德州儀器 (TXN) 2010 Q1 法說會逐字稿

Good day and welcome to the Texas Instruments first quarter 2010 earnings conference call.

Today's conference is being recorded.

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

Please go ahead, sir.

Thanks, Celia.

Good afternoon and thank you for joining our first quarter 2010 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 www.ti.com/IR.

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

A replay will be available through the web.

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

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

Our mid-quarter update to our outlook is scheduled this quarter for June 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 TI's plan for growth.

We'll talk about our progress to transform TI to a Company focused on Analog and Embedded Processing, how it's driving our growth today and our plans to support growth in the future.

We'll address near-term trends and inventories and lead times as well as our strategy for capacity to make sure we're positioned to grow in the years ahead.

Revenue in the first quarter slightly exceeded the high end of our range of expectations.

Earnings landed at the top end of our expectations.

Demand was strong and broad across end markets and regions, while supply chains across the electronics industry continued to be constrained and inventories appear to remain lean.

Revenue in the quarter was up 7% sequentially and 54% compared with a year ago.

Analog, Embedded Processing and our core Wireless products, excluding baseband, were TI's growth drivers in first quarter 2010, and we're investing to accelerate their growth from here.

They received about 90% of our R&D investments in the first quarter.

These businesses comprised 66% of our first quarter revenue, up from 61% a year ago and 58% in the first quarter of 2008.

Analog revenue grew 8% sequentially and was up 70% from the year-ago quarter.

Once again, all three of our major Analog product areas were strong contributors to this growth, with each expanding about equally from its fourth quarter level.

For HVAL, this was the fourth consecutive quarter of solid sequential growth, further evidencing the turnaround in this business that we told you to expect and that is now being achieved.

A more important metric could be that our Analog revenue is up 8% compared with the third quarter of 2008, the quarter before the industry entered the downturn.

While not all of our peers have reported, I believe this growth will compare favorably when results are in.

The importance of this metric is that it captures performance over a longer period of time and indicates who is growing stronger out of the downturn.

We are working to extend our lead with investments we've made in product technology, sales support and manufacturing capacity.

Just last week, we bought another 100 tools for 300-millimeter Analog production, kicking off Phase II of RFAB.

Embedded Processing revenue grew 7% sequentially and was up 39% from a year ago.

As a reminder, the year-ago quarter benefited from growth in our communications infrastructure business as China deployed 3G infrastructure.

The strongest areas of growth this quarter in both comparisons were in our catalog products that are used in a wide range of applications.

Catalog micro controller products were especially strong in the year-ago comparison.

Similar to Analog, Embedded Processing revenue was up 3% from the third quarter of 2008, which should compare favorably to competitors.

Wireless revenue declined 5% sequentially and was up 27% from a year ago.

Baseband revenue of $424 million fell 9% sequentially and was up 6% from a year ago, reflecting a stronger mix of 3G products.

Basebands are now down to 13% of TI revenue compared with 15% in the fourth quarter and 19% in the year-ago quarter.

Revenue of $293 million collectively from applications processors and connectivity products was even with the fourth quarter and was up 80% from a year ago.

This is up 12% compared with the third quarter of 2008, another indication of our strong performance in the SmartPhone market.

I should note that we have moved our low-power wireless products from our Analog segment to our Wireless segment.

We made this move because our Wireless organization is better suited to support this significant growth opportunity.

This low-power wireless product line is based on products that were included in or subsequently developed from our 2006 acquisition of Chipcon.

Revenue from these products was $68 million in 2009.

We have a chart on our website that shows our Analog and Wireless segments historically adjusted for this change.

Other revenue grew by 19% sequentially.

Royalties increased and we had a strong sequential growth in custom ASIC products as well as growth in DLP products and calculators.

From a year ago, other revenue grew 68% mostly due to strong growth in DLP products where revenue more than doubled as well as strengthened royalties, custom ASIC products and calculators.

From a geographical perspective, almost all of the sequential revenue growth came from the US, Asia Pacific and Japan regions.

Turning to distribution, resales or sales out of our distribution channel were up more than 10% sequentially.

We believe this represents share gains across multiple distributors.

Even with this strong retail growth we were able to help distributors build some inventory to support future growth.

Even so, distributors' total weeks of inventory remain about five, similar to last quarter and low by historical standards.

Now Kevin will review profitability and our outlook.

Thanks, Ron, and good afternoon, everyone.

Our gross profit expanded by 6% sequentially this quarter as revenue grew.

Gross margin declined slightly by 20 basis points to 52.7% of revenue.

Operating expenses increased $27 million from the fourth quarter.

As I explained in January, this was mostly the result of higher compensation expenses that resulted from our stronger financial outlook for 2010.

For example, accruals for employee profit sharing and annual raises in February.

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

Restructuring charges in the first quarter were $10 million.

This is for US pension plan settlement accounting associated with actions that occurred in 2008 and 2009.

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

Operating profit for the quarter was $950 million, 9% higher than the prior quarter due to higher gross profit.

From the year-ago quarter, operating profit was up $940 million due to higher gross profit.

Operating margin in the quarter was 29.7% of revenue.

Net income in the first quarter was $658 million or $0.52 per share.

Included in net income was $7 million of discrete tax charges that were associated with the change in tax treatment of Medicare retiree growth subsidies.

I'll leave most of the cash flow and balance sheet items for you to review in the release.

However, let me make just a few comments.

Cash flow from operations was $710 million.

This was down from last quarter's $1 billion due to higher receivables.

Cash flow from operations was up from the year-ago quarter due to higher net income.

Capital expenditures declined sequentially to $219 million in the quarter.

Expenditures included the purchase of additional assembly and test equipment as well as additional Analog wafer fab equipment.

Our process qualification work at our 300-millimeter Analog wafer fab, RFAB, is producing good results.

The initial wafers that we began producing in January have completed processing with good early yields.

We continue to track well to our goal to have full process production qualification before the end of this year.

In the quarter we used $504 million to repurchase 20.6 million of TI common stock and pay dividends of $149 million.

We were able to increase our inventory by $74 million in the quarter with most of the additional inventory staged as work in process to support our forecasted higher 2Q revenue.

Inventory days held steady at 76.

Consistent with what we described in our mid-quarter update, our delivery performance has continued to improve and our lead times have continued to decline as we bring additional manufacturing capacity online and get better positioned with inventory.

Even as we have begun an orderly process of reducing lead times, demand from our customers has remained strong.

Orders in the quarter were $3.64 billion, up 12% sequentially.

TI's book-to-bill ratio was 1.14 in the quarter, up from 1.08 in the fourth quarter and our strongest book-to-bill ratio since the second quarter of last year.

Turning to our outlook, we expect TI revenue in the range of $3.31 billion to $3.59 billion in the second quarter, or a 3% to 12% sequential growth.

We expect earnings per share to be in the range of $0.56 -- (audio difficulties)

Okay.

We'll continue where Kevin left off there.

Actually what I will do is back up maybe a paragraph.

I'm sure that caused a bit of a distraction for everybody.

Turning to our outlook, we expect TI revenue in the range of $3.31 billion to $3.59 billion in the second quarter, or a 3% to 12% sequential growth.

We expect earnings per share to be in the range of $0.56 to $0.64.

Our estimates for 2010 R&D, depreciation and capital expenditures are unchanged from last quarter.

In summary, as the recovery continues to gain momentum, we are seeing the results from investments that we maintained even through the depths of the downturn.

We have products well positioned and field sales and applications team that is second to none.

Our production output is at an all-time high, and we have a multi-year ramp in capacity underway that will allow us to support our customers, and therefore our shareholders, with strong growth potential.

And this capacity, both fab and assembly and test, is being procured at cost levels that will also advantage us competitively without burdening TI with a lot of fixed costs.

We see this strategy as having lots of upside opportunity and manageable downside risk.

With that, let me turn it back to Ron.

Thanks, Kevin.

While we're building the queue for Q-and-A, let me take a moment to remind you that we will be holding our 2010 financial analyst meeting in New York next Thursday, May 6, starting at two PM Eastern time.

The meeting will be webcast, so if you are unable to join us in person, please join the webcast.

Operator, you can now open the lines up for questions.

In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question.

After our response, we will provide you an opportunity for an additional follow-up.

Operator?

Thank you, Mr.

Slaymaker.

(Operator Instructions).

And we'll take our first question from Christopher Danely with JPMorgan.

Chris, are you there?

Operator, why don't we move to the next caller, and we will come back to Chris.

Operator, are we still online?

Yes, sir.

One moment, please.

Okay.

Mr.

Danely, please go ahead, sir.

Can you guys hear me?

We can hear you now, Chris.

All right.

Thanks.

First question is on the gross margins.

Why were the gross margins down despite the increase in sales?

And can you just maybe give us a sense of where gross margins can go for the rest of the year?

Yes, Chris.

You may recall that in January when we had our fourth quarter earnings release and our first quarter call, I mentioned that we were reinstating compensation changes, compensation increases for everybody in 2010.

And that we also, based upon [higher] outlook, would see related compensation such as profit sharing going up.

And so really what you're seeing is the effect of that going through the gross margin line.

In fact, you adjust for that, the fall-through would be very close to where you probably would have expected it.

Did you have a follow-on, Chris?

If you could just talk about where you can expect gross margins to trend for the rest of the year, ie, can they go up much or will the compensation continue to impact them?

Yes.

We've established the gross margins target of 55% gross margin and 30% operating margin, and we remain very confident in being able to achieve those.

The main driver of that, of course, is going to be just the revenue mix as we go forward.

I think Ron mentioned already that Analog and Embedded Processing and the core Wireless products are now about 66% of our total revenue.

They're becoming a richer mix and those deliver very nice gross margins.

We would expect that mix to continue to richen up as we go through the year and the years to follow, and the gross margins will move on accordingly.

Beyond that, I won't want to give a specific time period as to when we think we'll be achieving that 55% gross.

Kevin, could you speak just a minute on the compensation, how much of what we saw from fourth to first was kind of a one-time, moving into the new year versus what would just be expected quarter-to-quarter going forward?

Yes, that's a good point, Ron.

The compensation changes that you saw in first quarter -- our annual rate [is] actually effective in February, so you only saw two-thirds of the effect of that in the quarter.

So you'll see a bit more of that going into the second quarter where the full rate [will] burden the quarter.

And depending upon our outlook, our accruals that we take for our compensation-related incentive-type things such as profit sharing could be adjusted as well.

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

We'll go next to Tristan Gerra with Robert Baird.

Hi, good afternoon.

Sounds like your utilization rates went up in Q1, which I think might be above the flattish expectation you had last quarter.

And also if you could talk about your expectation in Q2 relative to your capacity ramps.

Tristan, actually our utilization rate didn't move that much.

It was very consistent with what we talked about.

And while we do expect utilization to go up a little bit next quarter, it's not going to be that much.

Again we have -- you may have noticed from our balance sheet we were able to build some inventory in the first quarter even with our utilization not changing by that much.

That helps position us well for growth going into the second quarter.

And so it's just [as more] relatively small additional wafer starts we'll be able to reach those types of revenue numbers that we gave in the guidance.

And Tristan, we don't really have expectations that we're sharing on our second quarter utilization because that will really tie more to our third quarter expectations.

Do you have a follow-on, Tristan?

Also, given your expectation to phase out the baseband business, are you changing your pricing strategy there?

Or is it pretty much in line with what you've done in the past?

And perhaps also some pricing comments on the Analog side of the business.

Tristan, I really don't have comments on baseband pricing.

Again, most of our pricing there tends to be driven more by longer term contracts.

But since most of our baseband revenue really goes to a single customer, it would be inappropriate for us to talk about pricing trends.

With respect to Analog, really no abnormal changes there.

I think Analog pricing in general, especially in the high performance area, tends to be very stable.

And in areas like HVAL, where it may tend to trend down over time, it tends to trend down based upon longer term pricing agreements, and those are well understood trends that we engineer for.

If I can broaden that, the only area where we've seen pricing that moves more with the near-term market environment would be in some of the commodity areas.

And we've said probably for the last quarter or so, that pricing has trended up and, in fact, we saw that as well in first quarter.

Okay Tristan, thank you.

And let's move to the next caller, please.

We'll go next to Adam Benjamin with Jefferies.

Please check your mute function, Mr.

Benjamin.

Okay.

we'll go next to Uche Orji with UBS.

Thank you very much.

Can you hear me?

Yes, we can, Uche.

Just one quick question, Ron.

When you look at your revenue growth in the last three or four quarters, which have been fairly strong, and you try to reconcile it with the ultimate end markets, be it industrial, be it wireless, are you concerned at all that inventory might be [heading] down the line with the OEMs?

I mean it just seems to be -- is there a way you have kind of tried to analyze this yourself and tried to figure out if this is happening?

Because that seems to be a little bit of a disconnect with the [strains] we have seen with the [customer inventory or] the end market themselves.

Uche, I guess the advice I would have in doing that comparison is you can't have the starting point be in the last three or four quarters because in first half of last year, especially first quarter of last year and probably even starting in fourth quarter 2008 as the downturn really started to take force, we were significantly undershipping our customers as they were reducing inventory.

So to look at growth trends coming off of that bottom when we were undershipping customers is probably not an appropriate metric.

I do believe that -- first of all, let's talk about the customer inventory.

You heard us say first of all with respect to distribution, our channel inventory, we were able to get some inventory built there, but weeks of inventory maintains at about five which is by any historical metric going to be lean.

We have an additional significant percentage of our OEM customers where we are managing their component inventory because it's done -- it's business that's done on a consignment basis and we know that is lean and it tends to be very productive, fast turning inventory.

So if you put distribution and the OEM consignment programs together, that represents about two-thirds of TI's revenue base.

So that leaves about one-third of the customers that we have frankly less direct visibility into their inventory levels.

But Uche, all signs and indications that we've picked up is that inventories remain lean.

As I said, this is a general supply chain type of consideration that inventories are lean.

The customers are trying to build inventory and bring in product consistent with their end demand, but they're really not to a point where they've been able to significantly increase inventory from a days or weeks basis.

So certainly, we watch it.

We watch relative growth.

We talk to customers about their needs and all of that, but we haven't seen anything to this point that is setting off any kind of alarms.

In fact, if anything, we're still the other way around where we're trying to continue to pull up our supply to be able to fully meet the customers' demand with the service levels that they're used to from TI.

Okay, Uche, do you have a follow-on?

Yes, I do actually.

Thanks for that answer.

My follow-on is if I look at the other revenues, that seems to be a very meaningful contributor to margins.

I mean one of the key contributors there, of course, is royalties.

Can you give us any comment as to what's driving royalties at the moment ?

What, if you don't give us the absolute size of that number, but just to get a sense of what's driving royalties right now.

I know historically it's been the DRAM companies and what your [specifications] are, and also within DLP.

If you can also talk about what your expectations are within that, that's my last question.

Thank

Uche, I think on the royalty front, naturally that's a function of how well our licensees are doing, and generally we've got a strong market going on.

I won't quantify any of the business units underneath the other segment other than to say what's up and what's down.

Royalties was up sequentially.

DLP was also up quite a bit.

That also happens to be a very attractive margin business and that's on the strength of front projectors.

In fact, on not only quarter-over-quarter but also year over year if I recall, I believe, it about doubled on a year-over-year basis.

More than.

And going forward, we're seeing continued strong demand, especially for the DLP in the future.

Again without being specific on that area because we don't really forecast or publicly forecast below the Company level.

Overall, what we'll see next quarter, just so it's not lost on folks, is the calculator business is inside the Other segment.

And you may recall, that has a seasonally stronger second and third quarter.

That's when the back-to-school selling season happens.

So we would typically see an uptick from 1Q to 2Q for that business, and we're expecting around $65 million to go from 1Q to 2Q [with that] revenue there.

It will typically go up a little bit more in third quarter and then drop off again in fourth due to the seasonal nature of that business.

Uche --

Thank you very much.

Yes.

Let me make a couple comments, also, just on what's driving that DLP strength because a certain part of it is the year-ago effect of markets being weak and inventory.

But actually, inside of DLP, education is a very big market and market driver for our front projector products.

And we're seeing a lot of strength now, especially, for example, in Asia as schools and classrooms over there start deploying DLP projectors in the classrooms similar to what many of the schools here have done.

And DLP had just a very significant reliability advantage that makes it attractive to educational systems.

The other thing that is more recently starting to play out as a differentiator for our DLP front projectors is they're 3-D capable.

And so you certainly know of 3-D in the cinema but actually educational systems are using the 3-D capability to help students better visualize things that wouldn't normally pop out in textbooks or in 2-D diagrams.

And then certainly, you don't have to look very far to realize how big 3-D is with movie cinemas these days and what I would just say, is almost all of that is being done on TI-based DLP projectors.

Okay, Uche, thanks for your questions and we'll move to the next caller.

We'll go next to Sean Webster with Macquarie.

Yes.

Thank you.

Can you hear me?

Yes, sir.

Okay, yes, I was wondering, you said the five weeks wasn't -- was still lean.

What is it historically?

And in terms of your lead times, when do you think they'll get to a more normal level?

Okay.

The historical distribution has run in the eight-to-nine-week range and that's over the past, oh, few years, maybe excluding last year.

But if you go back longer than -- or if you go back further in history, they would have even carried more weeks of inventory.

Certainly part of the reason that inventory levels have come down are just structural things that we've done from a consignment program.

And just as a refresher, today -- we actually started, I guess it was in June of 2008, deploying consignment programs to distribution.

Today, about 30% of our distribution revenue is supported by consignment.

So structurally, that will tend to bring down inventory levels.

But even accounting for that, inventory levels at distributors remain lean.

And Kevin, would you like to answer the second?

On lead times, Ron mentioned during mid-quarter conference call that we had already begun to pull in lead times as we've been bringing on capacity to deal with the high levels of demand that we've had.

And we have further pulled those in as we came out of the quarter.

We still have a number of products that have lead times longer than we prefer at this point.

But we've made significant progress coming into the first quarter.

I'd remind you that we're going to continue installing additional capacity for each of the quarters in 2010, and we expect that should greatly enable our ability to bring lead times back to a normal level.

Did you have a follow-on, Sean?

Yes, please.

I was just wondering if you could provide us some color on how your order books look going into Q2?

What areas do you expect the most strength from and what areas do you expect the least growth?

Sean, we don't break our guidance down into particular markets, so I probably need to stay away from that.

However, let me just say thus far in the quarter, which is what, 26 days, orders are strong and fully consistent with the guidance that we just provided you.

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

We'll go next to Tore Svanberg with Thomas Weisel Partners.

Yes.

First of all, just coming back to the lead times topic, can you just put some parameters or numbers around where lead times have been and where they are now?

We're talking about tens of thousands of part numbers here, so there really is no one answer.

But lead times that were, say in excess of 12 weeks, are pulling back into the eight-to-ten-week kind of range.

Lead times that were in excess of 16 are pulling back into the 12-to-14-week kind of range.

We're kind of seeing it across the board where proportionately more and more of our products are moving back into a normal lead time for that particular product.

Not all of them are the same.

It depends on the manufacturing process.

Some processes take longer naturally than the other processes.

But the lead times are all beginning to move back in consistent with those processes, but as I said, still some work to do on that.

That should be dealt with as this new capacity continues to come online this year.

Tore, one way of thinking about it, is I guess at mid-quarter we were seeing data that allowed us to believe they had stabilized and I think I described it as we were making slight improvements in lead times.

Since then, we've seen a lot of progress, and I would describe, compared to slight improvements at mid-quarter, I would describe the improvements as significant at this point.

So they're turned.

They're turned very clearly in the right direction and we're making significant progress.

Do you have a follow-on, Tore?

Yes, Ron.

You said the HVAL business has grown four consecutive quarters and has fully recovered.

Can you just talk a little bit about some of the bigger end markets that have been responsible for that recovery, please?

Yes.

But the only thing I would say is I don't know that I would say it's fully recovered.

I think we certainly believe we have it well on its path and we think that turnaround that we had talked about, I think really for a couple years now, is well underway.

But there is still work to do.

There's still additional progress to be made in terms of further diversification of those products and the markets that we're working through.

I think if you look at HVAL, it really isn't a single market.

It's a variety of markets.

Just even specific to first quarter it's clearly computing and peripherals.

Peripherals that we participate in with those products would include areas like printers, but maybe more significantly would be hard disc drives.

Those were some examples.

Probably automotive would be another one that I would mention as a notable area of improvement.

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

And we'll go next to Adam Benjamin with Jeffries.

Hello, Adam, welcome back.

Thanks, guys, sorry for the (trouble).

Just had a follow-up on the lead times.

With the lead times coming in on the back end mostly, can you talk a little bit about cancellations that you've seen maybe on a relative basis in Q4, and then comparing that to Q1 and then what you've seen so far in this quarter?

Yes, Adam, I can answer that pretty quickly.

We've seen no change in lead times.

There's no abnormal --

Cancellations.

Pardon me.

No change in cancellations.

No abnormal adjustments there at all.

In fact, I would just observe that during the quarter, even though we were improving the lead times on a considerable basis, once again we did see actually a strengthening of [demand] in the quarter.

We talked about earlier a book-to-bill that took us back up to 1.14.

So really showing the customers continue to have significant demand for our products.

I think to be honest, Adam, I know there's been a lot of investor and analyst concern and worry about what would happen when lead times pull in and what -- how that might affect orders.

But to be honest, I think that kind of focus really is missing the forest for the trees in this type of very strong demand environment.

So was there any noise in the order line associated with our change in lead times?

There could have been, but it was more than swamped by just rising [end] demand, rising production from our customers.

So again, I just -- I would caution against getting too micro-focused on that detail and focus more on just the recovering economy and what that's driving in terms of demand for semiconductors.

Adam, do you have a follow-on?

Just to follow up kind of on the longer term basis on gross margin.

I know in this quarter you mentioned you're layering on some comp and some CapEx, and I'm just curious as you move throughout this year and really into next year, how you're thinking about the gross margin and where we should be thinking about where that can trend to.

Adam, we've been talking for a couple years now about gross margins working their way as we rebuild the portfolio to a 55% kind of structure.And that's not to say that's a ceiling or a floor.

It's to say that our portfolio should be able to deliver that on a fairly reliable basis.

Going forward, we continue to be even more confident that we will be in those kind of gross margins, especially as we see Analog and Embedded Processing becoming a bigger mix of our revenue overall.

On the CapEx front, we've talked for a while about CapEx probably running in the 5% to 8% kind of range of percent of revenue and, in fact, we're consistent with that.

I was just looking over some data this morning and our capital spending for the last 12 months has been almost exactly 8% of revenue which bodes well for depreciation as we move forward, also.

So we shouldn't see a depreciation threat on the gross margin.

In addition to that, we've been acquiring capital at extremely attractive prices.

So we're getting more capacity than we would normally get dollar for dollar of capital spend, which bodes very well for being able to grow our top line, which is where we're highly focused inside the Company, is driving top line growth at this point as opposed to trying to adjust any gross margin models.

Okay, thank you, Adam.

Let's move to the next caller, please.

We'll go next to Jim Covello with Goldman Sachs.

Great.

Thanks, guys, so much for taking the question.

I appreciate it.

If we look forward to the 300-millimeter fab getting ramped up, how quickly do you think realistically you could gain some kind of meaningful share coming out of that fab?

Jim, the schedule right now is for that to be shipping its first production worthy product by the end of this year.

As Ron mentioned, we just started Phase II expansion in that factory.

The Phase I was to give us $1 billion of incremental revenue capacity.

That's what we announced a couple quarters ago.

Phase II is a second $1 billion of revenue capacity, and we have just begun bringing equipment, just purchased equipment last week to support that.

And we will be bringing that in very quickly.

We'd expect to probably have some fairly meaningful revenue begin to come out of there in 2011.

On that second phase, also?

Yes.

Okay.

Jim, do you have follow-on?

I'll stay on that.

When do we think the first phase would be complete?

I understand you'll ship product in the fourth quarter.

But when would that Phase I be kind of fully ramped?

Jim, that's going to be function of demand, I guess.

I don't know that I can really forecast out all the way to the end of 2011 as to when each of those pieces of machines will be fully utilized.

But they will certainly be ready to be fully utilized as we come out of this year and go into next year.

Okay.

So sometime in early 2011, then.

Generally available and we're just waiting for the orders.

Great, thank you.

Thank you, Jim and [we'll move to] the next caller.

We'll go next to [Srini Pajjuri] with CLSA.

Thank you.

Kevin, a couple of questions, one on accounts receivable.

It went up a bit in the quarter.

Given the tightness, I would have expected it to remain flatter actually or come down a bit, if you can give us a bit more color as to what's going on there.

Yes.

In the fourth quarter, what typically happens on our shipments in the fourth quarter is they actually drop off a fair amount in December as customers put their factories on holiday and so on.

And so our receivables will tend to decline and our days of receivables will tend to go down.

Coming out of fourth quarter into first, we're back into a more normal manufacturing environment for our customers, more uniform factory loadings and so our shipments are more uniform across the quarter which in turn, by contrast to fourth quarter, brings your receivables levels up when your revenue grows and you wind up with your days going up as well.

If you look on a year-over-year basis they're actually very consistent on a days basis.

So just relative linearity between fourth quarter and first quarter.

Okay, Srini, do you have a follow-on?

Yes, Ron.

On the pricing front, Ron, you mentioned that you were seeing some beneficial pricing on the commodities side.

Now that the lead times are common do you expect any changed to pricing?

Do you expect the prices to kind of revert to the normal declines and if so, what kind of impacts should we expect on the gross margins?

Thank you.

Srini, I really don't want to try to forecast what commodity pricing might be.

This is an area where for some time, I think since really the beginning of the year, we have actually been on a what we call controlled order entry process where customers just could not come in and place unlimited demand on us based upon a certain lead time.

We provide certain levels of support to customers that have been historic customers and, as competitors, we're having issues supplying product.

We weren't just going to be the benefactor for all their customers to be able to gain support.

So commodity really has been kind of a different environment for the last few quarters, very typical for this part, this kind of market environment in terms of how we and how our competitors move to a controlled order entry process.

But the statements about lead time reductions and such have not yet applied to those commodity products.

That was more statements about general products in Embedded Processing, high performance Analog power, HVAL, those type of product areas.

Okay, Srini, thanks for your questions and we'll move to the next caller.

We'll go next to Sumit Dhanda with Banc of America/Merrill Lynch.

Yes, hi guys.

My first question, Kevin, you talked about OpEx going up and some impact to your COGS line from higher compensation.

The question on operating margins by segment, it seems like that trend may have impacted all of your segments, but your Other segments.

I was wondering what is special there.

Was it just that royalty saw a big uptick relative to everything else in the quarter?

Well, the other segment actually doesn't have nearly the staffing level that you see in the three primary segments.

So there's not that much compensation to run through there compared to the other ones.

And then again, you had some very high margin kind of cash cow items, if you will, that are in that segment.

So dollar per dollar they tend to fall through quite rich.

But really what it comes down to, you just don't have as much compensation inside that segment that's going to see the changes that we saw in the other segments.

Do you have a follow-on, Sumit?

Yes.

I do have one.

I know you refrained from commenting specifically on your baseband business in the second quarter, but just overall in terms of the year, do you expect the trends to be largely seasonal, better growth in 3G offset by maybe some erosion in your [edge] business?

How should we think about it, big picture basis?

Yes.

Maybe if I can even move beyond this year, you've heard us say for some time and we'll say it again today, that we expect our baseband revenue to be essentially zero by the end of 2012.

So if you take our first quarter baseband revenue of $424 million, $425 million, and straight line that to zero at the end of 2012, I think what you're going to find is there will likely be quarters above this line and quarters below the line.

The exact profile of the decline is going to depend upon our customers' success in the market, the mix of their 3G versus older technologies, as well as our customers -- or I'm sorry, our competitors' progress in delivering baseband product to meet the customers' needs.

So maybe some additional color that can help you do your own analysis on this, is if you consider that today 3G-basebands represent about 75% of our baseband revenue.

And that's up from about 50% a year ago as the market really has transitioned to these more advanced technologies.

I think it's well known that our largest customer is intending to multi-source their baseband, and I think what you can expect in 2010 is that competitors should begin to support the older technologies that represented 25% of our baseband revenue in first quarter.

And for 3G we don't anticipate competitors to begin ramping new products there until sometime in 2011.

So our revenue profile this year in 2010 is going to depend on how the competitive incursions compare against the ongoing market shift to 3G, and also how our customer performs in that 3G market.

So hopefully, that provides you some level of insight.

Okay, Sumit, thank you for your questions and we will move to the next caller, please.

We'll go next to Steve Smigie with Raymond James.

Great.

Thanks, guys.

I'm not sure if I missed it, but if you haven't already discussed it, the mix of high performance in Power versus HVAL within Analog?

We didn't specifically break that out, Steve, nor do we.

We kind of do more on an annual basis.

So think about last year, it was a mix of 30% HPA, 30% power and the remaining 40% would then be HVAL.

But we don't provide quarter-by-quarter updates there.

Do you have follow-on, Steve?

Yes.

Could you just at least then give some color within HPA, what may be driving -- I'm assuming that that's up since overall [Analog] was up 7%.

What product types are just generally driving that.

Is it amplifiers?

Is it converters, et cetera?

It just -- not percentage maybe, but just color on what's strong, what's not.

Yes, sure.

From a product standpoint, you named several of them there -- operational amplifiers, data converters and then also in the first quarter, industrial interface products were the areas that grew fastest sequentially.

And I'll just note, our high performance Analog business, probably similar to a lot of the other HPA players that you've seen out there, really has a pretty strong exposure to the industrial market and is benefiting as the industrial market continues to have a pretty robust recovery here.

So those product areas that I mentioned, but then also maybe more aligned with industrial market overall.

Okay, Steve, thanks for your questions and we'll move to the next caller.

We'll go next to Ross Seymore with Deutsche Bank.

Hi, guys.

Ron, just first a little clarification.

You said in your baseband business, 3G was 75% and 50% last year.

Did you mean last year as in the first quarter of last year or the entirety of last year?

First quarter of 2009.

So first quarter 2009 it was 50% and first quarter 2010 has migrated to 75%.

You have kind of an average what it was for the full year?

No, but I'll guess it's somewhere between those two numbers.

Sorry, I don't have that data in front of me.

That's probably a pretty good guess.

The follow-on question, shifting gears to the order book.

I know you guys -- the duration of those orders can be three or six month orders depending upon the type of customer.

Has your lead times being pulled in started to be visible in the duration of orders that people are placing three months versus six months?

I would suggest that with a 1.14 book-to-bill and a growth rate that we're suggesting, probably won't consume all those orders next quarter.

You can pretty much assume, Ross, that we're still seeing some out in north of three month kind of window, nothing north of six months because we just don't recognize orders that far out.

But probably a good portion of those in the three-to-six month range.

I don't have the exact break-out, but that would be my expectation.

Great.

Thank you.

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

We'll go next to Glen Yeung with Citi.

Maybe just following up on that last question, when you guys are getting orders now, are you going through a process of scrubbing those for anything you think may be kind of a questionable order?

And is your process any different now than maybe it has been in the past?

Glen, I'd probably just describe it real simple.

The process is the same as it's been for the last few quarters, and that is we're looking very closely at each order coming in and making sure we're meeting true demand that the customer needs to keep their lines going.

Okay.

Thanks for that, Kevin.

And then my follow-up is on capacity growth.

Are you guys able to quantify how much capacity you're bringing on maybe in eight-inch equivalents, let's say by the end of this calendar year?

And then can you compare that point to where you were at say the end of 2008, i.e., are you above your 2008 amount of capacity or below?

Glen, I don't have those numbers.

Certainly, we've talked about on the 300-millimeter, the incremental revenue that that will give us and I -- We had talked about purchasing and deploying 200-millimeter equipment last year and more this year, but frankly, I don't have the numbers for you to give you any clear answer on that.

But we're clearly adding capacity.

I think you saw, I believe it was in the release, every quarter this year -- well, the starting point is the production output first quarter is higher than it's ever been.

And our capacity increases sequentially every quarter as we move through 2010.

Maybe just to clarify that, was there some capacity decline from your peak capacity levels in 2008?

No.

We did not take any factories offline.

Remember, the only factory we've taken offline in the last couple of years has been KFAB, and we redeployed that.

That was back in early 2007.

And then there was an older factory that we had acquired with the Burr-Brown acquisition in Tucson that we also wound down in the early 2008 kind of time frame.

But during the downturn we took no capacity offline.

In fact, we were adding new capacity.

All right.

Thanks.

Thank you, Glen.

Next caller, please.

We'll go to John Pitzer with Credit Suisse.

Yes, good afternoon, guys.

Thanks for taking my question.

I guess, Kevin, if you guys hit the high end of your June guidance, you'll start to see revenue that you saw back in sort of the December 2007 time period.

But gross margins are actually going to be down a little bit from that December 2007 quarter.

And I guess given that the mix has moved dramatically more towards Analog, I'm just trying to figure out how I should think about that.

John, I don't have the data in front of me from that time period back there and I'm not quite sure how you're modeling the gross margin assumption.

I would just remind you that the OpEx will be up a little bit more again next quarter and, as I mentioned earlier, on a four quarters overall compensation change.

So I don't know how you're squeezing that through your model, but you should take note of that.

But beyond that, I don't have the data in front of me for that time frame in 2007, so I really can't respond to you well on that.

Do you have follow-on, John?

Yes.

My follow-up, as we think about 300-millimeter coming online, how do we model that from a gross margin perspective?

Is it just incremental depreciation, or will you guys go through a couple quarters of kind of sub-optimal yields that we need to kind of work into the model?

Clearly, as we're ramping it up, even as we speak we're ramping it up now.

We're experiencing cost there because everything we're doing is not inventoriable so it's just expense.

The way to think about the economics on that, is generally speaking, the [dye] cost will be about 30% less than what the equivalent dye would be on a 200-millimeter wafer.

On Analog parts, about 50% of your cost is in dye and 50% is in the assembly of tests.

So you'll net only about a 15% kind of manufactured cost reduction in the apples-to-apples comparison to eight-inch.

That's really at the product level, and so as we look at turning that into Analog revenue coming out of that factory I think you can kind of model those numbers in and figure out the incremental gross margin we'll get out of that factory.

Okay, John, thanks for your question.

Thank you.

And we'll move to the next caller, please.

We'll go next to Doug Freedman with Broadpoint.

Great.

Thanks for taking my question, guys.

Ron, you offered some great detail there on the ramp-down of the Wireless business in the baseband side.

Can you actually more about what is happening on the business that you are keeping?

The apps processors and the connectivity, and what your expectations are for that business throughout the year and into next year?

I don't have specific forecasts for you, but let me just say it ties to a SmartPhone market where we believe you probably have SmartPhones growing on the order of 40% unit growth this year compared to last year.

So being in a rapidly growing market is always a good thing.

And then secondly, it's our full expectation that over the course of time we want to continue taking market share there across both the applications processors as well as the connectivity product.

So it's a combination.

The strategy, as you might guess, is a very attractive market in terms of growth which is why we've centered up our Wireless investment in that space.

And then also playing from the strength of our [position] and our technology with the OMAP applications processor.

And then a lot of connectivity right now is a lot about integration of multiple connectivity technologies into fewer chips, both for power consumption and costs, and we are absolutely leading that integration.

I think near term on OMAP, the growth driver will be just the deployment of OMAP3, which is our latest production part and soon to be followed up with OMAP4, as you might guess.

So we've got a good pipeline of technologies and we have a great pipeline of design wins.

OMAP3 will be ramping more than 50 design wins over the course of the next year into production, and we think that points to a very attractive growth opportunity.

Did you have follow-on, Doug?

Yes.

That was great color.

Thank you, Ron.

Kevin, for you on the OpEx side you keep mentioning your target model 55% and 30% for the operating margins.

That would imply 25% OpEx spending.

You're actually running under that.

Are we going to get ourselves in trouble here thinking that it stays at the present percentages?

Or should we be modeling that percentage to come back up?

Then follow-on to that, is what is your present plan for use of cash and your payout ratios?

Doug, on the OpEx, we are mindful of computing that OpEx percent with baseband removed, knowing it's going to be going to zero at some point.

So when you do that we're actually at about 26%.

So we will continue to be very disciplined in how we manage the OpEx for the foreseeable future.

As to the use of cash, you've seen us over the last few years using cash for both repurchases and dividend increases.

I can't make any specific forecasts on those, on dividend increases of course, because they are subject to Board approval.

But as we continue to generate cash, we first try to deploy it internally for growth and to the extent that we have deployed as much as we can effectively grow with, then we'll continue to do buybacks and also continue to pay dividends to our shareholders.

I don't have a specific payout ratio for you that I've tried to model in or that I'd want to communicate right now.

Okay.

Thank you, Doug, and we'll move to the next caller please.

We'll go next to Stacy Rasgon with Sanford Bernstein.

Hi, guys.

Thanks for taking my question.

Just one question on the operation margins by business unit.

So, the core business is the non-Other stuff they all compressed.

Embedded compressed quite a bit differently than the others.

It was down about 500 basis points versus about 100 to 200 basis points for Analog and Wireless.

Can you give me some feeling for -- were the compensation increases and OpEx increases by business unit about the same?

And what does that imply for the gross margins of those individual businesses and the change in those gross margins out of this quarter?

Really the biggest thing that you've got to be kind of be careful as you look at that Stacy, is we're still [reploying] internally.

I think Ron mentioned during his opening remarks that about 90% of our total R&D is now going towards our three growth areas of Analog, Embedded Processing and the non-baseband portion of Wireless.

That transition has been underway for -- really very aggressively during 2009 but even started earlier than that.

So what you're seeing on a quarter-over-quarter basis say is a little bit more of just our redeployment.

Again, some of that's coming out of the Other segment going into Embedding Processor and so on.

We've also stepped up our staffing level there quite a bit from sales side in order to accelerate the opportunities we see, especially in the micro-controller space with the 32- bit opportunities that we see emerging on that side.

Kevin, I think you had a lot of TI employees listening very carefully to how you were going to answer that question.

Stacy, do you have a follow-on?

Got it..

Yes, I do.

Around the Phase II for the 300-millimeter, can you give me a feeling for -- you bought 100 tools.

How complete is the purchase for Phase II?

Can you give me a feeling for, I guess the degree of discount you're getting for this equipment versus what you paid for Phase I?

I think Phase I was what, $173 million for the full 13,000 wafers per month?

Yes.

Phase I actually supports part of Phase II, also, by the way.

One of the things that Phase II is really doing is some line balancing for us.

So we spent about $75 million on those 100 tools that we mentioned earlier.

And we'll be needing to acquire some more tools to complete Phase II.

Overall spending will probably be below what we spent on Phase I, but that's really because you're line balancing them, and what I mean by that is some of the Phase I equipment can support more than just the incremental $1 billion of revenue we've been talking about.

It supports into the $2 billion number, but without some of the line balancing equipment that Phase II starts bringing in you really can't get that kind of through-put.

So that's what you're seeing happen here and our cost for that equipment so far in Phase II has been quite similar to what we saw in Phase I.

Got it.

Thank you, guys.

Thank you, Stacy.

Kevin, what you just said was that the Phase II -- I'll just say -- we'll put it this way.

The equipment purchase requirements for our second $1 billion of revenue at RFAB should be less than what was required for Phase I, which was the first $1 billion dollars.

Is that correct?

Correct.

Okay, operator, we're going to move to our final questioner here.

And we'll go to Tim Luke with Barclays.

Thanks for taking my question.

I didn't know it was you, Tim.

I'm just kidding.

Go ahead.

Obviously you were successful in building a bit of inventory in the quarter.

In the first quarter.

Are you thinking that you're likely or planning to build some more inventory in the coming quarter?

And as you've now made some progress in reducing the lead times, do you get the sense that your lead times, Kevin, based off what you see now are likely with the plans that you have in place to be at sort of normalized levels by say, the end of the third quarter?

Or do you think that could happen somewhat earlier?

Tim, on the inventory build, I won't get into specific forecasts on the inventory itself.

I would just point out, though, as I mentioned earlier to one of the earlier questions at a 1.14 book-to-bill, clearly our orders are stronger than our outlook which means we're getting orders that were probably no [into] the third quarter.

And so in second quarter we will begin to build, not only for second quarter deliveries but also for third quarter deliveries.

And to the extent that the revenue continues to grow, of course, we'll have to build more inventory to support that.

So you would see some growth, if, in fact, we expect revenue to increase in third quarter.

But it's too early for me to give you a forecast on that.

But as to when lead times reach a normal level, I think our customers would love it if I could say [that] right now.

But the truth of the matter is, we do plan on continuing to put equipment in place for each of the quarters of 2010 and it's really going to be function of just how strong demand continues to be.

If it keeps on coming in at the upper end of our forecast ranges, it's going to take us a little longer to get that lead time cleared up.

If it comes in around the midpoint or lower, we'll clean it up sooner.

Clearly, it's in our interest to try to get it cleaned up as quickly as possible.

And I'd like to say 2010 puts that behind us.

The follow-up if I may, given what you've seen, and you had a stronger than expected beginning of the year in the first quarter, then seasonal traditionally and maybe seasonal-ish in the second quarter, do you feel that you're now entering an environment that's likely to play out after the second half of the year largely according to seasonal norms given what you see?

Or do you feel, given the strength of the beginning of the year, that you might expect it to be somewhat more moderate than the norm?

And obviously Rich, in recent speeches, has been talking about how it's unusual to see a book-to-bill of more than one for five quarters.

And this is the fifth quarter.

But on the other hand, it seems you're saying that you've seen quite good order strength through the beginning of this.

Do you have any further thoughts that you might be able to sort of share or frame with us in terms of expectation on how that book-to-bill might begin to trend?

Thank you.

Luke, I could give a short answer and say I probably don't know the answer to that question.

But I would just say that what we're seeing here is the results of economies are generally growing again and the consumers are beginning to spend again.

We're seeing it in the automotive space.

We're seeing it in the consumer space.

We're seeing the industrial coming back.

We know that inventories remain very lean as we've been talking about, and it doesn't appear to us that they are likely to become that filled up, if you will, in the first half.

So that would suggest that we will continue to see some interesting growth.

As to exactly what size, I don't know how to forecast that for you right now.

So, Tim, the one thing I would just add is there hasn't been a whole lot normal about this downturn and the subsequent recovery that we've gone through.

I mean I think the last 18 months has been highly unusual.

So I wouldn't try to force fit it into any kind of normal pattern matching.

And then I think the other comment I would make is if you look at our second quarter outlook of -- the middle of the outlook really is pretty seasonal for TI in terms of a second quarter.

So we don't have an outlook that we're issuing for second half, but at least the next quarter we can affirm our belief is that it should be seasonal at least in the middle of that range.

Okay, Tim, thank you and for all of you thank you for joining us.

A replay of this call is available on our website.

Good evening.

That concludes today's conference.

We thank you for your participation.