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Smartphones And Consumer Electronics Boost Semiconductor Market

Posted on Wednesday, Jul 28th 2010

Chipmakers Texas Instruments (NYSE:TXN) (TI), Atheros (NASDAQ:ATHR), and STMicroelectronics (NYSE:STM) recently reported quarterly results that reflect the recovery in the semiconductor market. STM has swung to a profit after two years of losses while TI and Atheros are expanding. Let’s take a closer look.

Texas Instruments (TI), the world’s largest producer of analog chips with annual revenue of $10.43 billion, reported strong second quarter results but narrowly missed estimates. Q2 revenue was $3.5 billion, up 42%. Net income tripled to $769 million or $0.62 per share from $260 million or $0.20 per share last year. Analysts estimated profit of $0.63 per share on sales of $3.52 billion. The company repurchased shares for $750 million and paid dividends of $147 million. Q1 analysis is available here.

An area of strong focus for TI has been its Analog segment, which grew 56% to $1.5 billion, and its Embedded Processing segment, which grew 47% to $0.5 billion. This month, the company bought two chip factories in Japan from Spansion to increase its production capacity for analog chips.

Analog chips act as the interface between digital and real-world signals and power in most electronic equipment ranging from cell phones to digital TVs to robots. TI already is the world’s largest maker of analog chips and ranked second after Intel among U.S. chipmakers in total sales last year. Its analog revenue last year was $4.3 billion. Gartner expects the overall analog chip market to reach $22.7 billion in 2014. TI holds 19%, Analog Devices 13%, Nation Semiconductors 8%, Linear Technology 7%, and STM 3% of the general-purpose analog market.

Wireless revenue grew 18% to $727 million, including $416 million from the company’s Baseband business, which is being phased out. Basebands are now 12% of total TI revenue compared with 17% last year. Don Clark of the WSJ.com reports that Ron Slaymaker, the company’s vice president of investor relations, said one notable area of weakness was sales of chips used in cellphones. TI is a major supplier to Nokia, which has trying hard to maintain its market share. TI also has some design wins in Apple’s iPad and iPhone 4, gadgets that are accelerating Apple’s pace of growth and bestowing riches on its component vendors. From its design wins in iPad and iPhone 4, TI could earn about $20 million from sales of 10 million iPhone 4s and iPads this year.

For the third quarter, TI expects revenue of $3.55 billion–$3.85 billion and EPS of $0.64–$0.74. Analysts estimate EPS of $0.65 on revenue of $3.6 billion. TI is currently trading around $25.35 with market cap of about $30.3 billion. It hit a 52-week high of $27.44 on April 27.

Chart forTexas Instruments Inc. (TXN)

Chipmaker Atheros, with annual revenue of $542.5 million, swung to a profit in its second quarter and announced that it is acquiring Opulan Technologies for $72 million. Q2 revenue was up 112% to $238.2 million driven by strong demand from the company’s networking and consumer channels. Net income was $29.7 million or $0.41 per share compared to loss of $0.3 million or $0.0 per share last year and profit of $19.7 million or $0.27 per share last quarter. The company ended the quarter with a cash balance of $508.4 million. Q4 analysis is available here.

Opulan is a privately held Chinese fabless semiconductor company specializing in passive optical networking and broadband access aggregation. With this acquisition, Atheros aims to have the industry’s most complete and unique networking IC portfolio for connecting the entire home or office.

Oppenheimer analyst Rick Schafer notes that PC revenue dropped 10% from the first quarter because of increasing competition from Broadcom Corp. and manufacturers in Taiwan and slower demand in Europe. Broadcom beat Atheros to a design win in the iPhone and in Google’s Nexus One. The stock is currently trading around $28 with market cap of about $2 billion. It hit a 52-week high of $43.90 on April 21.

Chart forAtheros Communications Inc. (ATHR)

STM, which has about 3.3% share of the semiconductor market and $8.5 billion in annual revenue, reported a better-than-expected profit in its second quarter results. Q2 revenue was $2.53 billion, up 27%. The company swung to a profit of $356 million or $0.39 per share versus loss of $318 million or $0.36 per share last year. Gross margin increased to 38.3%, a nine-year high, owing to improved efficiencies and product innovation. STM ended the quarter with a net cash position of over $700 million, up from $420 million at the end of 2009. Q1 analysis is available here.

IMS revenue grew 56% to $945 million and ACCI revenue grew 47% to $1.045 billion. The company as well asthe investors are disapponted with its wireless business and the ST-Ericsson JV in particular. Wireless net revenues decreased 19.3% to $525 million, reflecting ST-Ericsson’s continued portfolio transition, a weaker-than-expected performance in Asia, and some supply limitations.

STM has landed a key design win in the iPhone 4. It provides the $2.60 microelectromechanical (MEMS) gyroscope and the accelerometer costing $0.65. According to iSuppli, STMicro is the leading supplier of MEMS for consumer and portable applications and Nintendo is its leading purchaser, followed by Samsung. Chris Nuttall on the FT.com Tech Blog reports that Apple is its fifth-largest purchaser, but iSuppli expects its use of MEMS to increase with its use of accelerometers – and possibly MEMS microphones – in the new iPad tablet.

iSuppli expects the MEMS market to reach $6.54 billion this year, a growth of 11% and hit $9.8 billion by 2014. Inkjet printheads are the dominant selling MEMS device and HP leads the MEMS market followed by TI. STM is at No.6 and holds more than 40% of the accelerometer market for cell phones. HP outsources the fabrication of a majority of its printheads to STM.

For the third quarter, STM expects sequential revenue growth of 2% to 7% and y-o-y revenue growth of 13% to 19%. Gross margin is expected to be about 38.8%, plus or minus 1 percentage point. The company is trading around $8 with market cap of about $7 billion. It hit a 52-week high of $10.73 on April 21.

Chart forSTMicroelectronics NV (STM)

According to iSuppli, semiconductor revenue grew 2% sequentially to $70.6 billion. TI was one of the six suppliers that managed to increase its revenue sequentially. STM on the other hand suffered a 10% sequential decline in revenue but managed a 40% y-o-y increase in revenue.

Another iSuppli report says the TV semiconductor market is set to grow 30% from $9.3 billion in 2009 to $12.1 billion in 2010. The semiconductor market is marching ahead boosted by the rising demand for smartphones and TVs. Tablets could also be a major driver for semiconductor growth. In fact, with the success of its products iPhone4 and iPad, Apple is set to rise to No.2 in semiconductor spending eclipsing Samsung and coming neck-to-neck with HP.

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