Conference Call, 04/21/97 - Texas Instruments, Inc. (NYSE: TXN)

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF 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 (April 21, 1997)/FOOLWIRE/ --- Texas Instruments reported first quarter 1997 results on April 15th. The company reported earnings per share of $0.70 for continuing operations, which excludes the charge they took of $56 million or $0.18 per share. Those are the continuing operations. They commented back in the fourth quarter that their defense business is reported as a discontinued operation and that, separately, was $0.14 per share of earnings in the first quarter.

PROFIT FROM OPERATIONS UP. Texas Instruments feels it is making progress towards its strategic direction of value, growth, and improved financial stability. They achieved higher operating margins in differentiated semiconductors and that was a major indicator of the progress. TI's profit from operations (PFO) at $227 million, excluding the charge, was up 55% from the first quarter last year. PFO as a percentage of revenues reached 10% in the quarter, versus 5.5% a year ago. Differentiated semiconductors were a prime contributor to this improvement. PFO also benefitted from the absence of mobile computing losses compared with the first quarter last year.

CHARGES. The TI special pre-tax charge was $56 million or $0.18 per share. That was primarily related to the sale of the mobile computing business as they commented in the fourth quarter report. About half of this charge applies to the SG&A line on the P&L (profit and loss statement) and the balance is distributed with a few million in R&D and the rest in Cost of Revenues. Gross margins were approximately 36%, up from 29.4% in the first quarter last year and 33.8% on an adjusted basis in the fourth quarter excluding the charges. One of their goals is to improve margins. Their goals are to have their differentiated semiconductor products realize the high-teens on a PFO basis.

REVENUES DOWN. TI's revenues were down 15% from the first quarter last year, but excluding the businesses that have been sold, which includes mobile computing, the custom manufacturing business, and printers, revenues were only down 3% and all of that was related to the lower DRAM prices year-to-year.

CURRENCY TRANSLATION IMPACT. Currency impact was not enough to break out. Overall, the yen-dollar relationship, they feel, probably takes a couple points of growth off of the world semiconductor market compared to a year ago. They believe the market there will grow, but very little because of the yen relationship. Because TI manufactures in Japan, they also get a break on the cost side on the currency, so they are pretty well positioned so that, thusfar, it hasn't been a major factor.

CAPITAL EXPENDITURES. Capital expenditures were $1.1 billion, as was depreciation. They haven't set a number yet for 1998. The reason capital expenditures seem low this year in contrast to what they spent last year is because they built the big DMOS-6 and they also built an R&D facility last which is something they would not do every year. The DMOS-6 is of a size that it should carry them for awhile in terms of capacity. Also, they are bringing online the Korean manufacture, where they will have 70% of that fab but they don't have to put any capital into it, it is not a joint venture but is an opportunity for them to have access to low-cost capacity. So, their capacity is in pretty good shape going forward without them having to spend as much capital as they might have in prior periods.

SEMICONDUCTORS. Because semiconductors now represent about 80% of TI's continuing revenues, they looked at that business in detail. This has been the strongest quarter they have seen in orders since the fourth quarter of 1995. Orders were ahead of the first quarter last year and were up strongly from the fourth quarter of 1996 -- double digit gains over the fourth quarter. Sequential order growth was found in all geographic regions. In Japan they saw the smallest gain because of currency and weakness in the Japanese economy, but it still managed to be up sequentially. DRAM orders also improved. They are still well below a year ago, but the non-memory orders were particularly strong, up more than 30% from the first quarter last year. Their digital signal DSPS solutions (DSP plus mixed signal analog) set another record high in orders. Their semiconductor revenues were up sequentially from the fourth quarter, but were still below the year-ago first quarter in total because of the lower DRAM prices. Excluding memory, semiconductor revenues were up substantially and DSPS was even higher. In fact, DSPS is now more than 40% of their semiconductor revenues and continues to gain strength. About 65% of semiconductor revenue was accounted for by differentiated products in the quarter.

DSP BUSINESS. The DSP business has a run-rate of around $700-800 million when you take out the discontinued businesses. The digital segment was essentially break-even in the quarter when the charges are taken out. That includes the microcomputer royalties, though. Going forward, they certainly have opportunities there for improvement because of the cycle. The calculator business is skewed toward the second and third quarters so that should benefit them going forward. Calculators continue to perform very well. They are in markets that are growing and they are going to be putting more emphasis this year on some of the international markets, such as Asia and Europe, so they will continue to do well.

SOFTWARE. Software has been a business where they have continued to invest in the new products there to keep it current and to try to get it out where the market is going -- to the distributed and desktop business. Because of that, it has stayed around the break-even or small loss from time to time. But it is not a big factor either way to be concerned about in terms of the effect on the P&L.

MANUFACTURING EFFICIENCIES. In terms of where they are on the yield improvement with their manufacturing, they will begin to show up in the second quarter and then continue on through the year as TI implements the 0.35 micron process in all of their JV fabs. Later in the year, the Twin Star facility will ramp up on the 64-meg. All of that points toward continuing improvements in their manufacturing and yield for their joing ventures. If you look at TI's differentiated products, DSP etc., probably the leading-edge fab there would be the DMOS-5 which is generally centered around 0.25 micron. In the second half, TI will be shipping some of the 0.18 micron ASIC designs that come off the Timeline process. Going into 1998 and beyond, we will see more of that in some of TI's other products. They think the combination of the mix moving higher and higher toward differentiated DSP, more of their processes moving to 0.25 micron and below will continue to benefit their semiconductor operations.

JOINT VENTURES. The joint ventures have not performed in line with the agreements the past few quarters. They are working better than they did last year when TI saw these very swift drop offs. They are not back to normal yet because of some of the disruptions in the pricing environment. But, clearly the loss is narrowed and part of that was the way the JV structures work. The main problem still for TI is that the total revenues that come to them are still below their fixed cost, so they still need a period of improving growth in units and stability in prices to get their revenues up to cover their fixed costs. But, they are making progress on that.

DSP BUSINESS BY MARKET AREA. As far as the DSP business related to the three end-market areas -- wireless, mass storage, and networking -- they have a dedicated team with P&L responsibility across those segments. TI saw strength in all those areas during the quarter. Mass storage was very strong because of the work they are doing with SSI. That acquisition has continued to go very well. They are focusing on the high density disk drives. They are also seeing design opportunities in the new CD-ROMs, the high-performance CD-ROMs, and also the DVDs that are just beginning to roll into the market. Their orders were up at record levels and had a very strong quarter in terms of orders. In the wireless communications area, those continue to benefit by the move to digital cellular. TI saw strength across the board in all the geographic areas. There is a lot of activity going on in Japan now in the small PC wireless sets. European vendors continue to show strength in both their local markets and their export markets. And they think the US market now is finally beginning to creep towards digital, but they think a lot of the barriers have been removed so that is an opportunity for growth ahead, strength in the US market. Networking is the smaller of all the units and is probably the one they will continue to see very good growth opportunities because it is beginning to see demands for bandwidth and high speed access go into production like they have seen with US Robotics. That rollout has gone very well. The activity is very high an the orders in the networking side were another record for TI.

DRAM PRICING. They have seen recent signs of stability in DRAM prices. Spot market prices for 4-meg DRAMs are around $2.50 and 16-meg is in the $9.00-$10.00 range and are on an upward trend overall. By the end of the quarter, the contract prices were starting to move back up too. It is still somewhat a volatile situation and they don't know exactly what will happen in the future. The stability in prices didn't come in time to provide much help in the first quarter but they would say it is a positive going forward if those prices are sustained. On the semiconductor margin front, in the report they commented that the semiconductor PFO was up more than 50% from the fourth quarter and that's excluding the charges in the fourth quarter that apply in the semiconductor business for the early retirement. That rise in PFO was because of differentiated semiconductors and the narrowing of losses in DRAMs. They have booked orders going into Q2 pretty typical of what they would expect to see at this time, probably half the DRAM orders would be booked, and those prices have firmed up. Which way the price goes when the quarter's all over would really depend on the environment. As they go through the quarter, they would say they are seeing more stability than they have seen in some time. They are seeing strength from their computer customers. So, unless someone brings in some additional supply during the quarter, it looks like they are pretty stable at this point. The bit growth rate in the market appears to be remaining well over 80%. Last year, with the revised numbers now, it looks like the bit growth for the industry was about 80% for the year and currently it is continuing to run over that rate.

DRAM UNIT GROWTH. In terms of units, 64-meg DRAM is not a factor yet for TI or for the market. They expect the market this year to grow substantially for the 16-meg. They think it will more than double. It was 985 million units in the market and they believe that will go to 2-2.1 billion, but more than double in 1997. Again, TI's joint ventures with their production and their shrinks, their goal will be to keep up with that market for the year. The 4-meg is going to drop sharply. There was 1.5 billion units in 1996 and they think that will drop down to half of that or less this year. TI will phase down probably even faster on the 4-meg because they believe the growth is in the 16-meg and then later this year in the 64-meg. So they will be shifting their capacity probably faster than the market over to the 16-meg and to the 64-meg later in the year.

SEMICONDUCTOR MARKET RECOVERY. TI's plans for 1997 continue to be based on moderate recovery in the world's semiconductor market. They saw the semiconductor inventories at OEMs remain at record low levels and they are seeing signs of stability in DRAM prices. This coupled with cost controls plus momentum in the value-added differentiated semiconductors is having a positive impact on TI's performance. On their inventory survey, it came in at 2.5 weeks and that was unchanged from the prior survey in January and is down from 3-4 weeks which is where it had been running for some time. In 1996 it averaged about 4 weeks and in 1995 it had gotten down into the 3.1 week area. So, it's well below the levels they saw in the early 1990s and continues to remain at a low level. As far as an order pattern for the semiconductor market, they saw a little weakness in January, but that is traditional coming out of the fourth quarter. In February they began to see some more activity and March was very strong. They are continuing to see the strength carrying through in April.

DSPS. Going forward, TI will continue to focus on DSPS. DSPS is the biggest opportunity for TI since the invention of the integrated circuit. They see DSPS at the heart of the digital revolution. TI is the leader in DSPS and they continue to gain momentum.

DIGITAL LIGHT PROCESSOR. They continue to make progress on the digital light processor. It is not really a big factor yet in terms of revenues but they are continuing to build up in their shipments of units and this quarter began shipping to a new segment of the market -- the upper end of the market, very high brightness/big theater/big auditorium market. Because of the shift to the higher-end of the market, TI doesn't expect that demand to drive unit volume increases, but ASPs will be higher. To drive volume, they will have to lower production cost and that is their goal. They continue to ship a few thousand units per month.

* 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.