Texas Instruments: We Can Grow at Twice the Market Rate
TI's Dave Pahl explains how the firm plans to grow its analog semiconductor business at twice the rate of competitors.
Brian Colello: Hi. I'm Brian Colello, Semiconductor Analyst at Morningstar. With us today is Dave Pahl, Director of Investor Relations at Texas Instruments. Some of you may be familiar with Texas Instruments from their popular line of calculators, but more than 95% of the business comes from semiconductors. They are the world's largest analog chipmakers and have a host of other product lines.
Dave, thanks for joining us.
Dave Pahl: Thanks, Brian. Thanks for having us.
Colello: Could you give us a quick overview of your business, your various segments where some of our listeners might be using your products today and can you also give us an overview of how business has been since the credit crisis?
Pahl: I think if you look at our products as you said, vast majority of them are in semiconductor market. Last year, we were a little over a $10 billion company with our guidance here in fourth quarter and finishing up the year we'll be probably around a $14 billion company, as we've come off the trough of the economic downturn that began in the third quarter-fourth quarter of 2008.
If you look at the composite of our businesses and we've got four segments that we report. About 40%, 42% of our revenues are what we call analog products and analog, as you know, go into really any electronic device that we see in the world, and they do simple things like converting energy from devices that plug into walls to what the electronics can use or from batteries into energy that they can use as well as a host of other things.
About 15% of our revenues are what we call embedded processing products and that's where we've got a either a microcontroller or a DSP where customers are writing software to those platforms. It's also a market where we service thousands of customers. We also have a core wireless business that is in both application processors and those are the brains of today's smartphones, as well as what we call connectivity products and connectivity products are things like Wi-Fi and GPS and Bluetooth and FM.
And then finally, we have a last bucket that we call other and inside of our other, we've got the famous calculators that has been a very nice business for us for years, as well as products we call digital light processors. So, if you've seen a 3D movie at a theatre, the vast majority of those are delivered through TI DLP engines, and then we've also got some royalties ASIC business and some miscellaneous businesses inside of that.
Colello: We've talked before and we've heard you discuss very aggressive or very optimistic growth plans going segment by segment for the analog business. You mentioned that you expect to grow at twice the industry rate. How do you expect to do that?
Pahl: Well, the good news is that if you look at our performance in two of our businesses inside of analog, our high-performance analog business as well as our power business we actually have been doing that and we're doing it because we've got a broader portfolio of products than any of our competitors.
So we've got the opportunity to cross sell to customers when we're engaged on one device. We're looking right and looking left of that product to see what other things that they are using and what we might be able to sell them. And the second thing is we've got two to three times the number of sales people in any given market, so we're just calling on more customers than any of our competitors.
So in analog today, we have about 13% of the market with the number one position. So there is a lot of opportunity to grow from market share gains. Where we haven't been happy with our performance is in the third business unit inside of analog, which is the high-volume analog and logic or HVAL as we call it and that business has not only lost share, it's actually reduced in size of revenue over that same time period. We went through a pretty major restructuring of that business a few years back and obviously it takes time for that restructuring to take hold.
The high-volume business as you would imagine most of those products are custom in nature, so you've got to engage where the customer execute on the design, which could take a year, year and a half, take another year or half a year to get it to ramp into production. So we have seen that business begin to show signs that the efforts that we put in place a few years back actually are taking hold and really sense the middle part of 2009 we've got a little more than a year, year and a half of data that says that, that business is now growing at the same rate as the others.
So, I feel very good about the content that we've got, the design and pipeline to be able to continue to deliver those results.
Colello: Another area I want to touch on, and I think you've talked about some of the growth rates is the embedded as you mentioned and specifically the digital signal processors, DSPs and I know you have a very terrific business there with great exposure to wireless infrastructure, which is really one of the long-term themes that we like going forward because wireless carriers want you to have a voice and data plan on your phone and phone makers want to sell you the higher end smartphone and a lot of those things.
Could you touch on that business a little bit and how you have done so well in this market and perhaps how the shifts from 2G to 3G or even to 4G and some of the expansion in emerging markets, how that's helped your business and how you see that going forward?
Pahl: Okay, all right. So I'll describe our embedded processing business and there we service primarily three end markets. Again, it's about 15% of our revenue. Last year, it was about $1.6 billion business. It's been growing very nicely, really better than twice as fast as market over the last four, five years. So we've done very well. Last year the market was roughly about $14 billion in size. Of that $14 billion, the smallest piece was DSPs or $3 billion and there we've got a very strong market presence. We have about a third of that market maybe a little less than $1 billion in revenue last year. The biggest end market now divide up our revenues by end market. About 30% of our revenues go in the communications infrastructure, so that includes both wireless infrastructure as well as the wireline and 20% is automotive, and then the balance the 50% is catalog products, which goes into everything.
But specifically your question is on that 30% piece. We've got a great position with our DSP products there. We've been shipping a single chip base station product for about a year and a half maybe two years now. It's doing very well in the marketplace. There is a transition to 4G that will begin to happen significantly probably a few years out. And we've just recently in the last 30 to 60 days released a single chip 4G product that makes it very easy for our customers to move from those 3G standards, keep that code base intact and then basically just add into it the 4G standards, and it's got the performance headroom to be able to implement those.
So we see some other opportunities in moving into the other layers of communication in the base station, so we've got some efforts to move upstream, if you will, and pull in other content. So, basically we're benefiting today with that business as you indicated both in the U.S. and Europe, operators are deploying CapEx to keep up the smartphone data demands. China started a little more than a year ago with their 3G rollout and that's in its early stages and then most recently we've seen India begin to turn on to deploy 3G technologies as well. So, between those secular trends and longer term the 4G products that will continue to be a good business for us.
Colello: Outside of the things we've discussed are there any other areas maybe smaller today or maybe not as well known today that could really be drivers for you, maybe three, five, ten years out? What are some really maybe under the radar exciting areas for TI?
Pahl: I think of one area that we didn't touch on and it sits inside of our embedded processing business that we're disproportionably investing in is microcontroller. So we talked a little bit about the great DSP position we have. If you look at that $14 billion, $3 billion was DSP, the remaining $11 billion is microcontrollers, and so it's more than three times the market size today and yet we have probably 4%, 5% share inside of that market.
So both through acquisitions as well as R&D investments we've really begun to build out the portfolio from the end of 2008 to the end of this year we'll triple our microcontroller product family and it has a lot of the same characteristics as what the analog business does meaning it serves lots of customers. The competitor base is very fragmented. It doesn't require the advanced semiconductor manufacturing equipment, so that those assets are very long lived and you can acquire them at very low prices. They tend to throw off a lot of cash, all the things that we like about businesses.
So you'll see us begin to make progress in those areas disproportionately as those investments begin to bear fruit and we're pretty excited about that opportunity.
Colello: So good growth, higher margins without a lot of capital intensity.
Pahl: Yes, that's the right mix that we're looking for.
Colello: Terrific. Well, Dave thanks again for joining us.
Pahl: Okay, thank you Brian.
Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.