TXN

Texas Instruments Incorporated (TXN)

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Texas Instruments (TXN)

Q3 2012 Earnings Call

October 22, 2012 5:30 pm ET

Executives

Ron Slaymaker

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

Richard K. Templeton - Chairman, Chief Executive Officer, President and Member of Special Committee

Analysts

James Covello - Goldman Sachs Group Inc., Research Division

Christopher J. Muse - Barclays Capital, Research Division

Joseph Moore - Morgan Stanley, Research Division

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

Vivek Arya - BofA Merrill Lynch, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

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

Glen Yeung - Citigroup Inc, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

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

David M. Wong - Wells Fargo Securities, LLC, Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good day, everyone, and welcome to the Texas Instruments Third Quarter 2012 Earnings Conference Call. At this time, I'd like to turn the conference over to Mr. Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon. Thank you for joining our Third Quarter 2012 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 December 10. At that time, we expect to adjust the revenue and earnings guidance ranges as appropriate.

Let me start with market environment. Revenue in the third quarter was in the upper half of our range of expectations. That being said, we expected revenue and demand to be weak, and they were. Similarly, our expectations is that this market weakness will carry forward into the fourth quarter as customers respond to the sluggish macro environment and to poor demand for their products. We continue to believe that inventory levels at OEMs and our distribution channels remain low. Although there could be some adjustments to inventory in light of weak demand, we believe this slowdown is being driven by poor end demand, not a broad inventory adjustment.

Even in the weak demand environment, our operations have performed well. We were highly responsive to changing demand and lowered our production loadings accordingly, resulting in lower TI inventory. We remain watchful and ready to respond to changes in demand, up or down, in this uncertain environment. Our lead times are short, our inventory is well-positioned and our factories are highly flexible. We also reduced expenses as we described at our September update.

EPS was $0.67 last quarter. This was favorably impacted by a couple of items in the quarter that Kevin will walk through in detail. These items include a benefit for taxes that contributed $0.14 to EPS and a benefit for changes that we made to our Japan pension program that contributed $0.08 to EPS. Neither of these items was comprehended in the guidance we had provided. In any event, we delivered a solid EPS result that exceeded the midpoint of our guidance by $0.05, even allowing for these items.

We also generated a lot of cash in the quarter, with free cash flow in excess of $1 billion. Kevin will describe how our opportunistic purchases of capacity over the past few years are now benefiting us on this front.

Let me now walk through the third quarter's results. Revenue of $3.39 billion declined 2% from a year ago and grew 2% sequentially. Analog revenue grew 18% from a year ago and was up 2% sequentially. The growth from a year ago was due to the acquisition of National Semiconductor late in the year-ago quarter. Therefore, the revenue comparison only included a week or so of this revenue in the year-ago quarter. The sequential growth was primarily driven by growth in High Volume Analog & Logic, as well as Power Management, offsetting declines in High Performance Analog and Silicon Valley Analog.

I should note that we will soon complete our IT systems integration work at SVA and will begin this quarter to implement a consignment inventory program with distribution on the SVA portfolio. As you will recall, we began to implement a consignment inventory program with distribution in 2008, and our experience has been good in that it creates supply chain efficiencies. In short, it allows the distributors' resources to be better optimized on revenue creation for TI products as a result of fewer resources being tied up in inventory carrying costs. For TI, we believe it translates to higher share at our distributors.

Revenue per products that are on consignment gets recognized as the distributors pull the products from the hub shortly before they ship to their customers. This means that as we convert part of the SVA portfolio to consignment, revenue recognition for these products will flip out about 2 or 3 months as distributors work down their existing inventory and then start pulling from the consignment hub. In total, about $100 million of SVA revenue will be impacted as we move these products to consignment support over a 2 to 3-quarter period. Since we recognize revenue on a sell-in basis to distribution, during this conversion process, the SVA revenue growth will be negatively impacted. Of course, this is only a timing consideration and will have no effect on resales. It will have minimal impact on TI's overall growth rate. However, it will have a more meaningful impact on SVA growth over this conversion period.

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