TXN

Texas Instruments Incorporated (TXN)

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Texas Instruments (TXN)

Q2 2013 Earnings Call

July 22, 2013 5:30 pm ET

Executives

Ron Slaymaker - Vice President of Investor Relations

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

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

Ross Seymore - Deutsche Bank AG, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

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

Ambrish Srivastava - BMO Capital Markets U.S.

Sumit Dhanda - ISI Group Inc., Research Division

Mark Lipacis - Jefferies & Company, Inc., Research Division

Joseph Moore - Morgan Stanley, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

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

Presentation

Operator

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

Ron Slaymaker

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 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 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 the significant noncash 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' returns. The more free cash flow we generate, the more we return in the form of dividends and stock repurchases. For the trailing 12-month period, free cash flow was 24% of revenue, 1 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.

Let me walk through a few details of revenue. Analog revenue grew 6% sequentially. Silicon Valley Analog, High-Volume Analog and logic and High-Performance Analog all contributed to the sequential growth. Power was about even as growth in broader markets was offset by weaker demand at certain handset customers and game console manufacturers, which were preparing for a product transition. SVA, with its strong participation in the industrial and automotive markets, has been the leading driver of growth within our Analog business. Additionally, it has outgrown the Analog market over the past 3 quarters. From a market share perspective, SVA troughed in the second half of 2012, and its share has significantly rebounded as it has grown since then. As we have communicated to you previously, our original expectation for SVA was that it would continue to lose share in the first year after the acquisition, grow similar to the market in this second year and then gain share in the upcoming third year. We're running a full year ahead of this plan.

Embedded Processing revenue grew 10% sequentially, with processors up the most, followed by growth in microcontrollers and connectivity. Although connectivity was the smallest contributor, its growth rate was the highest as a range of customers embraced our low-power products. In processors, communications infrastructure had solid growth, reflecting increased operator spending, especially in North America.

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