FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Texas Instruments Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %>
P.O. Box 655474
Dallas, TX 75265
(972) 995-2011
http://www.ti.com

UNION CITY, Ca., January 24, 1997/FOOLWIRE/ --- Texas Instruments released their fourth quarter 1996 results yesterday morning. TI's earnings per share in the fourth quarter were $0.67 including the catch-up Samsung royalties, but excluding the special charges taken in the quarter. This includes the Defense numbers for comparison. However, because of the sale of TI's Defense business to Raytheon which they announced on January 6th, they are reporting this business as a discontinued business. For continuing operations, without the charges in the fourth quarter, they were $0.50 per share. The discontinued operations, excluding charges were $0.17 per share. With all the charges included, TI reported a loss of $(0.15) per share for the quarter.

BREAKDOWN OF RESULTS FOR THE YEAR. TI's net revenues from continuing operations in 1996 were $9.9 billion, down from $11.4 billion in 1995, with most of the decrease due to a precipitous drop in dynamic random access memory (DRAM) prices. From the fourth quarter of 1995 to the fourth quarter of 1996, DRAM prices dropped about 80%. PFO from continuing operations in 1996, excluding special charges for cost-reduction actions and in-process R&D, was $374 million, down from $1439 million in 1995.

Net income for the year from continuing operations, excluding the special charges, was $281 million, compared with $996 million in 1995. Earnings per share from continuing operations, excluding the special charges, were $1.46, compared with $5.15 in 1995.

The special charges for continuing operations during 1996 included $192 million for in-process R&D associated with the purchase of Silicon Systems Inc. (SSi) in the third quarter, and $91 million in the fourth quarter for severance costs related to voluntary retirement and involuntary actions, as well as $117 million for asset write-downs on certain product lines, principally mobile computing.

Including the effect of the special charges, for TI's continuing operations, loss from operations for the year was $26 million; net loss was $46 million; and loss per share was $0.24.

BREAKDOWN OF RESULTS FOR THE FOURTH QUARTER. Net revenues from continuing operations for the fourth quarter of 1996 were $2459 million, down 22% from $3147 million in the fourth quarter of 1995. Most of the decrease was due to sharply lower DRAM prices. Excluding the special charges, PFO from continuing operations in the fourth quarter was $173 million, net income was $95 million, and EPS were $0.50. This includes the impact of sharply lower mobile computing revenues, compared with the third quarter of 1996, which negatively impacted fourth quarter EPS by about $0.08 per share from the running rate of the prior quarter.

Results for the quarter also include $105 million in catch-up royalties for the first nine months of 1996 from the previously announced cross- licensing agreement with Samsung Electronics Co., Ltd., of Korea.

For TI's continuing operations, including the effect of these special charges and catch-up royalties, fourth quarter operating loss was $35 million; net loss was $40 million; and loss per share was $0.21.

DISCONTINUED OPERATIONS RESULTS. Net income including discontinued operations for the year was $63 million, and in the fourth quarter of 1996, a net loss of $29 million. EPS including discontinued operations for the year 1996 were $0.33, and a loss per share of $0.15 for the fourth quarter.

IMPACTS ON EPS. Lower than expected orders for mobile computing negatively impacted their EPS by about $0.08 per share from the third quarter. They were at a loss in the third quarter. That loss widened and cost them about $0.08 per share from that running rate. Then working through the additional tax they took in the quarter, that was another $0.07 or so per share. There was a big swing from their operating numbers in the third quarter as adjusted for the third quarter charge which was related to the SSi acquisition and their fourth quarter charge of $0.67 per share. Part of that was the royalty catch-up, but semiconductor was a big part of that.

SEMICONDUCTOR SEGMENT STRONG. The semiconductor performance was impressive in the quarter. Orders and revenues were up sequentially from the third quarter and operating profits were up substantially. TI's book-to-bill for all semiconductor products was in-line with the industry book-to-bill. Semiconductor margins went up strongly from the third quarter and there was strength across all the product lines. The semiconductor operating profits were more than double from the third quarter.

MEMORY PRICE DROP SLOWS. Memory prices have been coming down very sharply each quarter and under their pricing arrangements with their joint ventures, that cost them quite a bit on the margin side. In the fourth quarter, those prices still came down, but they came down at a slower rate. So TI benefitted a little bit from the transition in that market. Whether that stays with them going forward is hard to say and will depend on where the prices end up at the end of the first quarter. But they did benefit some by the slowdown in the price decline on the memory products.

JOINT VENTURE STRUCTURES ON DRAM PRICING. With regard to the joint venture agreements TI has with other companies, there are two different situations and none of these agreements are quite the same, they all vary. But they are based on a discount to the market price. That would work fine in a normal year where the price goes down 25-30% because TI can handle the cost reduction, the normal shrinks would give them at least 25-30% cost reduction, so that would keep it all in balance and keep their margins stable. But, in a quarter where the prices are down 40-50% which is what they saw back in the first quarter, those pricing formulas just couldn't handle that and there were adjustments near the end of the quarter on products that were bought earlier in the quarter. So TI ended up with lower margins.

DRAM BUSINESS STABILIZING, SO FAR. They did not see as much of the repricing in the fourth quarter as they did earlier in the year, so they think it subsided in the quarter. Customers were willing to give them longer lead time orders and now, going into the first quarter more than half of their DRAM business is booked for the first quarter, so they are seeing more stability even though the prices do remain low and volatile.

FIXED COSTS, THE OTHER SIDE OF THE JV PRICING EQUATION. The second side of this is that because of the high fixed cost they have in R&D, regardless of what the margin is, when you multiply that by the units and then the total revenues drop below your level of investment you have a loss in the memory operation. If that were going to be a condition over a long period of time, you would work very hard to get your fixed costs down, but if it happens in a short period of time you can't do that.

TI KEPT R&D IN PLACE TO SUPPORT TRANSITION. TI chose to maintain their R&D at high levels because they were bringing on advanced versions of the next generation and shrinks on the 64-meg cell that they would be putting into place, back stripping into their 16-meg production to get cost reduction later in 1997. There are several shrinks and they are on different schedules. The first of these will be coming up in the next couple months. Singapore is implementing shrinks. Acer is moving a shrink through their process. They have opened up a new 8-inch wafer fab and that will have some of the latest shrinks in it. Also, TI's joint venture in the US with Hitachi is beginning early production of 16-megs and that will have the super shrinks in it. That will probably have the first 64-meg cell shrink in it and that will be coming out later in 1997. Then they will also be ramping up and introducing the 64-meg DRAM.

DRAM LOSS SUMMARY. So, it's the combination of the very swift price decline and the fact that the revenues fall below the fixed level that led to the loss. They did improve on that in the fourth quarter and are going to continue to work very hard with their partners to improve the structure going forward.

WHEN WILL DRAM BE PROFITABLE. As far as when they will be profitable on DRAM again, they indicated that it could happen in 1997. They see continued strength in the bit growth rate and if they see some improvement on pricing, they will obviously continue to get the costs down as they go through the year, making break-even more possible. The signs are encouraging, however they are still seeing product coming from the Far East suppliers who still seem to be producing somewhat in excess of demand and are keeping more pressure on the prices. Many of those same producers have announced that they have cut capital and are cutting back. Maybe in time all that will work through the system.

BIT GROWTH STRONG. As stated earlier, they saw improvements across every major product area of semiconductor, even memory, although memory remained at a loss position. DRAM prices remain volatile and the near-term memory market is expected to be difficult, although the bit growth rate remains strong. Bit growth did accelerate in the second half of the year and probably for the year now it is going to be getting up close to 80% for calendar 1996 and looks like it will remain at a strong level going forward. They think in most of the forecasts, they are looking at the bit growth rate to probably stay in the 75%+ range. Currently it is very strong and that is continuing in the first quarter. TI thinks there is a pretty good chance that it could stay very much at the rate it's been running in the past year.

TRENDS ON DRAM ARE PROMISING. As far as when the market comes into balance, that's very difficult to say. They see the vectors pointing in the right direction. In other words, the bit growth rates remaining strong, all the reports they are hearing from the computer customers would indicate strength in their markets, Microsoft when they reported commented on a doubling of Windows NT software and that is sold through a lot of 32-megabyte systems. At many of the major computer manufacturers TI works with now, that's becoming the standard. They think that the memory-per-computer trend will continue.

NEW CAPACITY SLOWING, BUT SPOT PRICING STILL LOW. They also believe that the cutback in capital spending in the industry that started back in early 1996 will begin to show some effect. What they saw through much of 1996 was the effect of efficiencies people getting more yields and pushing the factories harder. They think we've had the benefit of that in extra throughput. Eventually that runs its course. There will still be strengths coming on that will add some capacity, but the rate of new capacity coming on should be slowing down versus what they saw in 1996. Somewhere out in 1997, TI thinks we will see better balance. They can't call the quarter or the month that will happen. That is why their position is that, in the near term, if you just look at the spot prices, they think that market will continue to be volatile but it is encouraging to see the trends in the right direction. Contract prices are probably still above the spots. That will vary over time. Clearly they have seen out in the market that on the 4-megs now, spot prices are down below $2 and for the 16-meg they are seeing $6 or less for the 1x16 and $7 or less for the 4x4. Contract is probably a little bit above that, but still subject to some volatility in the marketplace. The DRAM business was about 20% of their semiconductor revenues in the fourth quarter. None of that is royalties, just shipments of DRAMS.

THE DSP BUSINESS. Their DSPS (their DSP business plus mixed signal and analog) set new records again and exceeded 40% of their semiconductor revenues in the quarter. The DSP portion of that is about 15% of semiconductor revenues and growing rapidly. It is in a $2.3-2.4 billion market.

ASICS. The other 40% is things like ASICs, network chips, microcontrollers, the SPARC microprocessor business, and a number of other products. They are making investments here as well. For example, in the ASIC arena, some of their first products people will see coming out into the market from their timeline technology (the 0.18 micron process) will be ASIC circuits. With their ASICs technology, they have won 5 out of 6 of the major network switch contracts. The large switching products in the next generations will be on TI high-speed ASICs, very large ASICs technology. The other thing to think about with the ASICs business is that it is really becoming the backplane for these big super integrated chips that we will be seeing throughout the rest of this decade and in the next decade because they will be integrating multiple functions onto single chips with the ASIC as the backplane. Those did quite well and have been growing steadily.

NETWORKING SOLUTIONS. Another area that has gotten very good investments is what they called the networking solutions. Those sometimes can involve DSPs and sometimes they involve combinations of TI's other logic. That is a very fast growing area and is getting a lot of resources, particularly on the R&D side. In the microcontroller and microprocessor arena, they are continuing to come up with advanced generations of UltraSparcs to support what Sun Microsystems is doing and that is very positive.

COMMODITY SEMICONDUCTOR PRODUCTS. A little less than 10% now is in the older commodity logic side of the business. The whole market is below 5% and they would guess their mix has come down under 10% and will continue to shrink over time. But, it's also been a very good business for them with very good sustainable margins and good cash flow.

DIGITAL SEGMENT. In the first quarter they will take a charge for the severance cost associated with the sale of mobile computing assets. On the digital segment, ex-mobile computing, they still had a loss there even without mobile computing because of software and some of the other investments they are making in that segment. Their calculator business, which always has a very strong second and third quarter came down, essentially breaking even, in the fourth quarter. So for all those reasons, even ex-mobile computing, they did have a loss in the digital segment. Their calculator business is an excellent business and is meeting its corporate model in terms of return on invested capital. They have a corporate model long range for 20% return on invested capital and 20% revenue growth. The work that they have done in restructuring the calculator business over the past several years fits in very well with their long-term corporate models. It is a seasonal business.

SOFTWARE TOOLS. Software is still an emerging business for them because they continue to make investments there. The older historical applications software development tools market has continued to weaken as people have gone to client/server, desktop, object oriented, and other types of things so they have had to bring on a number of new product packages to try to bring that business back on a growth basis. It's about a $250 million business and it lost money in the year, but actually reduced its loss somewhat from the prior year. Neither of those numbers were very large numbers. But, it's in an industry that should have potential for growth. So, they are still trying to get the right product there for that market.

OTHER SOFTWARE PRODUCTS. Throughout the rest of TI's businesses, software is taking on a much larger role. Earlier this year they acquired one of the leading DSC software development tools companies and that has doubled their software content. Increasingly, software is taking on a larger role across their semiconductor business, their digital imaging business, and TI's work with US Robotics which is a programmable solution. They believe it is an important market and one that has growth potential and they have to demonstrate that and feel the actions they are taking are focused to do that.

The $1.5 billion per year in revenue they had for additional systems products includes some of the discontinued printer businesses, contract manufacturing, and now the discontinued mobile products. They come out at different rates and at different points in the year. After all is said and done, the software plus the calculator and consumer electronic business basically runs at a $200 million per quarter run rate going forward.

X86 STRATEGY GOING FORWARD. Some time ago, TI announced to customers that they were getting out of the 486 processor business. It has been a small part of their product line and the market has transitioned over to more advanced microprocessors, so that market has shrunk pretty rapidly through 1996. As that was happening, they transferred more of their engineering talent over to the DSP area, as well as the software expertise that goes with that. They think they have some valuable insights into the integration of some of the systems and software technology. But, all those people now are focused on building up their DSP efforts and other support of their software across TI.

DIGITAL LIGHT BUSINESS. In terms of their digital light business, they think they are making very good progress in terms of getting into the marketplace, getting out the initial projectors which are really focused at the commercial market -- the conference room/small auditorium market. There are another group of people that are developing products for the high-end -- the digital home theater. The big market is the consumer 40-60 inch market. They believe to successfully enter that market they would have to get their costs down substantially lower than they are today. That is what they are working on to make a substantial cost reduction and it will take some time to accomplish. In the meantime, their revenues are continuing to build up from the startup of their part of the market. Sony has also shown their very large projector that would go into big auditoriums, stadiums, and that sort of thing, and they have not set a time yet when they will be shipping it, but they are showing it at various trade shows and continue to work with TI. As far as the size of the market, it is in the market where the growth currently is on the order of $7 billion growing to over $11 billion by the year 2000, so there is certainly large enough market opportunity if they get their costs down that they could grow a substantial business with a very high growth rate.

CUSTOMER INVENTORIES. Looking forward, their 1997 plans are based on moderate recovery in the world semiconductor market, supported by the sustainable growth they see in the electronics and equipment markets. Customer inventories, based on their survey of OEMs, were at historically low levels of inventory at year end. At the end of December/early January, customer inventories were 2.5 weeks, down from 2.9 back in October. That is the lowest level they have ever seen in their survey and it is pretty much across the board. Also in Europe they saw some reduction in inventories.

ACER AGREEMENT FOR THE MOBILE COMPUTING BUSINESS. TI also announced an agreement with Acer for sale of their mobile computing business, with closing expected on or before March 31, 1997. While their mobile computing business has grown dramatically over the past two years, TI has also accelerated its corporate focus on digital signal processing solutions. They believe that the continued growth and future success of mobile computing will be enhanced by Acer whose primary focus is computers. TI plans to take a charge in the first quarter for severance and other costs associated with the sale of the mobile computing business. As a result of the agreement, TI will not report operating results of mobile computing subsequent to 1996. No patents were sold as part of this deal. Acer is already licensed under a long-term agreement with TI, so they are previously licensed.

STRATEGY. There have been a number of changes and acceleration in TI's strategic direction towards value-added products, higher growth markets, and improved financial stability. They believe they are making progress in their strategies, but still have work to do. A lot has happened in a short time and while a lot of their energy in the next few months will be focused on the transition of the Defense business to Raytheon and Mobile Computing to Acer, with that behind them they will focus on strengthening their position in DSPS, which they believe is already by far the leader in that market.

CAPITAL SPENDING. On the basis of continuing operations, capital spending in 1997 will be $1.1 billion which compares with $2.1 billion in 1996. In 1996, they think capital spending was skewed more towards the brick and mortar, about 65% for facilities and infrastructure to 35% for equipment. They were putting the infrastructure in place for their new DMOS 6 plant that is primarily for DSPS. In 1997, that building program is behind them which is why the $2.1 billion can drop $1 billion to $1.1 billion because much of what will be spent in 1997 will be for equipment as they begin to equip some of those facilities. The capital spending will be focused in Dallas. The 1997 capital spending will probably be in excess of 70% going to equipment purchases as opposed to buildings/facilities. In 1997 they expect depreciation to be about $1.2 billion for continuing operations.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.