Convergence Device Chip Makers Battle

Guest author Vijay Nagarajan recently completed his deep dive analysis on Texas Instruments (TI) (NYSE: TXN). My earlier posts are available here and here.

In his analysis, Vijay looks at TI’s position in the Semiconductor industry. He also analyzes its pillars of business, Analog and DSP, which together account for 80% of its revenue. High Performance Analog (HPA) products account for 45% of its analog revenue and by skewing its product mix towards HPA, Vijay observes that TI can increase its 15% share of the analog market. TI holds 65% of the DSP market but this position might be challenged by new entrants and lack of its own 3G baseband chip or IP, a disadvantage that can be mitigated by acquiring Interdigital.

Of particular interest are his posts on its wireless strategy in which he says that its flawed baseband strategy, increasing competition, and multiple vendor strategy of its primary customer Nokia and Erricson have added to its wireless woes. In particular, the loss of Nokia as a key customer has really been a problem for TI.

With that as the background, let us now look at TI’s first quarter financial results reported yesterday. Revenue was $3.27 billion, up 3% y-o-y led by 20% growth in HPA semiconductors and down 8% q-o-q. EPS was $0.49 including a discrete tax benefit of $0.06. Net income was $662 million, up 28% y-o-y and down 12% q-o-q. It bought back common stock for $874 million and paid dividends of $133 million.

Segment-wise, revenue from Semiconductor segment grew 2% y-o-y and declined 8% q-o-q to $3.19 billion. Within the segment, analog product revenue went up 6% y-o-y led by strong demand for HPA and declined 4% to $1.32 billion due to lower demand for application-specific analog products in hard-disk drive and cell phone applications. DSP product revenue declined 3% y-o-y and 18% q-o-q to $1.12 billion due to lower cell phone application sales.

Revenue from its Education Technology segment was $81 million, up 7% y-o-y due to higher sales of graphing calculators and even with the previous quarter.

For the second quarter, TI gave a conservative outlook. It expects revenue between $3.24 and $3.5 billion and EPS between $0.42 and $0.48. Semiconductor revenue is estimated in the range of $3.08-3.32 billion.

TI is currently trading around $28 with a market cap of around $38 billion against Vijay’s valuation of $32. It hit a 52-week low of $27.51 on March 17. Unless TI gets its wireless act together, it doesn’t stand a chance of touching the $40 mark. One way out would be to acquire InterDigital for its 3G IP.

While TI seems to be struggling with its mobile business, Broadcom seems to be cashing on TI’s loss. Broadcom Corporation (Nasdaq: BRCM) today reported its first quarter results with profit double the analyst estimates. Revenue grew 15% y-o-y and 0.5 % q-o-q to $1.03 billion and profit rose 22% to $74.3 million or $0.14 per share. Analysts estimated profit of $0.07 and sales of $991.7 million. For the second quarter, Broadcom expects sales of $1.08 billion to $1.13 billion. BRCM is trading around $23, picking up from its 52-week low of $16.38 on March 20. This, however, is far below the per share valuation of $39.30 that we provided earlier, and I still maintain, is a bargain.