One of the world’s oldest and largest semiconductor makers, Texas Instruments (TI) is the market leader in digital signal processors (DSPs). Considering the growing role of DSPs in consumer devices, it’s no wonder TI jumped 25 slots from its 2009 ranking at 60th on our list of the top employers in electronic design to 35th in 2010. It also improved 12 places among OEMs, from 22nd in 2009 to 10th in 2010.
Many of the wireless phones sold worldwide contain TI’s DSPs, which are also found in other products, such as DVD players, automotive systems, and computer modems. Additional TI semiconductor offerings include logic chips, microprocessors, microcontrollers, and display components. And, the company has a long history of making calculators.
Nokia accounts for about 20% TI’s sales. Nearly three-quarters of its sales are in the Asia/Pacific region. The analog chip segment generates 41% of its sales. The company has manufacturing, design, or sales operations in more than 30 countries. It sells its products through a direct sales force, distributors, and third-party sales representatives. Also, it has a collaboration agreement with Gemalto NV, a Dutch company specializing in digital security.
Based in Dallas, TI was founded in 1930 as a geophysical exploration company that used seismic signal processing technology to search for oil. It adopted the name Texas Instruments Inc. in 1951 and entered the semiconductor market with its 1954 introduction of the first commercial silicon transistor. Its competitors include Freescale Semiconductor, Qualcomm Inc., and STMicroelectronics.
The global recession took its toll on TI, as its sales dropped 16.6%, its pretax income fell 18.7%, and its R&D funding was cut 23.9% from 2008 to 2009. Yet things are looking up for the first quarter of 2010.
Economies are generally growing again and consumers are beginning to spend. The automotive and industrial sectors are also improving. Demand was strong and broad across end markets and regions, while supply chains across the electronics industry continue to be constrained and inventories appear to remain lean, certainly for the first half of 2010.
Key Performing Sectors
Analog, embedded processing, and its core wireless products, excluding baseband, were TI’s growth drivers in the first quarter of 2010, and the company is investing to accelerate its growth from here. These segments received about 90% of its R&D investments in the first quarter. These businesses comprised 66% of first quarter revenue, up from 61% a year ago and 58% in the first quarter of 2008, with very nice gross margins, which should continue to improve as the product mix does.
Once again, all three of the major analog product areas were strong contributors to this growth with each expanding about equally from its fourth-quarter level. For high-volume analog and logic (HVAL), this was the fourth consecutive quarter of solid sequential growth, further evidencing the turnaround in this business that is now being achieved.
Wireless revenue declined 5% sequentially and was up 27% from a year ago. Baseband revenue of $424 million fell 9% sequentially and was up 6% from a year ago, reflecting a stronger mix of 3G products. Baseband is now down to 13% of TI’s revenue compared with 15% in the fourth quarter and 19% in the year-ago quarter.
Revenue of $293 million collectively from applications processors and connectivity products was even with the fourth quarter and was up 80% from a year ago. It also was up 12% compared to the third quarter of 2008, another indication of TI’s strong performance in the smart-phone market.
Continue to next page
Other revenue grew by 19% sequentially. Royalties increased, and TI had strong sequential growth in custom ASIC products, as well as growth in digital light processing (DLP) products and calculators. From a year ago, other revenue grew 68%, mostly due to strong growth in DLP products, where revenue more than doubled, as well as strengthened royalties, custom ASIC products, and calculators. From a geographical perspective, almost all of the sequential revenue growth came from the U.S., Asia-Pacific, and Japan.
Re-sales or sales out of TI’s distribution channel were up more than 10% sequentially, which should represent share gains across multiple distributors. Even with the strong resale growth, TI was able to help distributors build some inventories to support future growth. Even so, distributors’ total weeks of inventory remain about five, which is similar to last quarter and low by historical standards.
A Fabulous Fab
The process qualification work at TI’s 300-mm (12-in.) analog wafer fab, RFAB, is producing good results. The initial wafers that began production in January have completed processing with good early yields. They are tracking well toward TI’s goal of full-process production qualification before the end of 2010. The schedule right now is to ship the first production-worthy product by the end of this year.
The Phase I expansion announced a couple of quarters ago gave TI $1 billion of incremental revenue capacity at RFAB. Phase 2 is a second $1 billion of revenue capacity. TI has just purchased equipment to support Phase 2, and it will be ramped up quickly. Fairly meaningful revenue from RFAB would begin to be generated in 2011.
Overall, TI did not take any factories offline in 2009. Production for the first quarter of 2010 is higher than ever, and capacity will be added sequentially each quarter in 2010.
As the recovery continues to gain momentum, TI is seeing the results from investments maintained even through the worst of the recession. It has well-positioned products, and its field sales and applications team is very capable. Production output is at an all-time high, and the company has a multi-year ramp-up in capacity underway that will allow for strong growth potential. This additional capacity, both fab and assembly or test, is being acquired at cost levels that will also help margins, without burdening TI with a lot of fixed costs, so there is upside opportunity built in with manageable downside risk.
DLP was also up quite a bit, doubling on a year-over-year basis, on the strength of projectors. This is a very high-margin business, and TI is seeing continued strong demand. While markets needing to rebuild inventory are driving some of the growth in DLP, education is a very big market driver for TI’s front-projector products. A lot of strength is being seen now, for example, in Asia as schools and classrooms start deploying DLP projectors. DLP has a very significant reliability advantage that makes it attractive to educational systems.
The other driver of DLP that is more recently starting to play out is the fact that TI’s DLP front projectors are 3D capable. While 3D movies are all the rage today, educational systems are using 3D capability to help students better visualize things that wouldn’t normally pop out in technology books or in 2D diagrams.
Capital spending for the last 12 months has been almost exactly 8% of revenue, and capital is being acquired at very attractive prices, so the capacity per dollar of capital spend is improving significantly.
75% of TI’s baseband revenue is now in 3G, and that’s up from about 50% a year ago, as the market has transitioned to this more advanced technology. Nokia, TI’s largest customer, continues to multi-source its baseband business so TI’s competitors are supporting the older baseband technologies previous to 3G, which represents about 25% of TI’s baseband business. TI does not expect competition in 3G until sometime in 2011. TI’s baseband revenue in 2010 will depend on how much of the older baseband the competition takes away and how well Nokia does in the 3G market.
Other products showing strong growth include operational amplifiers, data converters, and industrial interface products. TI’s high-performance analog business enjoys strong exposure to the industrial market and is benefiting as the industrial market continues to benefit from a pretty robust recovery.
The smart-phone market will show 40% growth in 2010, and TI is positioned to grow market share across applications, processors, and connectivity products. The company is putting its wireless efforts behind the smart-phone market and using its strength and technology in the Open Multimedia Application Platform (OMAP) processor area, the latest production parts being OMAP-3 and the imminent OMAP-4.
OMAP processors are used by phones such as most of Nokia’s N-series range, including the N800 and N810 Internet tablets, and many Samsung devices, including the OMNIA HD. The Palm Pre, Motorola Droid, and Sony Ericsson Satio also use an OMAP processor. The open-source Open Pandora handheld game console uses one as well.