

In terms of baseband, you're right, I think if you look at the trends there, you've seen sequential growth now three quarters in a row.

And the reality is, I think we have some competitors that are late, relative to the original plans in bringing up their baseband product line.

And until they do, we are more than happy to continue to supply our customer with baseband products.

That being said, even though the profile has maybe been a little bit surprising in terms for the sequential trends of late, we do expect that, or continue to expect that revenue to have ramped down by the end of 2012 such that we really have no remaining revenue in 2013.

So no real change in expectations on the endpoint although the last few quarters certainly have held up stronger than maybe we would have expected.

And I'm not going to try to forecast 2010 other than to say or suggest, look at various baseband alternative suppliers and make your own assessment as to when you think they are going to be position to do ramp.

And especially I would say ramp on 3G product, because that's where the strong majority of our sales continue to be.

Okay.

Thank you, David.

With that we'll move to the next caller.

The next caller will be Edward Snyder with Charter Equity Research.

Thanks a lot.

I mean everybody is trying to gets their arms around the difference between inventory replenishment, recovering economy and market share gains.

I know it's kind of difficult for you, given how widely diversified your analog business is, but since that's the big grower, maybe we can touch on that quickly, how do you determine, and we all talk about the inventory, whether or not channel is filling, we understand that, but how much of this is market share gain versus economic recovery but do you see as the quarter unveils that you are posting better sales than you expected and just go with it as it lasts?

Can you give us some idea of where the strength is coming from?

I don't know if I can give you a highly accurate answer but I can give you anecdotal observations.

Back to what Ron indicated earlier, if we look at the majority of our analog competitors our analog business has continually outgrown them sequentially and year over year for several quarters in a row now.

It would certainly suggest that one answer to your question is that we are gaining some market share.

But as to how much of it is how much additional growth may be attributable to inventory replenishment or economic recovery that's pretty much an impossible answer for to us give to you.

One thing I would say, I know a lot of times it gets, that term inventory replenishment gets thrown around, I'll just remind you that early in 2009 as the economy had turned down and there was a very serious inventory correction under way, our shipments into, I'll just describe the channel overall, specifically our customers and their supply chain, was, so our shipments into that channel were well below what our customers were producing and what they were shipping out.

And so certainly to a large, not necessarily still today, but as I said before, for certainly second quarter and third quarter sequential growth, a lot of that was just our shipments normalizing back to their production levels.

So, again, that's not inventory replenishment, but there was that normalization process taking place whereas now we believe it's being driven by their increasing production levels.

Do you have a follow on, Ed?

I would like to do the same thing for the wireless side which is a little bit easier for you to get your arms around, because I know you've got fewer larger customers there.

OMAP or the apps processor connectivity seem to be doing particularly well.

Do you see this as a few big programs?

I think everybody notice the smart phones that you are on now, some of which you are launching and some of which have launched and are still selling well, are you seeing share gains, is the strength you are seeing in wireless due to a lot of other folks signing up and starting to ship product or to a handful of very successful products that are still ramping?

Okay.

It is share gains in the form of more customers that we are engaged with, and then it also ties to penetration of technology, for example, the various connectivity technologies, into a broader range of handsets.

So, again, share gain on both OMAP and connectivity, and then certainly the number of smart phones and the size of that market at which its growing is a big factor on both ends.

But then connectivity, the penetration rate for or pervasion rate for technologies such as as GPS and WiFi into a much richer set of handsets.

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

Moving on to John Barton, Cowen.

Thank you very much, in your prepared comments, you talked about the expansion of field sales and field apps.

Could you just touch on what that might mean to the SG&A line and kind of how you're approaching that, is that just as guys become available that are good you're picking them up or would you expect something more aggressive, you're regulating it based on revenue expansion, et cetera?

John, we are focusing on growth in that area and we have throughout 2009 and will continue into 2010 into markets that we think will give us a disproportionate in growth, so right now that's really talking about China, India, certain parts of eastern Europe.

Of course were will as you point out, come through the SG&A line, but I don't think you will see like a pop.

What you will see is just a gradual change in that overtime.

Let me just take a moment to point out though that going into first quarter, embedded in our discussion about what our earnings range is, that we do expect paying benefit to increases to occur during the first quarter which often happens in the first quarter of the year, which did not occur last year because reconstruction was under way but we are resuming giving increases this year, we also expect 2010 to be a more profitable year than 2009 so other incentive type of compensation such as profit sharing and so will accrue at a higher rate going into next year starting in the first quarter.

So you will see some increases probably in the G&A line, perhaps even the R&D line as well as we transition into those higher accrual rates but you'll also just see a steady increase in the sales and apps line as we go throughout 2010 and probably into 2011 as well.

Do you have a follow-on, John?

Yes, specifically to the March quarter and SG&A line, could you further quantify exactly what you might expect to see sequentially from that event?

I think the highest level on the OpEx, the total OpEx part of the SG&A, I wouldn't be surprised to see it increase at the $40 million to $50 million range.

Thank you for your questions.

We'll move to the next caller.

Thank you.

The next caller will be David Long with Wells Fargo.

Thank you very much.

Could you give us any feel as to who your biggest customers in applications processing are, please?

David, I think if you look, we are across a lot of the traditional handset players, I'm trying think, what's been publicly announced.

I think it's known that Nokia is a customer, Sony-Ericsson has done announcements, Samsung has done announcement, Motorola and a lot of their new products, their Android based Droid handset, are OMAP based.

Obviously there are a couple of players that are more positioned in the SmartPhone space; those being Apple and RIM where we are not engaged with OMAP.

Apple using their own proprietary architecture and then RIM using for the most part a legacy architecture that they've been engaged with for some time.

And then there is one other player, Palm, that is focused primarily on the SmartPhone space that is OMAP based as well.

So hopefully that gives I was feel for where we are positioned.

What I will say, also, is OMAP three has done very well for us.

We expect we have something like 40 different program engagements that will be ramping into production, engagement, over the next 12 to 18 months that will be good for us in that space.

do you have a follow on, David?

Yes, one other.

Are you nauseous can you give us a feel for which of your end markets are sharing the strongest amount of recovery at the moment of any that appear to be not yet recovering?

I don't know that I would say there are any that are not yet recovering.

They've moved at different paces.

I think if you kind of go back through 2009, late, and first quarter into second quarter, you heard us talking more about high volume spaces, products like computing.

Some of the handset areas, some of the consumer areas that seem to recover fastest.

And then probably the last market that has been more recent in its recovery would be Industrial.

And I'm sure inside of those different markets you can find particular products that maybe are still lagging but for the most part I would say with Industrial now picking up, it looks like all the major markets are now in recovery mode.

Okay, David, thanks for your questions.

We'll move to the next caller.

Moving on to Ross Seymore with Deutsche Bank.

Thanks, guys, just a question on the margin side of things.

The gross margin is a couple points off your long-term target while the operating margin is actually pretty close to it.

Can you hit the long-term gross margin target of 55 if wireless basebands are still 15% of sales?

Ross, when we talked about that, that's really a function of increasing mix of the higher profitability products such as analog and the better processing.

So inherently that's going to suggest that baseband will become less than 15% that it currently has reduced to over time and as Ron mentioned earlier, we expect that to go to zero by the end of 2012.

Just the growth alone of analog and data processing, even with baseband in there at 15% you are seeing margins come up pretty strong.

I don't think you have to depend on basebands to be gone in order to margins to improve, but that certainly would accelerate the higher margins.

Even with basebands and mix we certainly are not in any hurry to push that out to enhance gross margins.

Because with very little operating expense, it falls through nicely to operating profit and cash flow as well.

So we will welcome that baseband business as long as our customer wants to purchase that product.

And as long as we are continuing, of course, not to be making an investment which is our plan.

Do you have a follow on, Ross?

Kind of on exactly what you were just talking about, you almost hit about a 25% operating margin in that wireless business.

How should we think about what sort of OpEx is necessary to keep the OMAP and connectivity side going as you're clearly doing a great job of milking the baseband side?

The local and the specifics into how the P&L shares up inside those segments other than just talking about the segment as a whole but the overall economics of that business unit will be such that we should continue to see it delivering margins not too far off from where its at, these kind of revenue levels, and the mix of product will continue to change over time as connectivity and OMAP continue to become revenue.

It's safe to say we are investing ahead in OMAP and connectivity, both areas have gross margins above, for example, what baseband has.

But we certainly expect growth in OMAP and connectivity to exceed revenue growth in those areas to keep any additional operating expense growth in those areas.

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

Moving on to Jim Covello with Goldman Sachs.

Good evening, guys, thanks so much for taking the question.

Q2 inventories, do you have a goal for internal Q2 inventories.

Q2?

We haven't even shared a goal for Q1.

I like that you think ahead, jim, but the answer is we don't have a specific goal that we want to publicly share, any way, on Q1 or Q2.

And as you've seen even the last few quarters, a lot of what we achieve or what we don't achieve in repositioning of inventory will depend upon what happens with end demand as well as what actions we might be taking to support quarter out demand expectations, as well as what we are doing from a customer service metric positioning.

But we don't publicly disclose those expectations.

Do you have a follow on, Jim?

Could you let me know, what would capex have been in the quarter without the money spent toward the Qimonda assets?

I think it was in the press that we spent about $172 million on those assets.

All that $172 million was recognized in the fourth quarter CapEx?

Right.

Terrific, thanks so much.

Thank you.

Next caller, please.

The next question will come from Stacy Rasgon with Sanford Bernstein.

Hi, guys, can you hear me?

We sure can.

Thanks for taking my question.

I just want to do verify something.

In terms of the upside that you saw in Q4, it seems from your commentary and the release that you don't feel like you saw restocking this quarter, it was all due to just continued normalization.

Upside in Q1, you actually expect to see that upside from some restocking activity, and I was wondering if you can give me any color whether or not you expect that restocking activity to carry past Q1 into Q2 and the rest of the year.

: I agree with your characterization of Q4, that I think for the most part the supply chain was stretched and even if there had been a desire to get some inventory position, for the most part, the supply chain was unable to do that.

Now whether they are able to take an advantage of, does end demand seasonally slow in Q1, and are they able to take advantage of that, to be able to get some inventory positioned, I think a lot of customers and distributors down through their supply chain would like to do that.

But, again, the question is just going to be, are they able to do that in Q1?

And I really don't have a forecast or perspective to be able to provide on that.

Do you have a follow on, Stacy?

Yes, I do, around the CapEx budget for 2010, the 900 million, can you give me some feeling for how that is going to split up from assembly and test versus additional 300-millimeter investments to round up the process versus 200-millimeter buys?

Could you give me a position for how that might split?

Right now I would suggest that a majority of that would be going towards the assembly and test operations as our volumes continue to increase.

We would put more into the 300 millimeters.

We bring up 300 millimeters in that lines and we will as we did in the last quarter but certainly the 2010 budgets, the majority of that would be pointed toward the assembly test sites.

Thank you for your questions and let's go to the next caller.

Moving on to Srini Pajjuri, CLSA.

Thank you, just a couple of clarifications on the gross margin side, Kevin, just if I take the midpoint of your revenue guidance and plug in the assumptions, I'm getting gross margin to be flattish and based on what you are saying about Q1 and the history, I would expect the mix to improve and the revenue to start growing.

My question, why wouldn't the gross margins go higher?

Are there any offsetting factors here?

Srini I'm not sure how your assumptions are let me share a few points to share how we are looking at first quarter.

If you look on our balance sheet you actually saw that we grew inventory in the fourth quarter and principally on the finished goods line which is one of the things that will allow us to be be able to continue to improve on our delivery commitments to customers in first quarter and help our revenue outlook in first quarter.

That also goes to say that we probably have enough wafers in flow to begin to deal with demands.

And so therefore we don't expect utilization of our factories or front end with our fabs to be able to change that much in the first quarter.

I mentioned few minutes ago that the out look for the year is for higher profitability than what we had in 2009.

And I also mentioned that we are resuming increases in base pay for people.

Those two combined will increase not only our OpEx fourth quarter to first quarter, but will also have an increase on the cost of goods line which will affect GPM a little bit.

Those will ability the analysis that we are are you are trying to put together right now.

If I look at the analog business, Kevin, some of the product share gains that you mentioned, it looks like a majority of them are coming from the consumer side like the PCs and LED TVs.

My question is how does that impact the gross margins for that particular segment, the analog business going forward?

I mean, do you see any impact at all or do you expect to maintain that 65 to 70% gross margin that business typically has?

Thank you.

That higher gross margin that you're talking about is typically on the high performance analog products.

And we actually don't see that being impacted by the demands that we are seeing from that part, some of those other spaces that you were referring to actually was in the power products, where we are seeing a lot of success of new products going in there.

And while the margins, the gross margins there may not be quite as high as one might expect in the high performance analog, the operating margins are very similar.

While there may be mix over time, that causes bits and pieces to move it up, down a little bit as we pass through from quarter to quarter, we think overall the mix will continue to up because the total analog portfolio and embedded processing portfolio combined exceeds what we get from the rest of the portfolio.

And in addition, they are growing faster than the rest of the portfolio so they are becoming a bigger portion of the revenue mix.

And pretty much the same comments apply to HVAL where the gross margins are a little lighter than when compared to high performance analog.

The SG&A and R&D requirement are lower and operating margin is very similar.

So whether it's HVAL, whether it's HPA, or whether it's power, our objective and our expectation of long-term is to get all of them growing at about the same pace.

But even if there are variations at the operating margin, it won't make much difference.

Okay?

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

Moving on to Craig Berger with FBR Capital Markets.

Hey, guys, thanks for taking my question.

Just in talking to some of the investors, I mean, the main concern is as lead times come down you may see order volatility or you may see a little air pocket of demand.

Do you think that there's enough inventory out there in the channel for that situation to arise?

And can you also just talk about where fab lead times are and back end lead times are?

Thank you.

All right.

Let me take part of it and I'll let Kevin add to it.

I think, if lead times decline, might there be order volatility?

Could be.

But I'd also say we are not overly concerned with that.

like I said there's a lot of means by which we had visibility into what demands is and orders are just part of that.

The second part of your question I think is totally pertinent which is, is there enough inventory out there, such that true demand from our customers would go volatile, and that's where given how lean the supply chains are, I don't think it would make any difference.

Again, if lead times pulled in today, customers may not immediate feel the need to give us as much long-term visibility into their demand, but their take rate in terms of shipments, demand per shipment likely wouldn't wiggle at all.

But we'll see how that develops over time.

The second part of your question, I think we are both, Kevin and I are both sitting here with -- are you still there, Craig?

Yes, lead times, front end, back end.

You are saying manufacturing cycle times?

Meaning, generally -- I'm sorry, the question was utilization, front end and back end, kind of where are they and where do you see them going.

On utilization, we don't actually call it that.

I would say we are back more to a more than kind of utilization type environment.

Unlike where we were a year ago, of course but our utilization in the first quarter dropped into the mid 30% kind of range.

We are back into a more normal kind of utilization rate today.

I mentioned few minutes ago that we would expect our utilization going into first quarter to be very flat to what it was in first quarter.

That's on the, that's a reference to our front end or the wafer fabs.

On the back end, we have been investing for a couple of quarters now, and expanding our capacity there, especially on certain package types and clearly our utilization is very, very high, in certain of those lines, but the equipment is still getting into place now and we are beginning to see our throughput increase.

If you see our balance sheet the finished goods, actually start to increase since the first time since the second quarter of 2008.

Thanks for your question, and let's move to the next caller.

Next, Doug Freedman with Broadpoint.

Thanks for taking my question and congratulations on a strong quarter.

If you could talk a little bit about where we are with the distributor conversions that are going on and how much that might have impacted revenues either this quarter or next?

Doug, right now we are probably about a quarter -- let me just go to the highest level.

There's probably about 30% of our revenue goes to the distribution channel.

And of that, about a quarter of it is on consignment.

We are slowly increasing that each quarter, portions on consignment with the idea that sometime probably late next year, next year being 2011, we will arrive at somewhere on the order of half of our total distribution inventory on a consignment basis.

Were you able to calculate what impact that had to revenue recognize this quarter?

Not precisely, Doug.

I don't have that number with me.

I just don't have the answer for you.

Again, probably the way to think about it, Doug, if you go back, we started that consignment program with distributors in June of 2008.

So over the last, what, six quarters, we've gotten 25% of that revenue converted over to consignment.

You probably, based on that, can go make some average, call headwind calculations from that consignment program.

But the fact that we are doing a relatively slow deployment on that would say probably in any one quarter.

It's kind of a slow steady headwind on the timing of revenue, but, again, it doesn't impact resales at all, doesn't impact the end demand.

It just has the effect of moving it out a quarter as distributors rely more and more on that consignment program.

Do you have a follow on, Doug?

The guys have already commented on your operating margins coming in sort of above target this quarter.

Can you give us an idea how many quarters would you run with your operating margins above your target before you think it might be appropriate to adjust some of the targets?

If I look at the R&D and SG&A as a percentage of sales I guess it might be a really good quarter to be at TI next quarter because you are going to have to increase spending a lot more than what you just guided to get it up to the 25% number.

Doug, I think that we still have a lot of to achieve the targets we set for ourselves a couple years ago, it's 55% gross, and 30% operating, we didn't set that as a ceiling but we set those at an objective what the company should operate at and ideally on a sustained basis.

We think it's important for us to focus on topline growth right now and show that we can sustainably deliver those kinds of margins over a period of time.

Let's not celebrate yet.

We are close to the margin goals but we are not there yet.

Okay.

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

Next, Glen Yeung with Citi.

Thank you.

Can you guys talk about the pricing environment that you're seeing sort of generally across your products but specifically in some of the commodity products?

I'll start with commodity but let me do the normal caveat of, remember, it's only a few percent of our revenue, but pricing and commodities, is doing what you would expect in a situation where suppliers pretty much across the board are short, relative to what the demand environment is.

So pricing is moving up on commodities, as you might expect.

Outside of commodities, I would say which again is almost all of our revenue, pricing is pretty much following normal trends.

So nothing really environmentally unusual there.

Even in commodities it's not unusual but it has moved up in this constrained environment.

Do you have a follow on, Glen.

If you look back at the 2003, 2004 time frame, 2004 was the last time we had a material inventory problem and I was wondering if you can compare and contrast what you are seeing today versus what you saw back then.

Are you talking about coming out of the tech bubble?

No, no.

I'm really thinking about 2004 when we had, what I would characterize more as an inventory issue, shorter term, obviously.

You can look at the tech bubble too, obviously a much bigger inventory issue but I think in both periods we had some problems.

Glen, I have a couple of things I would observe and I suspect you've noted it, also.

I mean typically when you get into, call it the cycle rolling over again, you are coming from periods where inventory has been inflated.

Usually as that inventory build is taking place, customers, suppliers, distributors, convince themselves it's being done because the demand environment outlook is going to be strong, and then it results in some form of correction of that excess inventory level.

I think what's different -- and we all recognized when that inventory is being built.

But, again, we convince ourselves, and I'm talking the entire supply chain here, that it's appropriate relative to the demand outlook.

I think what's different in this environment is pretty much if you look at TI, you look at our distributors, you look at our customers, you see inventory levels that are historically lean.

And that's a big difference between pretty much every other cycle that peaks out and rolls over versus where we are today.

We have demand today that is being driven, call it more macro level in demand increases and you have inventories that to date have remained very lean and well behaved.

So I think Stacy asked a question earlier about replenishment and whether that's an expectation, I think typically at some point as demand continues to build and as suppliers get capacity online, you would expect at some point replenishment of inventory levels.

But I would describe that as ahead of us as opposed to anything that we've seen to date.

Okay.

Glen.

Thanks for your questions.

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

Certainly.

That question comes from Chris Danely of JPMorgan.

Thanks for squeezing me in.

I didn't know it was you, Chris.

Just kidding.

Go ahead.

I'm small enough to be able to easily squeeze in almost anything.

On the analog I know you talked about trying to get the HPA, HVAL and power to grow equally, can you give us the relative growth rates between those three products in 2009?

Chris, let me say, first of all, that I think if you look at, when I say -- I don't know that I intended to say it's our objective to try to get them to grow equally.

Clearly historically we've had really good growth in HPA and we've had outstanding growth in power, but HVAL has been a laggard and frankly it wasn't just a laggard relative to those two products areas.

It was a laggard relative to what you are our perception of the market was.

Frankly there's no reason that all three of those areas shouldn't have growth that is relatively similar across them.

But to some degree, you are going to have variations that develop.

I think if you look at historically, like I said, I would just almost have to leave it at that.

HPA and power clearly have been the primary areas of growth in analog over the last few years.

HVAL lagged through even the first, the first part of 2009.

I would say mid year, we bottomed out.

Some of the fruits of our efforts over the last few years, basically to, starting with management changes and then organizational changes below that, in markets on which we were focused and all the things we talked to you about in the past started to come to fruition.

And over the last couple quarters certainly HVAL has pulled its weight as well.

But that's really what we are intending to say.

and I think we are reasonably satisfied that we have good growth opportunities in all three and we are positioned to realize those growth opportunities.

But any quarter by quarter or even year by year, you may have differences.

And that will be okay.

Do you have a follow on, Chris?

Yes.

Just on the lead time thing, lead times have been going out for a couple of quarters now.

And I think you guys have said that it's mostly related to back end issues.

So my question is, when you guys first saw the lead times going out, why didn't you just ramp up your back end aggressively and as well much them?

Are you trying to sort of keep the lead times a little bit longer?

I'm just wondering about the machinations of that processing?

When you think about to when we began to see some of the challenges it was still on the way down.

It's how quickly we forget sort of thing but it wasn't that long ago when the bottom was falling out of demand across the board.

When the demand did start coming back in second quarter all of us scratched our head trying to decide whether or not it was real.

Certainly in retrospect it was real.

And once we acknowledged that, we began to step up capital spending.

You saw us move up in third quarter and you saw it move up again in fourth quarter and most of that is going to back end capacity trying to remove those constraints.

The history is trying to get to where we are at, it certainly was not an intended outcome, the last thing we want to be is displease our customers, in the matter in which we have on certain of these product lines, but our objective to get this fixed this as quickly as possible but experience tell us when were get behind like this it takes us quite a few quarters to get caught back up.

Chris, just as a reminder, second and third quarter growth rates across that six-month period was higher than what we've ever seen before, at least in any of the history that Kevin or I could find.

So when you do your planning, you do the best you can.

And sometimes it's not good enough.

But nonetheless, we would rather be in this situation where we have revenues rapidly growing than the alternative certainly.

Okay, Chris, thank you for your questions and, overall, thank you for joining us.

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

Good evening.

That does conclude today's conference.

Thank you for your participation today.