Texas Instruments Rises On Long-Term Plans

| About: Texas Instruments (TXN)
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Texas Instruments (NYSE:TXN), the world's leading analog chipmaker and third largest semiconductor manufacturer, reported an 11% drop in quarterly income to $264 million as revenues dropped by 13% to $2.98 billion, just managing to beat the revenue estimates by around $30 million. Operating profits have dropped by 62% from $365 million in Q4-2011 to $139 million in Q4 2012. Excluding a tax benefit of $0.15 per share, the earnings per share was $0.08, 1 cent more than analysts' estimate. The long-term story for TI has been its unwillingness to commit to the future in mobile computing which ultimately pushed its OMAP SoC to the fringes of the ARM (NASDAQ:ARMH) revolution in smartphones.

For the current quarter, Texas Instruments has given a dim forecast, where revenues are expected to fall from the current levels to between $2.69 billion and $2.91 billion, while earnings will be between $0.24 and $0.32 per share. Demand for almost all computing devices, except tablets, has been weak.

Moreover, in its main business, TI has been suffering from oversupply in industry amid falling levels of demand which has forced device manufacturers, from microwave oven vendors to military-radar system manufacturers, to keep low levels of inventory and move towards shorter orders. This has caused a drop in lead times - falling to just 6 weeks in H2-2012 - creating a scheduling nightmare for TI and clouding its forward guidance for investors. It is still citing the slowdown of the Chinese economy last year and the persistent debt crisis in Europe as two of the main reasons behind the soft demand, but it is just as likely coming from soft U.S. demand, as Q4 economic indicators have all been uninspiring.

That said, revenues from Embedded Processing increased by 6% or $27 million to $469 million. But the 2% drop in revenues of its core Analog segment by $26 million and a 56% drop in Wireless revenues by $405 million completely offset the modest gains of Embedded Processing. The significant decline in Wireless revenues along with baseband and connectivity products ran an operating loss of $396 million versus a profit of $112 million in the same quarter in 2011.

Most of the decline is attributed to baseband products, while the operating loss was because of lower revenues coupled with higher restructuring charges in this segment. In its drive to move away from digital chips, TI announced the elimination of 1,700 jobs - 5% of its total workforce - in an effort to save $450 million annually. However, Digitimes has reported that TI and Singapore based GlobalFoundries have successfully bid for purchasing 300-mm semiconductor manufacturing equipment from Taiwan based Powerchip Technology, although TI's spokesperson Kim Morgan has neither confirmed nor denied the news.

TI has been increasing its focus on higher margin chips business and is divesting from mobile processor operations. The company has laid the blame on the vertical integration from Apple (AAPL) and Samsung but, in reality, it is even worse than that, when we simply add the emerging dominance of Qualcomm (QCOM) and its current line of Snapdragon S4's, whose fully-integrated SoCs - including the baseband and LTE modems - simply offer so much more value than the off-the-shelf ARM cores in the OMAP. Design wins in Amazon's ([AMZN]]) Kindle Fires and Barnes&Noble's ([BKS]]) Nook made sense because of their modest performance needs and extremely low pricing.

Like HTC in smartphones, TI gained a great short-term first mover advantage providing what amounted to low technology, quick-to-market products that didn't need a lot of development money. It was great opportunistic business. It also had no future. Now, TI cannot, or will not, compete at the high end of the market, because it doesn't do R&D or the low-end of the market versus MediaTek, so it has wisely chosen to do exit the industry altogether. Eventually the superior patent portfolio of Qualcomm would overwhelm marginal players like TI.

Although, the company's decision to move away from low margin baseband to other more lucrative options of analog, wireless and embedded processing is a good strategy which is going to cause an increase in margins in the long run. However, as indicated by the graph above, it will take a while to recover from the gutting that R&D took in 2010 and 2011. The OMAP will have to be re-imagined as an embedded solution with longer product lifecycles.

The business has lots of capacity, and through acquisitions - including the $6.5 billion acquisition of National Semiconductor in mid-2012 - it is building for even more, which will ensure that it is well positioned to capitalize on the increase in demand in the long run. But, in the short term, dead fab space is nothing but a drain.

TI has rallied nicely after news of its exiting the mobile SoC market and the beginnings of its restructuring plan hit the stock. The rally in the S&P 500 (NYSEARCA:SPY) did not hurt matters either. But TI's problems are not over, and this is a very normal bounce on good news. Short interest in TI has been rising with price, but a divergence is beginning to show up as volume dried up and January rolled along.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.