Wireless Industry Analyst

I value Texas Instruments at $32 per share. As we have seen in the last few weeks, the strengths are a good management, its analog strategy, the HPA growth and manufacturing efficiency. Its weakness is the wireless business. The growth drivers do not have the ammunition yet to drive the company out of the rut caused by the wireless world. This means that the share price will continue to hover around the $30 mark for quite sometime into the future.

TI has made the conscious decision to pursue analog vigorously. This has certainly paid off, especially with HPA growing phenomenally in the last few years. The company benefits further from the higher margins from HPA which I anticipate will grow at about 15% over the next few years. In keeping with this push, TI has diverted all its manufacturing capabilities towards analog slowly migrating towards the fabless model for digital manufacturing. This move away from the Integrated Device Manufacturer (IDM) model to a more hybrid strategy has allowed TI to become more nimble.

On the other hand, TI also seems to have made a conscious choice to stay away from mainstream wireless development. As I pointed out, it appears to be a miscalculated strategy that has come back to bite it. A healthy 15% CAGR in its OMAP business will help maintain stable revenue from the wireless business as it compensates the loss in digital baseband and chipset business to its competition. The company is trying hard, however, to explain that all is not lost on the 3G side claiming that its most recent Ericsson deal’s “revenue potential is very, very significant over the course of time.” But it really appears that the company has missed the 3G bus and is trying hard to catch up with a soap-box car.

Overall, I estimate that TI will have a modest 4% growth in revenue for the next five years. The $32 valuation would not have been possible without TI’s constant push for a higher margin product portfolio, manufacturing agility and the laudable margin targets. If it can somehow transform its wireless fortunes, either through partnership deals or an accelerated development effort and complement it with regained design wins, then we may see the stock inch towards the $40 mark. In the interim however, I am going to stay away from this stock for I don’t see any promising ROI here.

In the past two segments on TI, I have presented my perspective of TI’s wireless strategy. Let us now look at how this will impact the company’s revenue outlook over the next few years.

With the current indicators, it appears that TI’s wireless business will not grow appreciably over the next five years. I expect the growth to be between 1-2%. The connectivity solutions will also lose their overall market share. This number just does not seem right considering the opportunity that 3G presents. But then, a combination of TI’s flawed (IMHO) baseband strategy and the competition will likely take the teeth off TI’s wireless program.

The savior, however, will be the OMAP business. Though the company’s market share will likely reduce from its current 65% to about 40-50%, the volumes achieved by the growth in 3G will reduce the impact of this loss. I expect OMAP-related revenue to double in the next five years. Note, however, that retaining the high market share will also be contingent on EMP, Nokia and Motorola using OMAP for a majority of their 3G platforms. Further, if TI can work out a partnership agreement with someone like Interdigital, for example, then perhaps it can leverage its complimentary OMAP solution to provide a very competent bundle for smartphones that Nokia may pounce at. More on this thread of thought can be found here.

Thanks to the OMAP business, I estimate that wireless will continue to contribute around a third of TI’s revenues into the next decade. But this will not yield anywhere close to what could have been obtained had TI played its cards right. If TI maintains its current market share, the wireless revenues will have grown at a much higher rate (around 10%).

Wireless, it seems to me, is a missed opportunity for TI today. In the concluding part of this series on TI, I will provide my valuation of the company and briefly discuss its future outlook in the context of all the details that I have laid out so far.

[Long IDCC at the time of writing]

In the prequel, we discussed TI’s growing analog semiconductor business. Digital Signal Processors (DSPs) is an equally big business for the company contributing 40% of its semiconductor revenues. TI dominates the DSP market with 65% share and its products are preferred in a variety of applications ranging from communication infrastructure, automotive navigation, imaging systems to HD video products.

The main drivers for TI’s DSP business are wireless handsets and infrastructure. The company’s DSP play in the cell phone market primarily comes from its OMAP business. The company enjoys between 65 and 70% of the application processor market share. OMAP processors are used for streaming video, 2D/3D gaming, video conferencing, high resolution still image, video capturing in 2.5 and 3G handsets and in PDAs.

The OMAP platform is a mix of its OMAP processors, software and support that deliver real-time applications with low power consumption – the two key components of tomorrow’s cell phones. TI offers stand-alone OMAP processors for use in smart phones. The customer can pick from a range of OMAP products for high performance and basic multimedia functions.

The company also offers integrated communications and application processors through its OMAP 730, 850 and OMAP-Vox modem technology. The OMAP-Vox platform integrated the baseband modem, the OMAP processor and the Digital RF Processor (DRP) together with analog and power management functions to provide a complete solution targeting the feature phone and the smartphone markets. The solution is currently available for GSM/GPRS/EDGE technologies only.

TI’s OMAP also pictures in the custom 2G and 3G products that it manufactures for the likes of Nokia and Ericsson. In these cases, TI integrates the customer’s baseband IP with its OMAP processor, DRP and power management functions to design customized chips. It does not however have its own 3G baseband chip or IP. While the company does not view this as a deficiency in its product-line, this strategy may well turn out to be its Achilles heel (I will discuss its mobile strategy in a sequel). Interested readers can see TI’s OMAP product roadmap here.

To summarize, TI is looking at DSP to open new growth markets in diverse areas like public safety, medical and automotive. Its OMAP processors are in most smartphones in the market today. The company is also buoyant about its prospects here. Though no other competitor has so far got wide traction in the application processors market, this position may be challenged due to newer entrants and TI’s own strategy to shun 3G baseband development. In turn, this will determine the fortunes of the DSP business and the extent of influence that the mobile market will have on its future.