Texas Instruments (NYSE:TXN) is set to announce its Q2 2012 earnings on July 23. Led by a substantial reduction in revenues from the wireless segment and continued lower level of factory utilization, the company registered a 9% sequential decline and a 8% y-o-y decline last quarter. We believe that with the rise in customer demand and inventory correction, this quarter could be the turning point for TI, which (barring 2010) has been reporting a y-o-y decline in revenues since 2007.
With a focus on driving growth in analog and embedded processing and broadening its market reach for both application processors and connectivity products, the company has good potential to leverage the revival in semiconductor industry. We believe that TI continues to have strong fundamentals as it maintains its position among the top four semiconductor vendors (in terms of revenue) with 3.8% market share. 
Broadening Market for Application Processors and Connectivity Solutions
Despite witnessing a declining market share over the years due to the planned exit from the baseband market, TI is capable of maintaining its current share for the period under review, in our opinion. TI has emerged a major player in the smartphone and tablet processor segment, and ranks high in the multi-core smartphone applications processor market.
We believe the innovative product offerings in wireless connectivity and application processors would become the new revenue drivers for the company. Two recent developments this quarter reinforce our belief:
1. TI’s upcoming OMAP processors will be Miracast certified. This will enable users to display full high-definition content from a mobile device onto a larger screen over a secure wireless connection.
2. Windows RT on OMAP processors: The company showcased Windows RT on its OMAP processors based system at Computex 2012 earlier this quarter. Though the tablet is still work-in-progress, the company is confident that it will be ready with its hardware running on Windows 8 by the time the new OS is officially launched in the market.
Analog and Embedded Processing Will be Primary Growth Engines
With an increase in orders and a growing backlog, TI is showing early signs of recovery. While the analog division contributes above 55% to our price estimate of $45.29, embedded processors only contribute around 13%.
The company believes that the inventory depletion has run its course in markets such as auto, industrial and infrastructure and that the demand should pick up hereon. According to research firm IDC, the global semiconductor revenue is expected to rise 6-7% this year. 
In the past couple of years, with the acquisition of National Semiconductor and the fabrication and equipment units of some other companies, TI has added around $7 billion worth incremental revenue generating capacity. Increased capacity combined with a slowdown in industry demand led to lower factory utilization and declining profit margins. However, we expect that as the industry revives and demand picks up, TI could leverage this additional capacity and consequently increase its factory utilization rates which, in turn, will improve the gross margins.
With several product launches, the company enhanced its embedded processor division this quarter. Having launched a development platform for real-time analytics applications and a fully integrated ultrasonic signal conditioner for automotive parking distance applications, TI added to its existing industrial portfolio new product development in the LED division last month.
TI’s product performance and excellent support are the top-selling points for its embedded division. The company continues to focus on investments to enhance its product line, and that is what sets it apart from competitors such as Renesas-NEC, Microchip and Atmel.
Our price estimate of $45.29 for Texas Instruments is at a premium of over 60% to the current market price.Notes:
- Worldwide Semiconductor Revenue Reached $307 Billion in 2011, Gartner Press Release, April 17, 2012 [↩]
- Worldwide Chip Sales May Grow at Faster Pace, IDC Says, Bloomberg, April 30, 2012 [↩]