Texas Instruments Inc. advanced towards its analog sales goal in 2014 with revenue and profits rising in key markets as the company intensified a decade-long plan to transform its operations away from price-sensitive commodity wireless components in favor of higher-margin proprietary products.
Once a major player in the wireless communications IC market, Dallas-based TI has in recent years shifted its stance and aggressively pushed towards building a stronger presence in the analog semiconductor segment where it can leverage its position as an integrated device manufacturer to squeeze out lower manufacturing advantages, according to company executives. Currently, the company is boosting its position by transferring more of its analog manufacturing to a new 300mm wafer fab and an older DMOS6 plant that is being converted to analog production.
The 300mm fabs will together help reduce TI's total production costs by up to 40 percent, increase its available manufacturing capacity substantially and give the company added flexibility to respond to customer demands, TI executives said. With 300 mm wafer fabs, TI could easily improve its overall production gross profit margin to 68 percent versus 60 percent on the older 200mm plants, they said.
TI is shooting for $8 billion in analog IC sales from the two fabs and projects it can easily achieve this objective within the next few years, according to analysis by Kevin March, CFO, at the Dallas-based chipmaker. The company said its 300mm RFAB, launched in 2009, currently accounts for about $2 billion in annual analog IC sales but has capacity for up to $5 billion. Meanwhile, the 14 years old DMOS 6 fab is being converted to analog production from wireless IC and should have capacity of about $3 billion once the process is completed, March said during a recent presentation to analysts.
“The majority of equipment for the RFAB is already purchased. It became our largest factory in 2014, supporting $2 billion in Analog revenue, which is 40 percent of its full capacity,” March said. “The DMOS6 will convert $3 billion of annual 300mm capacity to analog. This capacity was previously used for wireless products. Qualification is already under way with initial production scheduled for the end of 2015. DMOS6 will continue to support embedded.”
TI closed 2014 with $13.1 billion in annual sales, up 7 percent, from $12.2 billion in 2013. Net income at the company rose to $2.8 billion, or $2.76 per share, from $2.2 billion, or $1.78 per share. The company projects revenue of $3.07 billion to $3.33 billion for the ongoing quarter and said the midrange of this forecast would represent an increase of about 7 percent on a year-over-year basis. This forecasts means TI’s analog IC would continue to represent the largest chunk of its annual revenue, according to chairman and CEO Rich Templeton.
"Analog and Embedded Processing drove revenue growth in the [fourth] quarter, and combined, they comprised 85 percent of fourth-quarter revenue,” Templeton said in a statement. “Gross margin of 58 percent reflects the diversity and longevity of our product portfolio, as well as the efficiency of our manufacturing strategy. Our cash flow from operations once again underscores the strength of our business model. Free cash flow for the year was up 18 percent from a year ago to $3.5 billion or 27 percent of revenue. This represents an increase of 3 percentage points from a year ago and is consistent with our targeted range of 20-30 percent of revenue.”
While TI’s transition rests on the management’s conviction that the analog segment holds the greatest possible return on investment for the company, achieving this goal would require not only that the company manufacture its products on the latest available technology but also that most of the production be conducted internally. Using the RFAB and the DMOS6 fab, TI expects to raise annual analog IC production eventually to about $8 billion, which would account by then for more than half of its analog sales. The rest of the products would be sourced externally.
By manufacturing products internally TI expects to successfully continue to push up margins especially in targeted market segments, including automotive, power management, high volume and high performance analog. While the rest of its business continues to come under negative sales pressure, the company is pushing up sales in the analog and embedded processing segment.
In the fourth quarter, analog IC sales rose to $2.12 billion, up 14 percent, and accounting for approximately 65 percent of total revenue for the 3-month period. Embedded processing products contributed about 20 percent of sales, or $670 million, up 11 percent from the comparable year-ago quarter. The rest of the business accounted for $476 million of the quarterly sales, sliding 14 percent year-over-year.
“For 2014, analog and embedded processing revenue grew a combined 12 percent with analog up 13 percent and embedded up 12 percent,” said Dave Pahl, VP of investor relations, during a presentation to discuss the fourth quarter results with analysts. “We gained market share in both businesses again in 2014. These two key businesses were 83 percent of TI's revenue for the year up from 79 percent in 2013. Because they now make up more of our revenue, they are driving top line growth for the company.”
TI has also been making changes to its distribution strategy. The company increased sales via consignment inventory, scaling available-to-sell inventory as a percentage of sales back “to a historically low level of just under 4.5 weeks,” Pahl said.
“This level has decreased over the past few years because we've structurally changed how our inventory is managed in the distribution channel with our consignment program," he said. "This quarter we continue to support more of our distribution sales from consignment inventory and now have about 60 percent of our distribution revenue on consignment, up about 15 percentage points from a year ago.”
The change in distribution strategy means TI now carries more of its inventory directly on its balance sheet, recording sales only after it had been pulled by end customers. As a result, TI’s balance sheet inventory has increased, rising to $1.8 billion in the last quarter, from $1.7 billion in the year-ago quarter. The company gains greater flexibility in managing production and inventory with this strategy, according to executives.
“With this program, inventory sits on TI's balance sheet and revenue is recognized when our distributors pull products from our consignment inventory that's stored at the distributor's location,” Pahl said. “We carry higher loads of inventory on TI's balance sheet with this program which has several benefits such as minimizing impact due to changes in distribution channel inventory and giving us greater flexibility to meet customer demand.”