Global macro headwinds and weak consumer spending impacted Texas Instruments’ (NASDAQ:TXN) earning in 2012, with revenues declining by 7% compared to 2011. TI’s decision to exit the wireless market in September 2012, combined with low inventory level at OEMs and distribution channels led to a 12% sequential and 13% annual decrease in its Q4 2012 earnings. With a 16% sequential decline in orders last quarter, it anticipated lower revenues in Q1 2013. However, on account of better than expected demand so far this quarter, TI narrowed its revenue target last week, from the earlier estimate of $2.69 – $2.91 billion to $2.80 – $2.91 billion.
TI believes that its orders bottomed out in Q4 2012. It is seeing a stronger demand environment in January and February and claims to be building a backlog for the first time in several quarters. While weakness in the computing and communication sector continue to suppress demand, the strong performance in the industrial segment is driving demand for TI’s products.
Though TI’s wireless revenues will continue declining this year, the saving incurred from restructuring the business will offset the negative impact on TI’s business. Additionally, we believe that with increasing strength in its core business of analog semiconductors and shifting focus on embedded processors, the company can witness a revival in its business 2013 onward.
Our price estimate of $35 for Texas Instruments is in line with the current market price.
Improving Demand For Core Products – Analog & Embedded Processors
Generating strong cash flow and investment returns, the analog and embedded processor divisions remain the focus areas for TI. In 2012, revenues from the analog division increased by 10%, and though the embedded processing revenue declined by 7%, both division made healthy profits. Despite anticipating lower revenue in Q1 2013, TI claims that both divisions are performing better than expected. We think the decline is more on account of soft macro conditions and believe that the two divisions are the primary growth engines for TI.
Higher revenue from National Semiconductors and growth in high volume analog and logic, as well as power management will drive demand for TI’s analog products. TI is benefiting from the strong demand in the industrial sector which contributes approximately 17% to its business. 
TI witnessed a strengthening product portfolio last quarter as it earned a higher proportion of its revenue from analog and embedded processing products. The two divisions together contributed around 70% to TI’s 2012 revenue, compared to just 47% five years ago.
With new product launches, TI continues to expand its analog and embedded portfolio every quarter. While the excess manufacturing capacity gathered over the years might weigh on its short term growth, we feel the same will help TI further increase its market share in the analog division in the future.
Better Than Expected Wireless Demand, Though Revenue Will Phase Out This Year
In September last year, TI declared its intention to stop focusing on smartphones and tablets and to instead expand its OMAP footprint in embedded applications, which it believes offers greater potential for sustainable growth compared to mobile devices. TI intends to leverage its wireless connectivity solutions in a broader set of embedded applications – automobile, industrial and other non-consumer markets - which require fewer resources and less investment. It estimates its restructuring initiatives to translate into annualized savings of approximately $450 million by the end of 2013.
Though TI’s wireless business is witnessing better than anticipated demand this quarter backed by increasing handsets and tablets shipments, the company expects revenue from the division to decline sharply this quarter and phase out by the end of 2013. TI will transfer revenue from the remaining wireless business to its “Other” segment.Notes:
- Texas Instruments’ Management Hosts Q1 2013 Mid-Quarter Update Conference (Transcript), Seeking Alpha, March 7, 2013 [↩]