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Welcome to the Texas Instruments second quarter 2010 mid-quarter update conference call.

Today's call is being recorded.

And now at this time, I would like to turn the conference over to Ron Slaymaker.

Good afternoon, and thank you for joining TI's mid-quarter financial update for the second quarter of 2010.

In a moment I will provide a short summary of TI's current expectations for the quarter, updating the revenue and EPS estimate ranges for the Company.

In general, I will not provide detailed information on revenue trends by segment or end markets, and I will not address details of profit margin.

In our earnings release at the end of the quarter, we will provide this information.

As usual, with our mid-quarter update, we will not be taking follow up calls this evening.

Considering the limited information available at this point in the quarter and in consideration of everyone's time, we will limit this call to 30 minutes.

For any of you who missed the release, you can find it on our website at ti.com/ir.

This call is 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 risks and uncertainties 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 news release published today, as well as TI's most recent SEC filings, for a more complete description.

We have revised our expected range for TI's revenue and earnings to the upper half of our previous ranges.

We now expect TI revenue between $3.45 billion and $3.59 billion.

This is a range of sequential growth of 8% to 12%.

We expect earnings per share between $0.60 and $0.64.

Operator, you can now open the line for questions.

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

Dwayne?

Very good.

(Operator Instructions).

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

Thank you, Ron.

I was hoping you could just talk a little bit also about other dynamics like lead times, distribution, inventory, what you are seeing in the channel.

If you can just add some color there, that would be great.

Okay.

Let's start with, I guess, distribution.

In general, I guess we would expect strong resale or sales out of our distribution channel this quarter.

From an inventory perspective, I guess I would just characterize that we believe distribution inventory remained lean by historical standards, similar to what you've seen more recently.

I believe your other question that you asked was with respect to lead times, and I guess as we've indicated recently, including at our analyst meeting, we are making good progress on bringing up our additional capacity.

And so as a result our lead times are being reduced and they are being reduced in an orderly manner.

They are not as short as we want them yet, but I would say the capacity additions certainly have helped and will continue to help.

Lead times are coming in.

They are coming in because of higher levels of capacity, not because of any slowing of demand.

I guess another point I would make is that our customers are telling us that as we have reduced our lead times, in fact many of our competitors' lead times have been extending.

So certainly that encourages us that our capacity additions have been both timely and frankly the right strategic move in an environment that is increasingly supply constrained.

And I guess just a final note on this one is that, again, demand whether you measure it by revenue or whether you measure it by orders has remained strong in the quarter even as we've reduced our lead time.

Do you have a follow-on, Tore, or was that your follow-up?

No, that was great, Ron, really appreciate it.

Thank you.

Okay, Tore, thank you, and let's go to the next caller, please.

All right, next question is from Doug Freedman with (inaudible) & Company.

Great.

Thanks guys for taking my questions.

Ron, can you talk a little bit about the end markets and where you are seeing the most strength and maybe any signs of weakness that you are seeing regarding possible cancellations?

Well, I would say in general we are seeing pretty broad-based strength.

So from an end market standpoint I would say continuing the trend really that we talked about even in the first quarter, maybe even late 2009, industrial will probably be the strongest market this quarter, really reflecting that its recovery lagged some of the other market segments last year but it's certainly been powerful in the first half of this year.

From a product line perspective, TI product areas that should benefit from the strengths that we are seeing in industrial include areas like high performance analog, the power analog product, as well as our catalog embedded processing product.

Do you have a follow-on there, Doug?

Yes, if I could.

Have the European concerns in changing exchange rates had any impact on management's expectation or strategic plans?

Doug, I would say we are not seeing anything from Europe yet.

So from a growth standpoint, core Europe is growing at about the same sequential pace as our overall revenue.

Of course, we are being watchful but we haven't seen any change yet in the demand out of our European region.

Okay, Doug, thank you.

Let's move to the next caller.

Next question is Jim Covello with Goldman Sachs.

Hi, it's Jim Schneider, calling in for Jim Covello.

Thanks for taking questions, Ron.

First of all, could you talk about your expectations for the quarter, whether you think you will be building inventory at distributors, whether you would be able to do that this quarter?

Jim, I don't have anything specific on the distribution inventory trends at this point, other than what I indicated before, that we are, it's our belief that distribution inventory remains lean.

Do you have a follow-up?

Yes, just on, there's been a lot of chatter about noise in the PC and handset supply chains in particular.

And I was wondering if you could comment on what you are seeing on those two end products in particular.

Well, again, what we are seeing is pretty broad-based strength.

I don't know that I have PC specific comments other than, where we are selling, for example, in the peripherals such as storage products.

That area is seeing growth very consistent with our overall growth trends.

So, we haven't seen any real inflection in demand there.

With respect to wireless, I guess what I would say is that wireless is growing.

In fact, let me step back and kind of talk from the segments overall.

We are expecting all of our segments to grow sequentially this quarter.

The growth should be strongest in our analog and embedded processing segment.

In wireless, growth there will be driven by the connectivity and the OMAP application processor products, and although baseband revenue, we would expect to change minimally from the first quarter level, as a percentage of our total revenue, we expect that it will decline really due to the strong growth in the core business areas.

So, again, wireless overall up, driven by connectivity and OMAP baseband relatively flat to last quarter's level.

Okay, Jim, thanks for your questions.

And let's go to the next caller.

It will be Chris Stanley with JPMorgan.

Hi, thanks for taking my call.

This is Venk on behalf of Chris Stanley.

Ron, I have a couple of questions.

In terms of the backlog for the second half of 2010, have you seen any change in the backlog?

Has it declined and can you comment on that, please?

I would, yes, I don't have a specific response for you on backlog other than I would say orders are growing.

I guess what you really get to, part of your question is book to bill is going to be above one and therefore is backlog expanding, and we've always tried to stay away from describing book to bill trends at the mid-quarter update just because it's tricky when you have both the numerator and denominator changing.

I'll ask if you wait, we'll describe that of course at our earnings release.

But I will describe quarters are strong, and we expect they will be up sequentially.

Do you have a follow-on, Venk?

Okay, yes, that's fair.

And a quick follow-up.

You said your analog business segment is doing well.

Can you comment on the relative performance of the three segments within analog?

Okay, well, I guess to start with I would say all three are contributing strongly to growth this quarter, and so probably at the highest level, it would be power and HPA because of their exposure to industrial.

And as I noted before, industrial is doing exceptionally well, but that's, right behind that is HVAL.

HVAL is growing and contributing very strongly to that analog number.

So not a lot of distinction between the areas.

Okay, Venk, thank you for your questions.

Let's move to the next caller.

Next question is from Shawn Webster with Macquarie.

Yes, thank you, can you hear me okay?

Sure can.

Okay, can you talk about utilization rate trends in Q2 and what you expect for Q3.

And then my follow-up would be, can you comment on your own inventories and do you think they will be up in dollars and/or days for Q2?

Thanks.

Okay, Shawn.

With respect to utilization, I guess as far as I would go is to say we expect that utilization in 2Q will be up a little bit from the first quarter level.

I really don't have a forecast on what utilization in third quarter would be.

In terms of our own inventory level, I think what we would expect is that we should be able grow our inventory some this quarter, but from a days of inventory, just given the fact that demand is continuing upside on us, days of inventory will most likely remain low.

Okay, and let's move to the next caller then.

Thank you, Shawn.

Next is from Cody Acree with Williams Financial Group.

Thanks, guys.

Ron, you mentioned earlier the constraints you are seeing in some of your peripheral competitors, that it's actually giving you some comfort that they are seeing constraints and lead times expand, and you have supply.

Doesn't that, hasn't that in previous periods led us into a point where maybe TI start to begin to see those same issues if not backlash at least correct?

Well, I think, I would say the same, that we've been saying for the last few quarters.

Most of our products as you know are proprietary, and with proprietary products generally there is a sole source situation or close to that anyway.

So the customers tend not to have a lot of flexibility to move from TI to our competitors or from our competitors to TI.

I think probably what is more pertinent is that as we had, we probably ran into some of these constraints earlier than many of the competitors, just based on the growth that we saw sequentially in the second and third quarter of last year.

We responded earlier, both initially with bringing on the back end capacity, but then also some of the investments that we have made to bring on fab capacity.

And I think what is probably most pertinent is the customer see the kind of investments that we are making currently, the roadmap that we are laying in front of them, and to a large part even though these competitors are seeing lead times extend, they are really not seeing action out of them in terms of increased investment levels.

And certainly as you know at this point, the equipment lead times are pretty much extended anyway.

So their ability to respond in the short-term will be somewhat limited.

Probably how that will play out for us will be more in terms of longer term benefit, customers that are increasingly comfortable that TI is the analog and embedded processing supplier to bet on, in order to avoid these kind of constraints in the future just given the investments that we are making both in fab as well as assembly test.

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

Yes, I guess just continuing with that theme then, is there a point where, is it just a matter of tool constraints, of ramping of capital at some of the foundries, that starts to put resources into the channel.

That you obviously have already spent and got ahead of, but then can change some of the landscape and maybe does create some more volatility.

I don't know.

I think in some cases it's tools.

I think in other cases, if you just pull back and look, there have been an awful lot of fabs taken permanently offline through this down cycle.

So I don't know that you make up for that by adding a piece of equipment here or there.

There are new wafer fab facilities that will have to be built, and over the course of time, and certainly that's a longer lead time.

Okay, Cody.

Thank you.

And let's go to the next caller.

Next will be Srini Pajjuri with CLSA.

Thanks, Ron.

Ron, given the strength in the first half of the year, and also the fact that your wireless business may not be as strong this year, I'm just trying to understand how we should think about the seasonality in the second half for you.

Yes, Srini, I don't have, certainly as you understand from us, we basically take these forecasts a quarter at a time.

I don't know that the strength we've seen in first half necessarily translates to anything about second half.

It probably reflects more the weakness that we saw in 2009, as opposed to setting us up for any necessarily different seasonal trend in second half.

But beyond that I really don't have much to say about second half.

Do you have a follow-on?

Yes, just quickly on the hard drive market, you said that you are not seeing any change to your forecast.

Just a clarification.

Were you expecting growth in this business when you gave the original guidance.

I'm sorry, again, which business did you refer to?

The disk drive business.

I don't know what we had in the forecast.

What I was describing is simply the sequential growth pattern from first to second.

I don't have the first quarter, or the second quarter growth expectation for storage.

What you said is, it hasn't changed since you gave the guidance.

I don't know that it had changed.

I'm just saying that sequential growth in storage is, runs very consistent with our overall growth rate for the Company, and I'm not trying to make a characterization against our expectation.

Okay, Srini, thanks for your question.

Let's move to the next caller.

Ramesh Misra with Brigantine Advisors.

Thanks, Ron.

I wanted to ask you about your currency hedging program.

Can you talk a bit about it, especially related to the Euro?

Okay, maybe the way to think about this is that most of our sales in Europe are transacted in US Dollars.

So we have little direct exposure except to the degree that a weak Euro of course would make these Dollar based transactions relatively more expensive for our customers than in the past.

We have employees and factories located in Europe.

So changes in that Euro exchange rate would affect our US dollar equivalent cost for payroll and locally sourced purchases in Europe.

And then specifically to your question, we have hedges in place for balance sheet items but again not income statement item.

Do you have a follow-on, Ramesh?

Yes, very quickly.

So if the weakness in the Euro persists, would you be able to kind of load your European fabs a little more than the US fabs in order to cater to European demand?

Do you have that flexibility or is that somewhat limited?

I would say somewhat limited.

The fab loadings tend to be very product driven and things like that that I don't know that we strategically or tactically maybe is a better word, try to load fabs based upon currency swings.

Okay, Ramesh, thank you.

Let's move to the next caller.

It is Uche Orji with UBS.

Thank you very much.

Ron, just not sure if you commented on this earlier.

On your gross margins, given that the revenue and the earnings tightening seem to be in sync, can you just talk about what may have affected gross margin?

Is that earnings leverage left on the gross margin line.

That's my first question.

Okay.

I think you have seen, there's probably, we are not at our gross margin goal.

So I think clearly I would say we believe there's some room for additional expansion there.

I think as you noted, factory utilization will be less of a factor looking forward maybe than it has been over the last year, just considering that we are back at normal utilization levels again.

So probably the biggest driver of gross margin expansion will likely be product mix, and that really just reflects as we continue to increase our focus on analog and embedded processing.

And then I guess the final point I would note is we do continue to work to lower our manufacturing cost.

For example, bringing up 300-millimeter production for analog, we believe will be a cost benefit for TI.

So again, probably some room for additional gross margin expansion, but when you move to earnings growth overall, certainly our view is that the biggest driver of earnings growth is going to be top-line growth.

And certainly you guys probably heard this at our analyst meeting, but along those lines, we really believe that kind of the gross margin goals of the business model goals that we've outlined previously for 55% gross margin and 30% operating margin really provides a good balance of profitability and growth opportunity.

So specifically as we've described, our goal is to grow revenue in our core businesses of analog and embedded processing at twice the rate of the respective markets, and then continue to gain share as well in the fast growing smartphone chip market with our OMAP and connectivity product.

So, on that growth side, we are certainly making good progress toward this growth objective.

This quarter certainly is shaping up not to be an exception to that, but we certainly realize we need more time and results behind us on that.

Do you have a follow-on, Uche?

Yes, I do.

Just one question, June quarter, how back end loaded is it?

Everyone, no one seems to see any problem in Europe yet.

But does it sound like 2008 where we didn't see anything until suddenly in September?

Is there any parallel from what you see now vis-a-vis what you saw back in 2008?

June quarter is not exceptionally dependent upon the month of June just normally.

Probably the two quarters that tend to have a little variation in terms of linearity would be historically first quarter, where it's a little more back end loaded because of the weakness in the month of January, and then similarly fourth quarter, where December the final month in the quarter tends to be weaker.

Second, third quarter, there really is not a big difference in that monthly linearity.

But specific to this second quarter, I would just say April and May were both strong months, and to meet this guidance that we are providing today we really just need a normal June.

We are not expecting an exceptionally weak or strong June.

Just a normal June to be able to hit this guidance.

Okay, Uche, thank you.

And we'll move to the next caller.

That is Patrick Ho with Stifel Nicolaus.

Thanks a lot.

Ron, I know it's difficult to probably measure but could you just characterize how much of the, I guess the tightening (inaudible) driven by the overall demand in the environment versus some of the market share gains you guys have been achieving over the past few years?

I'm sorry, you are saying how much of the raise in this guidance?

Yes.

I don't know.

I think it's both.

I think on the one hand, we are continuing to see strength in our markets and markets like industrial, for example, that are continuing to gain momentum.

And then in addition to that we believe we are continuing to gain share, especially in analog and embedded processing.

But that's a belief statement.

We really need to see our competitors in those markets report before we can say that with strong conviction, but we certainly believe we are doing very well from a relative perspective in markets that seem like they are continuing to strengthen for us.

Do you have a follow-on, Patrick?

Yes, in terms of the back end capacity that has been tight for you guys for some quarters, but I think you've mentioned it has become alleviated somewhat, what do you feel you're along in terms of the back end test assembly capacity in terms of getting to what you feel is more normal levels?

I guess I would reiterate what we have said on our CapEx plans, that I think we've said this year $900 million for the year, but we expected it to be more front half weighted as we brought on that assembly test equipment and even made some of these fab expenditures.

That would say that the equipment generally in house by the time we finish first half, and then maybe still some lag time in terms of ramping it up and putting it in production.

But that would say, we think we are generally getting in pretty good shape from an equipment perspective, and then certainly the investment, and that's the equipment on the back end side.

And then as you have certainly seen from us, the investments that we are laying out for our fab and even some of the 200-millimeter equipment expenditures that we are making are really focused at making sure that we also have the front end capacity to support our growth objectives in the years ahead.

So certainly assembly test is a more near term focus type of investment to pull lead times in and alleviate those constraints, but what you see with the fab would be a more longer term multi-year commitment to make sure we are in a position to support our customers and their growth expectations.

Okay, Patrick, thank you.

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

And operator, this will probably need to be our last caller.

That is Craig Berger with FBR Capital Markets.

Hi, guys, thanks for squeezing me in.

I guess my first question is, what does it take for the Company to get more aggressive on share buyback given your ten times earnings multiple.

And as part of that, do you see any reason why earnings levels can't generally sustain here on a go-forward basis?

Craig, I really don't have anything to forecast for you on buybacks.

We will certainly report what we've done in the quarter in July when we report our earnings, but probably not in our best interest to give you a mid-quarter update on our repurchase activity or plans.

But I will also point back to last quarter.

I think you saw a nice step up.

I believe it was on the order of $500 million repurchase that we conducted in first quarter, which is about half of what we did all of 2009.

And I would even say 2009 repurchases were relatively aggressive in that we stayed committed to the market every quarter through the course of that downturn, whereas you saw many companies really pulling back when the markets got dark there.

So I think we've been buying back aggressively and beyond that historical statement I'll just say stay tuned until July.

Do you have a follow-on, Craig?

Yes, that's helpful, thanks for that.

And sorry to steer the conversation away from macro and Europe, but one bit of push back I get when pitching the TI story is that with baseband going away, it increasingly puts the application process or business at risk in years coming as integration eventually wins out.

How would you respond to that potential risk or investor criticism?

I think clearly we don't believe, our view is much different than that.

I think Greg Delagi probably gave a more thorough response at the analyst meeting and certainly that webcast is still available through our website in terms of the archive of it for investors that might want a more detailed response.

But just in general, I'll say you see a lot of customers very aggressively working to commoditize that baseband function, and the last thing I believe the customers want is for a supplier to come along that is providing an apps processor to integrate the baseband functionality such that they then only have that one source for their baseband.

That goes against a lot of efforts that you have seen over the past few years for these customers to multi-source the baseband and commodotize that function.

And then secondly, just from a system architecture perspective, the customers generally will have an applications platform and then they will want to ship that smartphone into different regions of the world, different service operators that have different baseband or communication standards that they are dealing with.

And so for them to try to create one big super chip that has baseband and application all integrated together means they have to do an awful lot of versions of that super chip to be able to support all those different communication standards.

So our view is, architecturally they are a very strong benefit to one, letting the baseband commoditize which is clearly well along the path to success there, and then secondly, by keeping those separate they can have an applications platform that they basically just snap on different baseband modems to support different standards.

And then, this is not just TI's biased view on it.

I think if you look at the customer trends over the last year or so, there has been a significant shift towards disintegrating those functions as opposed to customers that have moved forward with integrated versions.

So again, that is a very quick and high level view, but I would refer you to Greg Delagi's webcast of the analyst meeting or the webcast of his presentation for a more thorough response there.

Okay, Craig, thank you for your questions.

And thank all of you for joining us.

Before we end the call, let me remind you that the replay is available on our website.

Thank you and good evening.

That concludes today's conference call.

Thank you for your participation.