Texas Instruments Versus Analog Devices — Which Is Operating More Efficiently?
Though the number of transistors required on an analog chip are much lower than a digital chip, the performance specification is much more stringent. For this reason, the analog chip market is served by highly specialized chip companies and is much more fragmented than the digital chip market. Both Texas Instruments (NYSE:TXN) and Analog Devices (NYSE:ADI) compete with each other in this highly fragmented market. In the analysis below, we compare the key metrics of both the companies to find out which company is operating more efficiently.
Conclusion:
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Texas Instruments seems to be operating more efficiently than Analog Devices due to the following reasons:
- Despite a minimal revenue growth of Texas Instruments, its EBITDA has grown at a CAGR of 8.2% which is much higher than the EBITDA growth of Analog Devices, which stood at 0.4%. Further, the present EBITDA margin of TI is higher than that of Analog Devices, which is a reversal from two years ago.
- Even after outsourcing a majority of its manufacturing capacity to third-party foundries, Analog Devices has had a higher capital expenditure as a percentage of gross profit than Texas Instruments. Due to this, the net cash from operation as a percent of revenue is lower for Analog Devices than Texas Instruments. It is worth noting that Texas Instruments’ maintains sufficient internal manufacturing capacity to meet its majority of production needs. However, Analog Devices sources approximately 60% of its wafer requirements from third-party wafer fabrication foundries, primarily Taiwan Semiconductor (NYSE:TSMC).
- TI has been increasingly concentrating on shifting to 300 mm wafers. Over the years, this has helped the company improve its gross margins by approximately 7 percentage points and reduce chip costs by around 40%. This is due to the fact that TI can put 2.3 times more chips on a larger 300 mm wafer as compared to a 200 mm wafer.
- Texas Instruments might also have an advantage over Analog Devices due to its large scale of business, which is likely helping it achieve economies of scale. It must be noted that TI’s 2015 revenues were approximately three times more than Analog Devices’ revenues. Further, TI had approximately 18% market share of the analog market as compared to Analog Devices which had only 6% of the market share. We can partly attribute the reason for TI’s leading position in the analog market to the National Semiconductor acquisition in 2011. National Semiconductor was the third largest voltage regulator supplier in the market at that time.
Notes:
1) If you like or have any questions about our analysis, please write us back at content@trefis.com. We hope such lean communication sparks thinking, and encourages you to ask questions. The purpose of these analyses is to help you focus only on a few important things.
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Texas Instruments
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