Texas Instruments Off the Bottom

Texas Instruments, or TI (TXN - Analyst Report), is one of the largest suppliers of analog and DSP integrated circuits. March quarter results exceeded consensus expectations on both the top and bottom lines. Forward guidance is for a revenue decline of -6% to an increase of 15% in the June quarter.

Utilization rates dropped to all-time lows in the last quarter, and are expected to start picking up in Q2. The shares have good long-term potential, but the near-term outlook has been rendered cloudy by unfavorable macro conditions. We expect partial recovery in the back half of 2009, and improving coonditions in 2010.

A number of factors lead us to believe that we may have seen the bottom in TI's results. The primary indicator of change is the increasing order rate. Orders were up nearly 18% in the last quarter, the strongest sequential growth in the last two years, and significantly stronger than the March quarters in 2008 and 2007.

Management cautioned that the higher order rate was the result of replenishment of channel inventories, and did not signify end demand. While we agree that this may be the case, we are encouraged by the fact that production is likely to be more in-line with consumption in the next few quarters. This means that utilization rates will pick up gradually and profitability will improve.    

TI has been integrating different functionalities into single devices, encouraging customers to go for the simpler, more power efficient and smaller form-factor products that could potentially lower the cost of ownership and enable use in the smallest of applications. For TI, this increases the dollar content per device, thus helping share gains and margin expansion.

The company also provides the necessary development platform and software tools that can be configured by customers to facilitate product differentiation. This is a dual advantage for the company. On the one hand, it increases the demand for its products, and on the other, it helps retain customers, since the additional investment in software generally discourages the customer from switching to a competitor's platform.

Growth in the communications infrastructure market has been tempered by consolidations and regulatory pressures. The recession started deepening just as the infrastructure market was turning around.

However, TI remains very strongly positioned to benefit from the development of the 3G buildout in China. The strength in Chinese infrastructure spending was one of the main reasons for the results exceeding management's expectations in the last quarter.

Although the company lost share at Ericsson's (ERIC - Analyst Report) initial 3G platform, TI has a win for the next generation product. Management expects this to translate back into share gain towards the end of fiscal 2009. The Motorola (MOT - Analyst Report) platform will bring additional revenue in 2009.

Therefore this business is already beginning to look stronger and should improve further by the end of the year. Nearly half of TI's revenue is derived from the communications market, and the long-term prospects of this market are very good.  

Sejuti Banerjea contributed to this post.