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Texas Instruments Inc TXN
Q4 2009 Earnings Call Transcript

Transcript Call Date 01/25/2010

Ron Slaymaker - VP of IR: Good afternoon and thank you for joining our Fourth Quarter and Year 2009 Earnings Conference Call. As usual, Kevin March, TI's CFO, is with me today. For any of you, who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through TI's 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 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'll also address inventories and provide our perspective on where they stand today in the supply chain. Finally, we'll discuss actions that we're 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 semiconductor 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 3 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 growing part of Analog for TI this quarter, as we penetrated new opportunities, and gained share. Specifically, growth was strong in power supplies 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 RISC microprocessors from a year ago.

From a geographical perspective, while sequential growth was fastest in the U.S. and European markets, all regions grew. Compared with a year ago, all regions were up, except for the U.S. market.

Turning to distribution, resales or 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.

Kevin P. March - SVP and CFO: 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 the year ago quarter, gross margin increased 890 basis points.

Operating expenses were down slightly from the third quarter and declined $90 million from the year ago level. 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 improved performance reflects the potential of our business model that is now focused on Analog and Embedded 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 in 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 through to 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 are 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 paid 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 us to 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 a 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 earnings per share 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 about 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 toward 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 2010 R&D is $1.5 billion, about even with our 2009 level. We estimate depreciation will be about $900 million this year, about the same level as 2009.

In summary, as the recovery continues to develop, we are seeing the results that we expected from our focus on Analog and Embedded Processing. We are investing to position TI for growth in these strategic areas as evidenced by our investments in the industry's first 300-millimeter analog fab and our assembly and test capacity expansion, as well as our continued investment in deploying field sales and application resources into the regions and markets that we expect to grow the fastest.

And we're 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 demand for PC upgrades, especially in emerging markets, which we'll benefit from well positioned products such as our Analog Power Management, as well as products sold into hard disk drives and other peripherals. All of which gives us confidence that there is plenty of opportunity for TI and our shareholders ahead.

With that, let me turn it back to Ron

Ron Slaymaker - VP of IR: 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 yourselves to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator?

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