Q1 2005 Texas Instruments Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon, ladies and gentlemen. And welcome to the Texas Instruments' first quarter 2005 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. It is now my pleasure to introduce your host, Mr. Ron Slaymaker. Sir, the floor is yours.

RON SLAYMAKER, VP, MANAGER OF IR, TEXAS INSTRUMENTS: Good afternoon and thank you for joining our first quarter earnings conference call. Kevin March, TI's Chief Financial Officer is with me today. This call will last one hour. 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 released 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 7th. We expect to narrow or adjust the revenue and earnings guidance ranges as appropriate with this update. We will observe a quiet period beginning on June 1st until the update.

In today's call, I will review our revenue performance and then Kevin will discuss profit performance and the second quarter outlook. After this review, we will open the lines for your questions.

First quarter TI revenue was $2 billion 972 million, about in the middle of the guidance range that we provided at our March mid-quarter update. TI revenue declined 6% from the fourth quarter due to a drop in Semiconductor revenue that offset growth in Sensors and Controls and Educational and Productivity Solutions, or E&PS. We are especially encouraged that TI's profitability increased in the quarter despite the sequentially lower revenue. Kevin will address the factors behind the profit increase in a few minutes.

Sensors and Controls revenue of $296 million grew 7% sequentially, 4% compared with the year-ago quarter, and set a new quarterly record. E&PS revenue of $82 million grew 3% sequentially and from the year-ago quarter. Semiconductor revenue fell 7% compared with fourth quarter. The decline was primarily driven by lower wireless revenue, and to a lesser extent, lower DLP revenue.

The decline in wireless was at the level we had expected in January. The decline in DLP revenue was consistent with our expectations at the March update, although it was steeper than we had expected in January before we had access to sell-through data for the peak season.

Although the inventory correction of standard products sold through distribution continued to have some residual effect on our results in the first quarter, we believe distributors have now achieved their desired levels of inventory. Our confidence is based on the sequential revenue and order growth for these standard products in the first quarter, with a book-to-bill ratio for these products exceeding one in the quarter. Compared with the year-ago quarter, Semiconductor revenue was about even with wireless up and most other areas down.

Total analog revenue declined 3% sequentially due to weaker demand from wireless customers and declined 8% from the year-ago quarter due to broad-based declines. High performance analog revenue increased 5% sequentially, reflecting the wind down of distributor inventory reductions, and decreased 2% from a year ago, a quarter in which distributors were building inventory.

Similarly, revenue from commodity standard linear products had a strong double-digit sequential increase. Although both of these standard product areas sequentially increased shipments into distribution during the quarter, distributor inventory in both product lines was reduced.

DSP revenue decreased 12% sequentially and grew 16% compared with the year-ago quarter, with both comparisons reflecting trends in wireless. TI's remaining Semiconductor revenue declined 6% sequentially, due to reductions of excess inventory at TI's DLP customers and their distribution channels.

DLP revenues declined about 30% sequentially, and about 25% from the year-ago level. Although we are encouraged with the pace at which our customers are addressing the inventory issue, there remains excess DLP-based television and front projector inventory at our customers and in their channels. Although the inventory correction will continue into the second quarter, we believe the pace of reduction should subside.

DLP-based televisions and projectors continue to sell well, and TI holds strong share in these markets. For example DLP-based front projectors held 47% share in the fourth quarter. This is the most recent period for which we have data from market analysts, and represents the 10th consecutive quarter of share gains for TI in the front projector market.

In big screen televisions, DLP share increased to about 18% of the North American market for the peak December and January selling months. Nonetheless, both of these markets didn't develop to our customers' full expectations, resulting in excess inventory.

In other areas, we had mid-single digit sequential growth in commodity standard logic products and microcontrollers. And low-single digit growth in risk microprocessors. Compared with the year-ago quarter, commodity standard logic revenue declined over 20%, while mix [ph] RISC microprocessors and microcontrollers both grew about 10%.

Royalties of about $130 million in the quarter were almost the same as the fourth quarter level. As expected, the semiannual royalty from our cash based licensee was received in the quarter. This royalty revenue is now being accrued on a quarterly basis. This should bring the total royalty level in the quarters ahead closer to the $100 million run rate that we've described as our average, while dampening the quarterly swings around this level.

In the wireless market, revenue increased 14% sequentially, and grew 15% from a year ago. The sequential trends were generally consistent across all handset technologies 2G, 2.5G, and 3G, although the increase from the year-ago level was driven by the advanced 2.5 and 3G technologies, which more than offset a decline in 2G revenue.

At this point, I will ask Kevin to review profitability and our outlook. Kevin?

KEVIN MARCH, CFO, SVP, TEXAS INSTRUMENTS: Thanks, Ron. And good afternoon, everyone. TI's first quarter gross profit was 1 billion 336 million, up 2 million sequentially, as higher gross profit in Sensors and Controls and E&PS partially offset lower profit in Semiconductor. Gross profit at the Company level included an $8 million gain on the sale of the commodity LCD driver operations in the first quarter. Gross profit margin of 44.9% of revenue increased 2.6 percentage points sequentially.

Semiconductor gross profit of 1 billion 189 million declined 17 million sequentially, as cost reductions combined with higher factory utilization, mostly offset the impact of the decline in revenue. Having completed a significant inventory reduction in the fourth quarter, first quarter factory loadings were increased to realign our factory output with our shipment levels, resulting in the higher utilization levels. We are pleased that during this transition, we are able to avoid any inventory build. In fact, TI's overall inventory levels declined slightly, although the decline partly reflected the inventory transferred as part of the sale of our LCD driver assets.

As we've discussed previously, TI's manufacturing strategy includes complimenting our internal advanced logic capacity with external foundry support. As we are beginning to transition our most advanced logic products from the 130 nanometer process to TI's 90 nanometer process, our total demand for 130 nanometer wafers is declining, yet our internal factory utilization for this process technology remains high. Once again, we are pleased that our manufacturing strategy is yielding a positive results for which it was designed.

In Sensors and Controls, gross profit of 106 million, or 35.8% of revenue, increased 7 million sequentially due to higher revenue. E&PS gross profit of 44 million, or 54.2% of revenue, increased 2 million sequentially due to higher revenue. Operating expenses of 839 million or 28% of revenue, decreased $11 million from the fourth quarter. For the R&D spending of 495 million, increased by 8 million, due to higher Semiconductor product development expense, and SG&A expense of 344 million, decreased by 19 million, due to the gain on the disposition of the sales office facility and lower expenses.

In general, expense and cost reductions include the effect of a lower profit sharing accrual. This is the result of a change to the profit sharing formula in 2005, and affects compensation expense in cost of revenue, R&D, and SG&A. TI's operating profit for the quarter was 497 million or 16.7% of revenue. Operating profit increased 13 million sequentially and operating margin increased 1.3 percentage points. Semiconductor operating profit was 460 million, or 17.7% of revenue. Sensors and Controls operating profit was 69 million, or 23.2% of revenue. And E&PS operating profit was 20 million, or 24.1% of revenue.

In the first quarter, other income and expense, or OI&E, produced income of 48 million, a decrease of 38 million compared with the fourth quarter, primarily due to the impact in the previous quarter of a partial settlement of matters related to the grants from the Italian government regarding TI's former memory business operations, and the resolution of an open sales tax item associated with the Company's previously divested defense business.

The effective tax rate for the first quarter was 24%, as we had expected. By comparison, the effective tax rate in the fourth quarter was 14%, which included the effect of accumulative catch-up reduction in tax expense. Net income was 411 million or $0.24 per share, down 79 million from the fourth quarter, primarily due to the impact of higher taxes. It might help to summarize the EPS transition from the $0.28 that we reported in the fourth quarter.

About $0.04 of lower EPS resulted from the reduced revenue level in the first quarter compared with the fourth quarter. An additional $0.03 decline resulted from the higher tax rate in the first quarter and $0.02 of decline were associated with the lower OI&E. These were partially offset by about $0.04 of benefit that resulted from higher utilization, as well as lower manufacturing costs and operating expenses.

About a $0.01 benefit resulted from the combination of the gain on the sale of the LCD driver assets, as well as a couple of facility sales. We had expected the sales of the facilities and our LCD driver assets to close in the quarter, and had included those gains in our prior guidance.

The quarter's results included $15 million of pre-tax amortization of acquisition-related costs. Total cash at the end of the first quarter of 5 billion 140 million decreased 1 billion 218 million from the end of the fourth quarter. TI used 1 billion 493 million in cash during the quarter to repurchase 58 million shares of TI common stock.

Cash flow from operations was 523 million in the quarter down 782 million sequentially, primarily reflecting a significant reduction in accounts receivable in the fourth quarter that was not repeated in the first quarter, and payment of the employee profit-sharing plan for the full year's 2004 performance. Cash flow from operations increased by 130 million from a year ago.

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