TI Is Betting Big on Single Type of Processing Chip

Semiconductor maker Texas Instruments Inc., unsated with diversification and especially weary of the boom-and-bust cycles of selling basic memory chips, is now gambling most of its future on just one group of leading-edge data-processing chips.

And investors are loving it.

Texas Instruments’ stock has soared in recent weeks amid the company’s new focus on “digital-signal processing” chips, a $3.3-billion business that the Dallas-based company currently dominates, with about 45% of the market.

Though DSP technology has been around for more than a decade, it’s now the hot corner of the chip industry because several product lines--including digital phones, digital cameras and computer modems--began using them in recent years. DSP chips also are expected to be even more prevalent in the future because they’ll make all sorts of gadgets smarter and more powerful.

So Texas Instruments, under the guidance of Chief Executive Thomas Engibous, has been shedding unrelated assets (which had annual revenues of $4 billion) and otherwise streamlining to put its financial horsepower behind DSP. It sold its defense-electronics line to Raytheon Co. and, this summer, sold its unprofitable memory-chip line to Micron Technology Inc.

In response, Texas Instruments’ stock has nearly doubled in price during the past year--including a 50% surge in just the last nine weeks--that’s swelled TI’s total market value to $33 billion. The stock closed Monday at $85.25, down 63 cents for the day, in New York Stock Exchange composite trading.

But not everyone is as impressed as Texas Instruments’ investors.

One analyst, Thomas Kurlak of Merrill Lynch & Co., noted that in fact Texas Instruments’ biggest business is not DSP chips per se, but so-called analog chips that not only are needed for DSP chips to work, but that also are used for many other purposes.

And that analog market right now is lousy, which is evident in Texas Instruments’ latest financial results, Kurlak said. (Texas Instruments also is the leader in the $21-billion analog-chip business, with about 12% of that market.)

“If you look at the statistics, you don’t see anything good happening in analog,” he said. “I don’t have a problem with DSP and there’s nothing wrong with the company focusing on them. The problem is, DSP chips themselves are only about 20% of the company’s revenues.”

Indeed, Texas Instruments’ third-quarter earnings from continuing operations--that is, excluding the memory-chip business sold to Micron--fell 31% from a year earlier, to $164 million, on a 15% revenue decline, to $2.1 billion.

The company’s analog revenue dropped 11% from a year earlier and was flat with the preceding quarter, mostly because of weakness in the market for hard-disk drive chips. Even sales of its “pure” DSP chips, while up 17% from a year earlier, were unchanged from the prior quarter.

Bill Aylesworth, Texas Instruments’ chief financial officer, acknowledged the weakness in the analog-chip business, which he blamed in good part on soft demand in foreign economies, especially in Asia. “Growth rates for all these markets are going to be somewhat slower than in the past,” he said.

But Aylesworth said the company’s overall DSP business has picked up again in the current quarter, and he emphasized that DSP will remain one of the fastest-growing areas of the semiconductor business.

That’s why Texas Instruments seized on DSP, because it “provides tremendous growth opportunities” and because it’s a chip “that goes across a pretty diverse marketplace” of products.

Many analysts agree. Texas Instruments’ shift “is the perfect strategy for [exploiting] the continued evolution of the semiconductor industry,” said analyst Mark Edelstone of Morgan Stanley, Dean Witter & Co. “It will give them higher quality earnings and accelerated growth.”

In coming years, newly designed DSP chips are expected to enhance not only phones and computers, but digital cameras, audio systems, hearing aids, office products, speech-recognition systems and even mundane household-appliance motors, which can use DSP to consume less power.

DSP and related analog chips account for 58% of Texas Instruments’ semiconductor sales, which in turn account for more than 80% of its overall sales. The company’s smaller lines include the calculators that are familiar to consumers.

DSP’s bright future does raise another problem for Texas Instruments: the threat of stepped-up competition from the likes of Motorola Inc. and Lucent Technologies Inc., which also want to capture more of DSP’s growing sales.

But Christopher Chaney, an analyst at A.G. Edwards & Sons Inc., believes Texas Instruments can fend off the attacks. The company has an established DSP product line, its chips require proprietary software to program them, and it has long-standing customer relationships, all of which “will make it more difficult for new entrants to gain market share,” he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Strong Signal

Texas Instruments’ stock has oared in response to the company’s new focus on a single line of leading-edge chips.

Monday: $85.25

Source: Bridge