In contrast to Glavin and Nirenberski, Brown Brothers Harriman analyst Bill Milton -- who had lowered his recommendation on the stock to Short-Term Avoid from Short-Term Hold just last month -- responded to Thursday's announcement by cutting his 1998
estimate to $1.95 a share, from an already reduced $2.00. "1998 is
another year that has to be written off because of memory pricing," he told Barron's Online, pointing to the continued turmoil in Asia, excess
inventories and weakness in the modem and disk-drive industries.
Having just returned from TI's annual meeting, I feel compelled to remind Mr. Milton of a few of Tom Engibous' comments --- (available on TI's website:
ti.com )
I'll also quote from the annual report, available through every press source in the Western Hemisphere if not the entire planet.
A year ago Mr. Engibous told his shareholders, "In 1996, we faced one of the toughest semiconductor market environments ever. An eighty percent drop in DRAM prices from fourth-quarter '95 to fourth-quarter '96 caused a nine percent decline in the total semiconductor market. That's the first time the market has actually contracted since 1985. In spite of that, TI maintained profitability during a DRAM price slump for the first time ever. And that progress has been rewarded with a market capitalization to annual revenues, more than double what it averaged for the past 10 years. "
In light of a 9% drop in the semiconductor market between '95 and '96, perhaps 5% projected growth from '97 to '98 --- amid instability in Asia --- isn't so bad.
Yet even this is secondary to the fact that TI is continuing to change its focus to the point this year Engibous could say, "Semiconductor is clearly now the cornerstone of our company. It represents about 83 cents out of every dollar of revenue for TI, and the Digital Signal Processing Solutions part is now almost half of our semiconductor revenue" --- up from 40 percent a year ago.
This segment of the industry --- together with mixed signal/analog chips -- is expected to reach $15 billion by the year 2001. And not so incidentally, TI is now number one in both analog/mixed signal chips --- up from number two last year and number five in '95 --- and in DSP, with 45% of the market and no close second.
Recalling that Mr. Milton said, "1998 is another year that has to be written off because of memory pricing," I have to think blindness runs in the family. He has to know TI sold its shares in Acer, and he must have read that the TI-Acer transaction "is expected to close in the second quarter and TI expects to recover its original investment," but must have missed the next sentence where the hint is so loud had it been a snake it would have bit him. --- "TI and other joint-venture shareholders continue to explore further measures with respect to the joint-venture structures." At least Deutsche Morgan Grenfell's analysts, Scott Nirenberski and Charles Glavin, got it. The Barrons' article says Glavin "expects to see improvement in several key areas of TXN's business over the next year. . . TXN actually has reduced its exposure to the cyclical and price-competitive DRAM business to only 12% of its total revenues -- a big drop from 20% of revenues only six months ago-- and he expects the company to continue shedding underperforming DRAM operations, possibly getting out of that business altogether."
It's comforting to note that the company which did the financing for the Amati buyout, DMG, is the one to give TI an upgrade.
At any rate, I wish Brown Harriman's Bill Milton would have attended the stockholders meeting and eaves-dropped on some of the conversations afterwards.
A few random notes:
* Moving rapidly into DSPs where they hold number one position
* Sales to modem makers not booked in Q1 could resume in Q2 (check out COMS and CPQ expectations)
* Acer-type events could occur over the next few Qs
* Acer costs expected to be recaptured in Q2
* With release of ADSL-based C6x, highspeed chip revenues will kick in with possible backlog by end of year
* Significant DSL revs in '99 and beyond
* Strong DSL connections to majority of top telecom equip cos
* Working with COMS on CPE and talking to others
* Wireless market growing rapidly, especially in Europe
* Turnaround in DRAM would improve that shrinking market
* FCC-mandated move to digital broadcasting will have positive impact on DSP revs.
Considering how quickly TI is changing focus, the second to last paragraph in the earnings press release is worth repeating: "In the market sectors most important to TI, the company expects about 30 percent growth in DSP and about 20 percent in mixed-signal for 1998, fueled by wireless and networking applications. Over the next few years, these end-equipment markets are expected to grow in excess of 20 percent annually. . . . "
I talked to more than a few TI leaders and putting together what I heard with what I've read, I'd say that's an understatement.
In a personal aside, I have to say TI is one of the classiest companies I've ever come across. If anyone is considering going to next year's stockholders meeting, I encourage you to do it. That is, if you don't suffer from agoraphobia. Dallas is the flattest piece of earth on the planet. Later that day I was standing on the twelfth floor of the GEICO building and asked my host how to get to the civic center and he just took me over to the window and pointed five miles south and said, "You see the Interstate. . ."
TE ended his stockholders speech by saying, "We are . . . a company of winners.
"We know the race isn't won. Not by a long shot. In many ways, our journey is just beginning. But we relish the challenge that lies ahead.
"We care deeply about building value for TI stockholders. And there's no question in my mind that we will deliver on that commitment. Why? Because, all across TI, we've got our eyes focused squarely on the next wave of opportunity in the electronics business.
"And because, just about anywhere you look in this company, you'll find TIers who believe that the best is yet to come. "
The next wave is the digital revolution and TI's on the leading edge.
Later --
Pat
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