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Texas Instruments Inc TXN
Q2 2013 Earnings Call Transcript

Transcript Call Date 07/22/2013

Operator: Please standby, we're about to begin. Good day and welcome to Texas Instruments' Second Quarter 2013 Earnings Conference Call. At this time, I'd like to turn the conference over to Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker - VP, IR: Good afternoon. Thank you for joining our second quarter earnings conference call. As usual, Kevin March, TI's CFO, is with me today. For any of you who missed the release, you can find it and relevant non-GAAP reconciliations 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 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 earnings release published today, as well as TI's most recent SEC filings for a more complete description.

Our mid-quarter update to our outlook is scheduled this quarter for September 10. At that time, we expect to adjust the revenue and earnings guidance ranges as appropriate.

The second quarter was another solid quarter for TI. Revenue came in as we expected, up 6% sequentially and up 8% if you exclude the legacy wireless revenue, which declined to less than 5% of TI revenue in the quarter.

Analog and Embedded Processing increased to 78% of TI revenue. Our overall backlog continued to increase. Visibility into the second quarter has improved, and we expect another quarter of solid growth in the third quarter.

The industrial and automotive markets were once again important drivers of TI revenue growth. More than 35% of our product revenue in the first half of 2013 came from these important markets. Although we continue to have exposure to the PC and handset markets, these are now much smaller percentages of our revenue. We believe this increased diversity of markets and customers should make for steadier growth and financial returns.

The strength of our business model continues to give us confidence that we can sustainably generate $0.20 to $0.25 of free cash flow for every dollar of revenue and then return all of it to shareholders except what is required to repay debt. As we’ve said previously, free cash flow is an important consideration for a couple of reasons. First, net income has generally lagged the amount of free cash flow that we have generated for the past few years and will continue to lag in the years ahead. This is because of significant non-cash items on the income statement, including amortization of acquisition intangibles as well as the large amount by which depreciation exceeds our capital expenditures.

The second reason free cash flow is important is that cash returns are a big part of our long-term shareholders return. The more free cash flow we generate, the more we return in the form of dividends and stock repurchases. For the trailing 12 months period, free cash flow was 24% of revenue a point higher than last quarter and once again, we returned all of that and more to our shareholders, consistent with our capital management strategy. Earnings in the second quarter were strong, a result of good operational execution and improving product mix and a transfer of wireless connectivity technology to a customer, reflecting our continued monetization of the legacy wireless business even as this product revenue declines.

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