TI is one of the largest suppliers of analog integrated circuits. Fourth-quarter earnings were in-line with the Zacks Consensus Estimate and forward guidance also Match Estimates. Demand appears to be picking up, with the higher mix of analog and embedded processing products contributing to profits. The company's compelling product line, market share gains, strategic refocus on high-growth areas of the analog and embedded processing markets are positives. However, we recognize that the channel is more conservative than it has been before and remain concerned about the risks associated with a high debt level. These along with the fair valuation lead us to reiterate our Neutral rating on the shares.
Texas Instruments, Inc. is headquartered in Dallas, Texas. The company is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits. TI, as the company is more popularly called, was the seventh largest semiconductor manufacturer in 2013 (in terms of revenue). Management estimates that the company had an 18% share of the analog IC market and a 14% share of the embedded processor market in 2013. This made it the largest producer of analog chips and second highest producer of embedded processing chips in 2013.
The personal communications end market was the largest for TI in 2013, with a revenue share of 37%. Industrial generated 24% of revenue, communications 16%, automotive 13%, enterprise brought in 11% and calculators the remaining 4%.
From the fourth quarter of 2012, the company dissolved the Wireless segment, incorporating relevant portions within the remaining three segments.
The Analog segment generated 59% of revenue in 2013 (up 2.8% from 2012). Analog products have been categorized into three high performance analog, high volume analog, and logic and power management. High performance analog products include standard analog semiconductors, such as amplifiers, data converters, low-power radio frequency devices, and interface products. High volume products may be either customized or commodity in nature. Power management products are made for both portable and other applications. The National Semiconductor acquisition in 2011 added a fourth sub-segment, which the company is referring to as SVA.
The Embedded Processing segment generated 20% of revenue (up 24.3%). Last year, management took a strategic decision to de-emphasize the volatile smartphone and consumer tablet markets and focus on markets with longer sales cycles where its solutions will be embedded. Therefore, revenue from TI's OMAP and connectivity solutions are now reported under this segment. This segment also includes non-wireless DSPs and microprocessors.
The Other segment generated the remaining 21% (up 2.5% from 2012). The segment includes smaller semiconductor product lines, such as DLP products, RISC microprocessors and ASICs, calculators and other schoolroom tools, and royalties.
TI has manufacturing and design facilities, including wafer fabrication and assembly/test operations in North America, Asia and Europe. Management's strategy has been to build assets that would be fully utilized through their lifetimes and outsource any excess demand in peak situations to outside foundries. Since digital products require very expensive, state-of-the-art equipment, this strategy enables it to minimize its capital expenditure. In 2012, 20% of its total wafer requirement and 35% of its assembly/test requirements were outsourced to foundries. Products are sold through a direct sales force, distributors and third-party sales representatives. The company has sales and marketing offices in 34 countries.
In 2013, around 55% of total semiconductor sales were through distributors, compared to 50% in 2012. TI had no customer accounting for more than 10% of sales in 2013.
Approximately 63% of 2013 sales were generated in Asia ex-Japan (down 5.6% from 2012), 14% in Europe (up 3.5%), 11% in the U.S. (up 4.4%), 9% in Japan (down 21.0%) and 3% from the rest of the world (down 15.8%).
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