TI cuts wireless investments, plans to sell cellular baseband operation
By Suzanne Deffree, Managing Editor, News -- 10/21/2008
Texas Instruments Inc will put its focus largely on analog and embedded processing as it moves forward, announcing plans to reduce its wireless business efforts, especially in its cellular baseband operation.
The change sees TI reduce wireless expenses by about one-third, or more than $200 million annualized, and sees the Dallas-based company "actively pursuing the sale" of the merchant portion of the operation. TI said in its Q3 statement Monday afternoon that it is in discussions with undisclosed potential buyers and noted that it will continue to support select custom programs within the cellular baseband operation.
In making the move, TI said it will focus its remaining wireless investments on its OMAP applications processors and pointed to continuing opportunity for the line in smartphones.
"You have heard us talk for some time about the good opportunity that we believe is ahead of us in smartphones with our OMAP applications processors," Ron Slaymaker, TI's VP of investor relations, said on the company's quarterly financials call with analysts. "The smartphone market is fast growing and TI is well positioned. Handset makers are focusing their own R&D activities on user interfaces and applications in order to maximize their product differentiation. From a semiconductor perspective, this points to the application processor as the best opportunity in the handset. Looking ahead we will concentrate our wireless resources on OMAP and our intent on extending our lead in this market."
The reductions in cellular baseband operations will begin immediately and are expected to be complete by June 2009. Slaymaker estimated TI will take restructuring charges of approximately $110 million across the next three quarters on the move.
"The merchant business includes LoCosto and eCosto and would generate approximately $350 million to $400 million in revenue in 2008," Tim Luke, a semiconductor market analyst with Barclays, said in a research note this morning. "While the timing of the sale remains uncertain, management expects it may be completed in the next few months. If the business does not sell, TXN [TI] will support current products but remove further investment costs from the business."
Luke estimated TI's custom programs will bring in approximately $2.3 billion in revenue in 2008 and its OMAP applications processors and connectivity solutions will bring in approximately $900 million in revenue in 2008. However, Barclays is skeptical as to if TI will sustain the two businesses over time.
"While TXN will continue to support both product lines, we believe the longer term outlook remains uncertain," he said. "We believe costs associated with the custom business are relatively scalable and TXN may consider the continuation of its custom business on a program by program basis. We believe longer term TXN may look to evaluate options for this business as it comes under pressure with current share losses at EMP [Ericsson Mobile Platforms] and longer term uncertainty with respect to its ramp at Motorola (now looking to be second half of 2009) and largest customer Nokia as Nokia looks to move to a merchant supplier system."
In 2007, TI’s 3G partnership with EMP shrank in size when EMP announced a 3G agreement with STMicroelectronics. Just before that, Motorola had expanded its agreements with TI to include 3G, WiMax, and OMAP technologies. However, Motorola's relationship with TI has been in question since Sanjay Jha left Qualcomm to become Motorola’s co-CEO and CEO of its mobile devices business in August, tightening the relationship between the handset maker and the TI wireless chip making rival.
The changes to TI's wireless business have been foreshadowed by TI, itself, for sometime now. In June, Slaymaker narrowed the company's Q2 guidance on wireless handset revenue that he said continued to be unseasonably weak.
Demand slowing, capex lowered, new college hiring only
The overall economic situation, too, has played a role in TI's decision to cut costs. On the company's Q3 call, CEO Rich Templeton (pictured) noted that he has spent the last month in Europe and in Taiwan, talking to customers and examining the overall electronics supply chain.
"We see customers that are observing slowing demand from their market places, I think we have a number of customers that fear more reductions as they look at the overall economic environment, and I believe we have a number of people starting to guard against getting caught with inventory. I think we see people reacting and starting to react pretty quickly," he said.
"We see it in general across all regions, across all end markets even though certainly the logical end markets have been more impacted; automotive for example more impacted and at the other end of the spectrum things like the basestation, our infrastructure market place doing better. We’ve seen that through the balance of the last three weeks of September where ordinarily you’d be seeing a building demand for the holiday season. We in fact had a slowing demand, and that has been held through the first 20 days of October accordingly," Templeton said.
| TI product categories and sales | Q3 | Q3 2007 | Year-over-year change | Q2 2007 | Sequential change |
| Analog | $1.289B | $1.308B | -1% | $1.287B | near flat |
| Embedded processing | $427M | $390M | 9% | $439M | -3% |
| Wireless | $915M | $1.094B | -16% | $902M | 1% |
| Other | $756M | $871M | -13% | $723M | 5% |
TI made specific note of its embedded processing business, which saw its revenue gain 9% year over year on higher demand for communications infrastructure products. The business saw revenues dip 3% sequentially, however, on lower demand for catalog and automotive products.
TI further stated in its Q3 report that capital expenditures have been reduced from $900 million to $800 million.
"At this point, that’s obviously just an adjustment to the fourth quarter and the simple reason is because we don’t need them from a capacity and a manufacturing perspective. Yes, we will be able to continue to keep those at low levels if we continue to see soft demand," Templeton assured analysts on the call.
"Expenses are being reduced using a lot of the classic techniques that you will do in this type of time, and we will also be very, very targeted on our hiring, in fact being focused primarily on new college hiring only, as we move forward right now," he said.
"We are also prepared to adjust further if things change because I believe we’re in a market place and an economy that the assumptions that we made will not be precise, but we make them anyhow so we can act," Templeton concluded.
TI estimated Q4 revenue between $2.83 billion and $3.07 billion and earnings per share between $0.30 and $0.36.
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