TXN

Texas Instruments Incorporated (TXN)

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Texas Instruments (TXN)

Q1 2013 Earnings Call

April 22, 2013 5:30 pm ET

Executives

Ron Slaymaker

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

Analysts

Glen Yeung - Citigroup Inc, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Blayne Curtis - Barclays Capital, Research Division

Joseph Moore - Morgan Stanley, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

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

Presentation

Operator

Good day, and welcome to the Texas Instruments 1Q '13 Earnings Conference Call. 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 first 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 June 10. At that time, we expect to adjust the revenue and earnings guidance ranges as appropriate.

Business in the quarter strengthened steadily. You will recall that in our mid-quarter update, we narrowed revenue to the upper half of the original range we set in January. In the end, we finished just below the top of our range. This is a healthy environment, where customers are maintaining lean inventory levels and are relying on TI's short product lead times, well-positioned inventory and strong manufacturing capacity to give them what they want when they want it.

As our revenue built in the quarter, it fell through nicely to profit. EPS of $0.32 was at the top of our range of expectations. As we review our first quarterly report for 2013, I believe it is important to note that TI is now a company firmly rooted in Analog and Embedded Processing. These 2 areas made up 77% of our revenue in the quarter, a full 500 basis points more than a year ago. This makes us less dependent on any one customer and on any one end market. As we've noted previously, our largest customer is now in the mid-single digits as a percentage of our total revenue.

As more of our revenue comes from Analog and Embedded Processing, our market exposure has also expanded favorably. Today, 35% of our revenue comes from the industrial and automotive markets, more than from the communications market and more than from the computing market. Each of these markets is important, and with more balance in the mix of revenue from each, we expect steadier growth and better returns.

The strength of our business model gives us confidence that we can sustainably generate $0.20 to $0.25 of free cash flow for every $1 of revenue, and then return all of it to shareholders except what is required to repay debt. You saw that confidence exhibited in the first quarter, as we raised our dividend by 33% to $1.12 per share annualized and added another $5 billion of share repurchase authorization.

In considering our performance and valuation, we believe it is important to pay attention to cash flow from operations and especially to the free cash flow we're generating, in addition to our income statement and balance sheet. We think free cash flow is important for a couple of reasons. First, over the past few years, net income has lagged the amount of free cash that TI generates, and we expect this to continue for a number of years. In fact, free cash flow was more than net income in 4 of the past 5 years. In 2012 alone, free cash flow exceeded net income by $1.16 billion.

So why does free cash flow exceed net income and why will this continue? Two primary factors are the amortization of acquisition intangibles associated with National, which will run about $320 million per year for the next 6 years. Also, depreciation expense exceeds our capital expenditure needs, thanks to the strong capacity position we currently have installed and the long life of our manufacturing equipment for Analog and Embedded Processing.

In 2012, depreciation exceeded CapEx by $462 million, and our guidance reflects about a $400 million difference in 2013. We expect it will be several more years before this gap closes, considering that our capital expenditures should remain at low levels.

The second reason we believe free cash flow is important is that cash returns are an important element of shareholders returns. The more free cash we can generate, the more cash we intend to return to our shareholders through dividends and share buybacks. This is an important benefit to our long-term investors.

The end result is that free cash flow, when considered on a trailing 12-month basis, is an important metric for our investors to assess the value of the enterprise and one that determines how much cash we can return to them. Of course, in the short term, any quarterly metric can vary significantly with seasonality and other factors. This is often noise and may not correlate with long-term changes in the intrinsic value of the company.

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