On account of macro headwinds and weak consumer spending, Texas Instruments (NASDAQ:TXN), which designs and manufactures semiconductors for sale to electronic designers and manufacturers, closed its fiscal 2012 with a 7% decline in its annual revenues. TI’s exit from the wireless market last year along with poor demand on account of low inventory level at OEMs and distribution channels led to a 12% sequential and 13% annual decline in its Q4 2012 earnings. The company will announce its Q1 2013 results Monday, April 22. With a 16% decline in orders in the previous quarter, we anticipate lower Q1 revenues.
Nevertheless, TI claims that its orders bottomed out in Q4 2012, and backed by stronger demand environment in January and February, it is building a backlog for the first time in several quarters. Last month, the company narrowed its revenue target to $2.80 – $2.91 billion, compared to its initial estimate of $2.69 – $2.91 billion, as strong performance in the industrial segment drove demand for TI’s products.
We think that the lower revenue target for Q1 2013 is more on account of macro factors and continue to believe in TI’s long term growth potential. With increasing strength in its core business of analog semiconductors and shifting focus on embedded processors, the company’s growth rate could accelerate this year onward. Additionally, 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.
Growing Strength In Its Key Product Portfolio
Generating strong cash flow and investment returns, the analog and embedded processor divisions remain the focus areas for TI. 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.
- Analog Semiconductors: In 2012, TI’s revenues from the analog division increased by 10% despite the soft macro environment. Higher revenue from National Semiconductors and growth in high volume analog and logic as well as power management contributed to higher revenue from the analog division.
With new product launches, TI continues to expand its analog portfolio every quarter. It has added around $7 billion worth of incremental revenue generating capacity in the last few years. 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.
The global analog semiconductor market size is estimated to be approximately $39 billion in 2o12. The analog market tracks the worldwide semiconductor market, which has declined by approximately 3% in 2012.  However, with an improvement in macro environment, the semiconductor market is forecast to rise by 4.5% and 10% in 2013 and 2014, respectively.  (Read: How Texas Instruments Can Take Share In The Analog Semiconductor Market)
- Embedded Processors: Despite growth in automotive and catalog products, the lower revenue from communication infrastructure applications contributed to a 7% decline in TI’s embedded portfolio in 2012. We believe that the decline was more on account of macro factors. With new product launches, TI continues to expand its embedded portfolio every quarter. Exiting the smartphone and tablet markets, the company is now focused on expanding the OMAP footprint in embedded applications such as automotive, industrial equipment, enterprise communications, etc.
The global embedded processor market is currently valued at $19 billion, and we expect the same to track growth in the overall semiconductor market in the future.
Cost Savings To Offset Decline In Wireless Revenue
In September 2012, 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. It 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. TI expects revenue from this division to decline sharply in Q1 2013, and phase out by the end of 2013. It will transfer revenue from the remaining wireless business to its “Other” segment.
The savings incurred from restructuring TI’s business will offset the negative impact of declining revenues from the wireless segment in the future. TI estimates its restructuring initiatives to translate into annualized savings of approximately $450 million by the end of 2013.
We will update our price estimate of $34.27 for TI after the Q1 2013 earnings release.Notes:
- Gartner Says Worldwide Semiconductor Revenue Declined 3 Percent in 2012, Gartner Press Release, December 17, 2012 [↩]
- Gartner Says Worlwide Semiconductor Sales to Reach $311 Billion in 2013, a 4.5 Percent Increase from 2012, Gartner Press Release, December 13, 2012 [↩]