Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment-bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."
This Tuesday, Texas Instruments
Analog or digital -- it's all good
The meat of Ron's slideshow dealt with revenue growth and the factors driving it. Among TI's many product lines, the two areas feeling the love buzz from management these days are high-performance analog circuits and digital signal processing (DSP) designs. Mr. Slaymaker called them the "two best segments inside of the semiconductor industry, both from a topline opportunity as well as the profitability associated with these markets."
The two segments each have a multitude of internal growth drivers. For DSP processors, it starts with the multitude of radio signals going into and out of consumer devices these days. If one handset has 3G cell phone reception, a Bluetooth link to a wireless earpiece, a GPS tracker, and a WiFi connection, that's a lot of radio signals to handle at once. Ron noted that digital processing can help keep all of these signals clean and separate.
The other DSP opportunity is video signal processing. You may not have noticed the explosion of video-capable gadgets these days (and if that's you, welcome back from your hermitage to Outer Micronesia -- we missed you), but management believes that it will only accelerate over the next few years and is putting serious R&D muscle behind its DaVinci video processing platform.
All in all, TI claims a 62% share of the total DSP market, up from about 40% four years ago. Ron supported that claim with some growth figures: 2006 handset shipment volume was 21% higher than 2005, but TI sold 36% more of its primary cell phone DSP engine.
The analog market is a very different beast. There, TI can lay claim to only 13% of the market, but that still makes the company the top supplier of these chips. Competitors like Maxim Integrated Products
My ears perked up when Ron mentioned the fragmented market as an opportunity rather than a problem. Where others might see tooth-and-nail competition and tough going, TI just wants to grab a bigger slice of the peach cobbler. If you've read Jim Collins' Good To Great, you'll recognize that attitude from Kimberly-Clark's rise to greatness, that time with established market leader Procter & Gamble as the galvanizing force.
Having dispatched with sales growth drivers, the presentation turned to operating efficiency. Essentially, TI is becoming something of a fabless chip designer, farming out ever-greater proportions of its manufacturing to foundries like Taiwan Semiconductor
The flexibility gained from that shift has protected TI's margins during this latest slump in the semiconductor markets. But that's not all. Less in-house production means less investment in expensive semiconductor manufacturing equipment, to the tune of $400 million lower capital expenses this year alone.
And with a smaller installed production capacity, there are fewer tangible assets at work, boosting the return on invested capital significantly. Management says ROIC doubled from 11% to 22% in the last two years, thanks to lower asset balances and higher earnings.
We're not done yet. $140 million in research savings comes from dropping the need for new and improved process technologies every other year. Instead of racing side by side with its foundry partners to reach the next die shrink, TI engineers will work directly with the foundry teams, on their premises, to help UMC's and TSMC's efforts rather than duplicating them.
If I had to nitpick, I'd poke at the lower percentage of revenues used to fund R&D. But with sales growing the way they are, it still means a higher dollar amount, so I'll let that slide.
That wraps up our report from this presentation with Texas Instruments, but stay on the lookout for more "Fool on the Street" reports that bring you juicy information that only the analysts have paid any attention to.
- Texas Instruments Is Misunderstood
- All Quiet on the Texas Front
- The Lure of Great Wealth
- Don't Invest Another Penny
Fool contributor Anders Bylund is a Taiwan Semiconductor shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like. Foolish disclosure looks great on a small screen, but even better on a DLP jumbotron monster.