Texas Instruments (NYSE: TXN) is an American company known best for its semiconductors and graphing calculators. TI is the leader in DSP (digital signal processing) and DLP technologies (digital light processing). DSPs play an integral role in many modern cell phones, wireless routers and computers. These powerful processors receive, refine and display digital signals (e.g. voice and data that has been converted to digital). DLPs, on the other hand, are capable of projecting very high quality images. Furthermore, Texas Instruments is the strongest player in the analog market with a market share of 13%. In spite of this strong presence, however, it is still subject to substantial volatility stemming from changing demands for new technologies, uncertainties in pricing, and low margins of commodity chips. The company earned $10.4 billion in revenue and $1.5 billion in net income in 2009.
Texas Instruments was founded in 1941 through the purchase of Geophysical Service Incorporated, a seismic exploration company, which the founders turned into a company that built electronics for the US Army and Navy. 10 years after its founding, the company changed its name to Texas Instruments. Over the years, TI, as it is popularly referred to, has made numerous advancements in the field of electronics, including the first transistor radio in 1954, the integrated circuit (patent filed in 1958), the hand-held calculator in 1967, the single-chip microcomputer in 1971, as well as the nearly simultaneous invention of the microprocessor, along with Intel, the patent for which was granted to TI in 1973. Today, Texas Instruments continues to be a leader in the semiconductor and education technology sectors. ........................
TI's semiconductor division (SC) is by far the largest in terms of revenues, at 96%, and is divided into two primary subdivisions: 1) analog semiconductors and 2) DSPs or digital signal processors.
Analog semiconductors process inputs such as sound, temperature and pressure and subsequently convert and amplify those inputs into digital signals.
DSP technology, on the other hand, uses algorithmic and compression techniques on existing data streams in order to modify and/or enhance them. A processor such as this, for example, could help eliminate echoing or static for voice application. Another pioneering technology for Texas Instruments is DLP, or digital light processing, which is used in video projectors. Semiconductors have a wide variety of uses in many different industries, including audio, automotive, broadband, industrial, medical, military, and wireless, and a graph of the industry breakdown for semiconductor sales can be seen to the right.
Texas Instruments has currently embraced a "fab-lite" manufacturing strategy for its semiconductor division that has proved to be quite successful so far. According to the Fabless Semiconductor Association, a "fab-lite" company is one that outsources 40% - 50% of its production. Doing so enables a company to significantly lower its "capex," or capital expenditures by letting foundries with the existing machinery to do the actual manufacturing of the chips. TI outsources about 50% of its CMOS production to these foundries, whose sole job is manufacturing. These foundries include TSMC (Taiwan Semiconductor), UMC (United Microelectronics), and SMIC (Semiconductor Manufacturing International), all of which TI uses to outsource its semiconductor fabrication. By doing this, TI hedges itself against the down cycles of the semiconductor industry, although it does sacrifice some of the "potential margin upside" during up cycles.
The educational technology division (ET) accounted for only 4% of TI's revenues but many consumers' familiarity with Texas Instruments name comes through the ubiquity of ET's hand-held graphing calculators. These calculators are seen in high schools and colleges across the United States, the most popular of which are the different variants of the TI-8x series of calculators.
The semiconductor industry is deeply cyclical. Demand in up cycles is so high that chip manufacturers have trouble keeping up. Similarly, if electronic sales, particularly PC sales, are slow, demand for chips can plummet. The fact that the semiconductor industry is more subject to the whim of consumer demand more than corporate demand, also adds to the overall volatility. The backdrop of this high market volatility, however, has been continual growth. Over the last 20 years the semiconductor industry has seen about a 13% average annual growth rate.
Semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales.
As the business mix chart above demonstrates, a significant portion of Texas Instruments' revenues come from the wireless sector, which is great news for the company, since cellular phones now make up the second-largest end market for chipmakers. However, TI must be careful to anticipate changes in demand from its primary end market.
Some new technologies that will likely increase demand for chips include 3G wireless, portable medical devices, and digital video.
In addition to end market demand, end market or buyer power can also play a significant role in influencing Texas Instruments through pricing pressure. Because such a substantial portion of TI's revenue comes from the wireless market, handset chip buyers' demands for lower prices could prove detrimental to TI if the demands are coordinated. This is in contrast to the following trend, in which the semiconductor companies themselves are lowering prices.
While this segment of Texas Instruments' business now makes up a much smaller percentage than it did in the past (about 25%), declining margins for commodity products could quickly erode revenues if competition increases. Commodity products, such as corn, wheat, or certain types of semiconductors, are characterized by their uniformity and large quantities of production. Because of the uniform nature of certain "generic" semiconductors, semiconductor companies are compelled to compete on the basis of price, rendering them vulnerable to decreasing margins.
Developing countries like India and China have seen tremendous economic growth over the last five years. Although incomes in these countries is still well below the United States and other developing countries (lest than a 10th), their is significant for low cost headsets. In fact mobile adoption rates in some developing counties, is well into the double digits. TI which manufactures chips for low cost headsets is well positioned to benefit from this trend.
Texas Instruments is the number three sales leader in semiconductors, and has been in the top five since 1997. Its competitors, however, have varying degrees of relevance to TI because of different market focuses. Analog Devices and STMicroelectronics N.V. (STM), for example, are much closer competitors for TI than are Intel or AMD, which make chips primarily for computers. Texas Instruments, on the other hand, offers a differing array of products.
TI, for example, holds a very strong position in wireless, with a 50% market share in digital baseband processors, as well as a 70% in application processors. TI will likely hold on to a great deal of this market share because it has built up switching costs for its buyers and has also been able to differentiate its technology from its competitors. Nevertheless, there is still strong competition from others serving wireless handset manufacturers, such as Qualcomm, Freescale, Infineon, Rensas, Broadcom, Marvell, and the aforementioned STMicro.
HPAs, or high-performance analogs, however, may be TI's strongest business currently. Texas Instruments ranks number one in the amplifiers/comparators and interface sub-sectors, and number two in power management and data converters with other major competitors including Analog Devices, Linear Tech, Maxim, and National Semiconductor. Overall, TI ranks as the leading company in a fractured analog market, which includes HPA, mixed signal, and commodity semiconductors.
In the DLP market, TI holds a 50% market share in projectors, followed by 30% for Epson and 20% for Sony. As for DLP chips for Digital TVs, Texas Instruments holds an 19-20% market share for TVs 40 inches and up and sells its chips to Magnavox, Mitsubishi, RCA, Samsung, and Toshiba.
As seen from the chart below TI is low to mid-range among its competitors in terms of inventory days. Inventory days measure the amount of unsold product (e.g. DSPs DLPs, etc.). Given the rapidity with which technology advances, high levels of unsold inventory can be construed as a negative factor for manufacturers of semiconductors and other technology products. Processors which may be cutting edge now may be outdated 6 months later, when the next model comes out. As new models enter the market demand for the older products driving prices down.