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Texas Instruments Q3 2010 Earnings Call Transcript

Texas Instruments Q3 2010 Earnings Call Transcript

Texas Instruments (TXN)

Q3 2010 Earnings Call

October 25, 2010 5:30 pm ET

Executives

Kevin March - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Ron Slaymaker - IR

Analysts

James Covello - Goldman Sachs Group Inc.

Shawn Webster - Macquarie Research

Uche Orji - UBS Investment Bank

Tristan Gerra - Robert W. Baird & Co. Incorporated

Glen Yeung - Citigroup Inc

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Stacy Rasgon - Bernstein Research

Christopher Danely - JP Morgan Chase & Co

Adam Benjamin - Jefferies & Company, Inc.

TheStreet Recommends

Ramesh Misra - C.E. Unterberg, Towbin

Edward Snyder - Charter Equity Research

Christopher Caso - Susquehanna Financial Group, LLLP

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Ambrish Srivastava - BMO Capital Markets U.S.

Presentation

Operator

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Good day, and welcome to the Texas Instruments Third Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon, and thank you for joining our third 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 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 December 7. We expect to narrow or adjust the revenue and earnings guidance ranges as appropriate with this update.

In today's call, we'll describe how TI's strategic position in our core businesses of Analog, Embedded Processing and smartphone chips continues to strengthen. We'll discuss our manufacturing strategy and recent additions that we have made to our analog capacity. We'll also provide our perspective of the near-term demand environment.

Revenue in the third quarter generally tracked closely with our initial expectations in the quarter. In July, the middle of our guidance range projected about 6% sequential revenue growth. We held that level with our September update and in the end, we delivered 7% growth.

Although our results are good, demand is a bit of a mixed bag. The industrial market was strong for us in the third quarter as it continued a cyclical recovery. We believe this market has now recovered and, therefore, we expect industrial growth will be somewhat less robust in the fourth quarter. In communications, wireless infrastructure was strong as operators continue to expand capacity to support increased data traffic. Accordingly, demand for chips that we sell into smartphones was also strong in the quarter. As we said at our September update, we saw a notable slowing in demand for products that we shipped into the PC market during the third quarter. We expect demand from our PC customers to remain subdued in the fourth quarter. Similarly, some of the consumer-related markets, such as televisions, also slowed in the third quarter, and we expect these trends to continue through the current quarter.

The increase in TI revenue was driven by growth across all of our segments. Analog revenue grew 5% sequentially and 35% from a year ago. Sequentially, Analog revenue was up most in High-Performance Analog, where we have higher industrial exposure. High-Volume Analog & Logic and Power Management products both grew, although to a lesser extent, with their exposure to the computing and consumer markets. From a year ago, all three product areas contributed to growth about the same and all contributed to TI's market share expansion in Analog.

Embedded Processing grew rapidly again this quarter. This partly reflects its exposure to markets that performed well, including industrial and communications infrastructure. It also reflects continued market share gains for TI and the strategic importance of Embedded Processing to our company. Sequentially, Embedded Processing grew 12% with both communications infrastructure and catalog products contributing about equally to this growth. Catalog products include both digital signal processors and microcontrollers. From a year ago, Embedded Processing grew 47% with catalog product being the biggest factor in the growth.

Wireless revenue grew 6% sequentially and 11% from a year ago. Collectively, products targeting the smartphone market, both being connectivity products and OMAP applications processors, grew 6% sequentially and 37% from a year ago. These are the Wireless products that we're investing in for growth. We've had tremendous design-in success especially with our latest generations of OMAP applications processors across a range of smartphones and tablets, and we look forward to solid growth as our customers' new product transition into volume production. Baseband product revenue was $438 million in the quarter and grew 5% sequentially and declined 3% from a year ago.

Our Other segment revenue grew 10% sequentially, driven by custom ASIC products, DLP products and calculators. From a year ago, this revenue was up 29%, with growth from DLP products and custom ASIC products being the biggest factors.

Distribution resales were up 8% sequentially in the quarter, about the same as TI revenue overall. We were able to help distributors build a few days of inventory in the third quarter. We're comfortable that their inventory is appropriate relative to current levels of demand and to historical metrics. Now Kevin will review profitability and our outlook.

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