TI Sets Sites On Embedded Market, Shakes Up Wireless Division With Job Cuts

by Trefis Team
Texas Instruments
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With a view that its baseband business offered less promising growth prospects, Texas Instruments (NASDAQ:TXN) ceased all R&D efforts for cellular baseband in 2008. Earlier in September this year, the company declared its intention to focus away from smartphones and tablets and instead expand the OMAP footprint in embedded applications such as automotive, industrial equipments, enterprise communications, etc. We consider this to be a bold move as smartphones and tablets are currently the fastest growing divisions in the technology sector.

Earlier this week, TI announced its intention to cutback 1700 jobs to reduce its expenses in the wireless business. The company plans to provide a range of assistance w.r.t. compensation, benefits and job search for the affected employees, because of which it estimates an additional expense of $325 million this quarter. However, TI’s initiative to reduce costs would translate into annualized savings of about $450 million by the end of 2013.

See our complete analysis of Texas Instruments here

Why TI Decided To Shift Away From Mobile Devices?

TI has scored some significant wins in the application processor business – Amazon’s (NASDAQ:AMZN) Kindle Fire HD, Barnes & Noble Nook Tablet, and a number of Motorola phones. However, it has been struggling to hold its ground in face of intense competition from Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA) as well as from the in-house design of bigwigs such as Apple (NASDAQ:AAPL) and Samsung, which happens to be one of TI’s customers.

TI feels that the tremendous growth opportunities in smartphones and tablets market has led to intense competition, thus making the business less profitable. While the company had seen a rapid increase in revenues from OMAP processors in Q1 2012, winning both the application processor as well as the Wi-Fi socket in Amazon’s (NASDAQ:AMZN) Kindle Fire, the revenues slipped slightly in the subsequent quarters. Additionally, Nokia and Research In Motion, two of TI’s key customers, have been losing ground in the smartphone market.

Embedded Market Provides Greater Potential For Growth

TI plans to restructure its wireless business by focusing its investments on embedded markets, which it feels offers greater potential for sustainable growth compared to mobile devices. The company will now focus on leveraging its OMAP processors and wireless connectivity solutions in a broader set of embedded applications which require fewer resources and less investment.

TI aims to expand the use of its OMAP processors to alternate products such as automotive, robotics, industrial, health monitors etc. The company claims that it sees the momentum for new applications already building up with a broad set of customers. It recently introduced its OMAP 5 processors which are specifically designed to simplify and speed industrial applications.

We currently estimate TI’s share in the wireless market to remain around the same level for the rest of our forecast period. However, if TI’s restructuring strategy does not work well in the long-run and its market share continues to decline, there could be a marginal downside to our price estimate.

You can change the estimated market share using the graph above to study the resultant impact on our valuation for TI.

Our price estimate of $38.53 for TI is at a premium of close to 30% to the current market price.

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