Texas Instruments Incorporated (NASDAQ:TXN) is a bit like me.
When I was in school I always retreated when subjects got hard. When math got hard I dropped math. The same with sciences.
The same with Texas Instruments Incorporated (NASDAQ:TXN). Some 30 years ago, when competition heated up in processors with Intel Corporation (NASDAQ:INTC), TI moved toward digital signal processors, or DSPs. Now that mobile DSPs are becoming a hard place to live, the company is moving away from them.
The question is whether this strategy will result in new momentum or whether the current stall will continue.
TI by the numbers
Revenue was actually down 9%, year-over-year, to $3.07 billion from $3.335 billion. Income rose nearly 50%, however, from $598 million to $906 million, because the company transferred some of its wireless connectivity technology to a customer, presumably Amazon.Com, with whom it was working on the Kindle.
Texas Instruments Incorporated (NASDAQ:TXN) announced last fall it would close its Open Multimedia Applications Platform, or OMAP unit making low-power chips for tablets and smartphones, laying off 1,700 and saving $450 million.
The most important number for investors, the company’s book-to-bill ratio, remained unchanged at 1.03, meaning it has just a few more orders than it has current manufacturing capability. That indicates slow growth ahead.
TI by strategy
Texas Instruments Incorporated (NASDAQ:TXN) is placing its bets on analog and embedded chips. Analog chips manage such things as frequency and power, the kind of work once done by tubes, and are key to things like amplifiers and managing industrial processes.
Embedded chips are chips that go into other products, not just computers. Here it’s the auto companies that are the biggest customers. But embedded chips are also going into appliances and other devices as part of what’s called the “Internet of Things,” in which single-chip sensors transmit real-time data to processors for analysis and deliver people such messages as “take the car in for service” or “get yourself to the emergency room.”
More than 10 billion such chips were shipped back in 2008, and many embedded markets are expecting faster growth than in the market as a whole.
The problem for TI is that it has a lot of competition for that business.
ARM Holdings plc (ADR) (NASDAQ:ARMH), which is not a chip maker, is nevertheless a key competitor thanks to its low-power designs, which can be tweaked and turned into custom chips with intellectual property rights held by a product manufacturer.
ARM Holdings plc (ADR) (NASDAQ:ARMH) repeatedly has profit margins well north of 25%, and its balance sheet shows no debt. Its past success in selling its designs against Intel in the mobile market have given it a sky-high Price/Earnings (P/E) multiple, currently over 70. The company has been throwing off over $100 million per year in cash flow for years, allowing it to offer a small dividend and a market cap of $19.5 billion.
QUALCOMM, Inc. (NASDAQ:QCOM) is the company most often credited with driving TI out of the wireless business. They are known as a “fab-less” company, in that they create finished designs but don’t own an expensive fabrication plant, relying instead on companies like Intel and Taiwan Semiconductor to actually produce chips for its customers.
QUALCOMM, Inc. (NASDAQ:QCOM), like ARM, also sports margins north of 25%, and it has nearly doubled its sales volume over the last two years, thanks to the growth of the mobile market. It has no debt, and delivers over $4 billion in cash flow each year to sustain a $108 billion market cap. Despite all this, its P/E ratio looks almost reasonable at 17.8 and its 35 cent/share dividend delivers a yield of 2.24%.