May 4, 2012 — Texas Instruments Inc. (NASDAQ:TXN, TI) hosted an Analyst Day this week to discuss and review key strategies and progress achieved over the past 15 years. Barclays Capital “heard few surprises” at TI’s Analyst Day; its analysts maintain their view that TI is a “high-quality analog company” that raises some concerns that it is not able to benefit from its scale advantages, with a growth trajectory of only GDP-plus (i.e. in line with overall semiconductors). FBR Capital Markets analysts agree that “little new surfaced.”
See Texas Instruments’ Q1 results.
Management recapped its transformative moves: the sale of its memory business, its acquisition of analog capabilities with Unitrode and Burr Brown purchases, the sale of the sensors & controls business, its move to wind down baseband sales (20% of revenues in 2006), its purchase and ramp of multiple 300mm analog fabs, and its purchase of National Instruments.
Texas Instruments’ management focused on the transition to higher-quality revenues — analog and embedded processing — for growth, Barclays notes. TXN is ranked 1st in analog with 15% share and second in embedded chips with 12% share. TXN’s competitive advantage to enable faster growth in core markets is led by breadth and depth of portfolio, sales/service engineering scale, 300mm leadership/back end IP. TXN has a wireless focus on "internet of things" or the era of interconnected cloud, where the company today over 100 design wins. Texas Instruments’ management focus is on stickiness of long-term relationships/profitability in this business, though they do not provide a timetable here.
Also read: Texas Instruments (TI, TXN): Trouble with wireless, analog is stable
Led by inexpensive capacity buys (i.e. RFAB 300mm), TI’s current footprint supports $21 billion ($26 billion including empty cleanroom space) with utilization today in the low 50% range, Barclays reports. Capital spending was down by one point to 4-7% of revenues, FBR Capital noted. As TI’s 300mm analog RFAB ramps, TI will see cost and margin benefits on its highest-volume analog chips, allowing it to make fatter margins, sell at lower prices to gain share, or possibly dip into lower-margin segments to drive growth, FBR reports.
Financial targets largely unchanged; TI plans to grow top line "significantly faster" than semis, even better EPS growth, and cash return to shareholders via dividends/buybacks (though tempered near term by NSM debt pay down). TI noted that core revenues (analog, embedded processing, OMAP, connectivity) have grown from 52% of sales in 2006 to 78% of sales in 1Q12 (baseband still 3% in 1Q12). With a broad-based business not dependent upon any single customer or product, a decreasing capital investment profile, and robust future growth prospects in 80% of its business, TI believes it will return more capital to shareholders going forward.
Management firmly believes its markets have bottomed and that the recovery has begun, driven by strength in auto and industrial, which appear to have responded earlier than typical in this cycle. R&D guidance was unchanged at $2.0 billion in 2012 (with annual capex guidance of $750 million).
TI has done a good job of focusing on its analog core, building competitive barriers, and growing scale, said FBR analysts, but the chipmaker has built inventory ahead of demand and its wireless business seems challenged. TI’s days of inventory grew by 21 sequentially to 108 days, likely borrowing from future fab utilization rates. FBR analysts do not think this is “too much” inventory to service its customers, but it could drive lower utilizations at some point in the future, for a company that already has ample unused capacity.
TI’s recent revenue weakness has been worse than that of some peers due to a meaningful revenue correction in wireless base station products, continuing secular baseband declines, lagging connectivity combo shipments and design wins (Broadcom seems dominant), and with solid exposure to industrial shipments (where inventory declines are meaningful).
While TI does have a meaningful market position with its OMAP application processors, and likely further penetration into smartphones and tablets in the coming years, this segment has thus far underwhelmed initial expectations. Increasing competition has compressed ASPs and challenged TI’s share, as we now estimate OMAP and connectivity revenues (wireless excluding baseband) to decline year over year — hardly the growth engine the wireless segment once was.
TI’s OMAP 5 dual core A15 OMAP refresh is expected in 2H12. With the latest release of Qualcomm’s S4 and NVIDIA’s quad core Tegra 3, OMAP has lost some of its differentiated value proposition. Weak OMAP sales may also be magnified by decisions from Samsung and Huawei to increasingly use proprietary applications processors (TI had numerous 2H12 wins with both companies).
FBR wonders whether some of the weakness TI is seeing now could be due to wireless or other customers reducing exposure to the combined TI/National entity, pointing out that this has happened in other mergers when one supplier has too much share at any given customer, then second sources of supply are qualified.
TI acknowledged that National lost considerable handset share in recent years, partially driven by hardline pricing decisions based on predetermined gross margins or ASP goals, with management determined to price chips depending on market characteristics and value to stem the share loss. Finally, management noted that SVA has about $2.5 billion of revenue-generating capacity, but only $1.5 billion of sales in calendar 2010, though management looks to increase utilizations beyond National’s recent 50-60% through share gains and cross-selling. The deal adds about 12,000 new parts to TI’s analog product stable. While there is likely some overlap in TI parts and National parts, the firms said their offerings are highly complementary with limited overlap. While TI said that it is likely to keep using National’s 150mm and 200mm fabs given their mid 50% utilization rates and low manufacturing costs, TI could slowly move National’s production out of those facilities and into its 300mm facilities. TI currently has equipped capacity to generate about $2 billion in annual revenues from its 300mm fabs, and it has walled capacity to generate more than that.
More consolidation is possible in the analog space given the fragmented and diffuse nature of that market, and given that TI is so much larger (18% share) than its next few competitors (4-6% share). FBR would not be surprised to see TI acquire more analog firms, or to see other analog firms merge in order to build scale and manufacturing efficiencies to more effectively compete against TI.
Texas Instruments has shifted its wireless focus away from baseband products to application processors and connectivity products, as the baseband business requires considerable R&D and scale to address multiple standards in many different countries around the world, and to avoid rampant competition. The company’s exit from the baseband business, which was guided to play out through year-end 2012 on a linear basis, negatively affected revenues by about $810 million and EPS by about $0.13 in 2009, versus 2008, and did not fall at all in 2010 as the semiconductor market recovered and TI’s baseband business increasingly centered around 3G. The total baseband-related
EPS drag was about $0.11 in 2011 as the firm rode out its 3G business, having already lost its 2G business, and then $0.16 per year in 2012 and $0.04 in 2013, making this issue fairly minor compared to the scope of TI’s overall business, and since other growth areas such as analog and embedded processing should more than make up for this EPS drag. Management did recently say that baseband shipments would track near $75 million in 1Q12, and then track at $50 million to $100 million per quarter for the remainder of 2012 before dropping to zero in 2013.