Cheap Chips: TI, Broadcom, STM

There have been some significant developments in the semiconductor industry, especially at Broadcom and Texas Instruments. TI is planning to sell off its baseband arm and Broadcom is the rumored buyer. Broadcom is also buying AMD’s TV chip business. This post will look at the recent earnings results of these companies as well those of STMicro.

On October 20, Texas Instruments (TI) (NYSE: TXN) reported Q3 results that missed earnings forecasts. TI also announced its plans to sell its merchant baseband business.

In our deep-dive analysis of the company, guest author Vijay Nagarajan pointed out that TI had a flawed baseband strategy in which it wasn’t investing to develop a 3G digital baseband.

TI’s Q3 revenue declined 8% to $3.4 billion, in-line with analyst estimates. However, the company missed profit estimates. Net income sank 27% to $563 million or $0.43 per share versus analyst estimates of $0.46. TI bought back shares worth $429 million in the quarter and paid dividends of $131 million.

By segment, Analog revenue declined 1% y-o-y but was flat with Q2 at $1.3 billion. Embedded processing grew 9% y-o-y and declined 3% q-o-q to $0.43 billion. Wireless declined 16% y-o-y but grew 1% q-o-q to $0.9 billion. TI’s strength and future potential was largely based on its wireless business, so it is concerning to see the strategy for this business straying.

Orders were $3.23 billion, down 9% y-o-y and 7% q-o-q. Based on the weak orders, TI expects revenue between $2.83 and $3.07 billion. Anticipating weak demand, TI has reduced inventory aggressively by about $76 million, putting pressure on its factory utilization and profitability. Also, by selling the baseband business, it expects to save about $200 million annually. It now plans to focus on the OMAP application processors in its Wireless segment. OMAP processors are essential for differentiating smartphones. TI will also continue to look out for small acquisitions to strengthen its analog and embedded processing businesses. The company has plenty of cash, and if used well, that can help them acquire interesting businesses at reasonable prices.

The stock is currently trading around $20 with a market cap of about $25 billion. It hit a 52-week low of $15.6 on October 24 after the earnings release. Even though a lot of analysts give the stock a Buy, I would put it at Hold at best.

While TI is planning to sell its baseband business, Broadcom seems to be on a buying spree, which in these economic conditions is the best step forward. (Read my Forbes column on the subject.) Broadcom recently bought AMD’s TV chip business for $141.5 million, about $51 million less than originally projected because of lower revenue guidance.

Broadcom has emerged a strong semiconductor company and is near the top of my Top 10 Semiconductor Stocks list. It can be expected to get stronger in this weak economy, especially if it uses its cash to acquire more businesses at low prices. It could be a great bargain.

Broadcom (BRCM) reported a strong third quarter on October 21. Net revenue was $1.298 billion, up 8.1%  q-o-q and 36.7%  y-o-y including $38 million in royalty from Verizon. Net income increased to $164.9 million, or $0.31 per share versus $27.8 million, or $.05 per share in Q3 2007. In August, its board approved a new $1 billion share repurchase program but it did not repurchase any shares because of the impending AMD deal.

Gross margin was 52.3%, down 150 points from last quarter. Cash flow from operations was a record $286 million and the company’s cash and marketable securities balance was $2.29 billion at the end of the quarter.

The iPhone, for which it has the design win for the touchscreen controller, has also helped Broadcom to grow stronger. Its mobile and wireless business grew by about 60% y-o-y and 20% q-o-q, mainly driven by seasonal strength in Bluetooth, wireless LAN and touch screen controller products.

In Q4, Broadcom expects broadband communications to grow sequentially driven by growth in the set-top box market. The mobile and wireless segment is expected to decline slightly as demand peaks in Q3 due to the holiday seasonal orders. The enterprise networking business is also expected to decline due to slower spending in the weak economy.

Revenue is expected in the range of $1.17 billion to $1.235 billion versus analyst estimates of $1.28 billion. Gross profit margin is expected to decline by 50 to 75 percentage points. Broadcom’s shares are currently trading around $17 after hitting a 52-week low of $13.52 on October 10.

On October 28, STMicroelectronics (NYSE: STM) reported its third quarter results. Excluding the effect of NXP Wireless JV and FMG, revenue increased 10.9% y-o-y and 2.7% q-o-q to $2.46 billion, and net income was $178 million or $19 per share.  Analysts expected revenue of $2.5 billion and EPS of $0.19.

NXP started its operations on August 2, 2008 and including NXP contribution, revenue was $2.7 billion, up 21.8% y-o-y and 12.7% q-o-q driven by strong growth in the Telecom segment. Net loss was $289 million or $0.32 per share. This includes $344 million charge related to the spinoff of its flash memory group into Numonyx, a JV with Intel.

With better mix and manufacturing efficiencies, gross margin improved from 36.8% to 37.2% excluding NXP and 37.7% including NXP. ST bought back shares worth $148 million in the quarter and paid $80 million in dividends. Its net debt is $409 million.

STM’s business is now organized into Automotive, Consumer, Computer and Telecom Infrastructure Product Group (ACCI), Industrial and Multisegment Sector (IMS) and Wireless Product Sector (WPS). ACCI revenue grew 9.6% y-o-y and declined 1.4% q-o-q to $1.1 billion. IMS grew 12% y-o-y and 4.2% q-o-q to 0.9 billion led by MEMS, IPAD, Smartcards and Microcontrollers. WPS revenue was $0.7 billion, a growth of 12.5% y-o-y and 10.8% q-o-q excluding NXP. 

By market segment, Telecom had the strongest growth at 16% (50% incl NXP). Industrial grew 19%, Consumer 8%, Computer 5% and Automotive 1%.

For the fourth quarter, ST expects demand to weaken across its markets and has cut back its outlook. Sequential revenue growth is expected to be flat to down 8%, which translates to revenue between $2.259 and $2.455 billion, below the Street estimate of $2.65 billion. A favorable currency rate and improved operational measures are likely to help the gross margin improve sequentially to 38.8%. The stock is currently trading around $8 with market cap of about $7 billion. It hit a 52-week low of $7.42 on October 24.