TI applying lessons from past cycle, cuts capex and shifts R&D strategy

January 23, 2007 – In its conference call announcing 4Q06 financial results, Texas Instruments Inc. execs revealed plans to increase the company’s use of foundries and reduce spending and internal process development, in an effort to manage demand and investments based on lessons learned from a similar market environment two years ago.

TI’s 4Q sales and earnings were actually a bit better than weak market expectations — profits rose about 2% from a year ago to $668 million, on 4% higher sales of $3.46 billion, amid unseasonably weak demand for chips used in cell phones (new orders were down 18% year-on-year). Revenues and net profits were down about 8% and 5% vs. 3Q, respectively.

TI president/CEO Rich Templeton and CFO Kevin March acknowledged a “challenging” near-term environment, that has some parallels to the period of late 2004-early 2005 (notwithstanding a shift in wireless demand to low prices and basic features). “This demand environment feels to us quite similar to what we experienced back then” — an inventory build, a couple of quarters of declines, and then a rather fast turnaround, said March during the conference call Q&A, adding that TI spent the next 18 months trying to catch up to that market rebound. So, the lesson now being applied “is not to get too tight on inventory on this part of the correction cycle, so as to possibly miss a sudden up-tick later in 2007,” he said. “It’s very easy for us to slow the factories down. It’s a heck of a lot harder to speed them up if demand suddenly comes in faster than expected.”

The lessons won’t be applied without some scrapes, though. TI also announced plans to cut 500 jobs through this year from its 31,000-person workforce and shut down an older digital factory in Dallas (shifting the equipment to its other analog factories), totaling about $55 million in restructuring charges through the year — all of which will ultimately net about $200 million in annual cost savings.

TI execs also announced a shift in development of next-generation digital process technology over to foundry partners, while the company continues its own internal analog and mixed-signal work. March noted the move is an effort to stop internal activity just as its early 45nm capabilities come online but before the company starts incurring costs or activities on development for 32nm process node. “We no longer believe that it is necessary to maintain this redundant capability” by developing leading-edge digital processes internally in conjunction with work involving foundry partners, he said, adding that TI’s wireless competitors have access to the same manufacturing technology anyway, so any differentiation will come from TI’s chip designs and chips-based solutions.

Capex is being slashed by nearly 30% this year, from $1.27B in 2006 (when it invested heavily in assembly test operations) to $0.9B, “a level that we find very appealing for the company going forward,” March told listeners to the conference call. He explained that TI’s increasing focus on analog is inherently less capital-intensive, and that “our need for development equipment spending goes away” as the company ramps up digital CMOS manufacturing process development with foundry partners.


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