Texas
Instruments' Q2 '96
| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) Texas Instruments Inc UNION CITY, Ca., July 15, 1996/FOOLWIRE/ --- Texas Instruments reported Q2 1996 results this morning. Net revenues for the quarter were $2845 million, down 12% from Q2 1995 and down sequentially from Q1 1996. Profit from operations for Q2 was $96 million, compared with $403 million in Q2 1995. Net income for Q2 was $76 million compared to $278 million in Q2 1995. Earnings per share were $0.39 in Q2 1996 compared to $1.44 per share in Q2 last year. This was well below analyst expectations of $0.53 per share.
Their financial results were adversely affected primarily by two factors -- sharply lower DRAM prices and lower royalties. In contrast, TI's differentiated semiconductor products continued to grow but could not offset the effect of the DRAM price decline. And, their semiconductor orders, revenues, and profits were down. If you exclude the semiconductor revenues, all of TI's other businesses had increased revenues for the quarter. Their book-to-bills ex-DRAMs would've been below 1, but above the .91 reported. They still see excess inventory in the market. Their July inventory survey showed 4.7 weeks, up from 4.4 weeks at the end of last quarter, so they still think there is some additional inventory correction to work off in the marketplace.
In the DRAM business, average unit prices declined 40-50% sequentially from the first quarter which translated into memory revenues down sharply quarter to quarter. At the same time, they maintained their R&D cost and the cost of ramping up their 16-meg production increased. That combination resulted in a loss in their memory operations.
As they commented in Q1, their joint venture supply arrangements were not able to fully comprehend the sharp declines in prices and the short period of time. They had that same effect in this quarter. In total, though, they still believe they are better off with the joint venture structure which shares the risk and rewards of being in the volatile DRAM business. The joint venture structures were put in place to work over a long period of time and TI believes they will work, but they are not structured where they can handle a 40-50% decline in one quarter.
To explain this further -- the traditional industry cost reduction, on average, has been about 30% per year. So, if we were in a more gradual, normal situation, that would give TI time to implement the cost structures in the joint ventures so that we would see relatively stable margins period to period. But, in these very abrupt, short price declines those price structures just can't handle it. The memory revenue line has been chopped down proportionately to prices. Even with the gross margins that are afforded by the joint venture structures, the gross profit drops below the fixed cost that they have, which causes the loss. They are keeping these structures in place because they think it is the right decision for the R&D of next generation products -- the 64-meg, the 256-meg, and the ramping up of additional 16-meg capacity and putting the shrink in place. All of that, plus the marketing costs were more than the gross profit margin derived out of the joint ventures.
On the royalty front, they mentioned that royalty revenues were down year-to-year by $105 million. They also declined from the first quarter because of expired licenses which have not yet been renewed. As they noted in the report, Matsushita and TI reached a new 10-year agreement. There are now 3 new agreements in place -- Fujitsu, OKI, and Matsushita -- all 10-year agreements. TI is continuing negotiations with others and is continuing litigation with Samsung.
In this environment, TI is taking several actions. They are trimming back selectively on their semiconductor capital equipment spending. That will make their expenditures in 1996 approximately $2.3 billion, down from the projected $2.5 billion. Capital spending rate in the quarter was $620 million versus last year's $300 million. They had a surge this year because they are building a number of facilities. They are stretching out some of the capital equipment side of that, which they don't think will hurt them longer term, but they are going to absorb a good portion of the building side this year. (Specifically, they are employing a "fast fab" building strategy that allows them to push out purchases of some of the clean-room items with longer lead times that they won't need in the short term.) That should take the pressure off in 1997 because TI will have the capacity in place and can fine-tune their equipment to meet the market demand. This strategy should reduce spending requirements in 1997.
Secondly, TI is emphasizing their .35 micron process -- the process that's been developed for the 64-meg -- and they are going to implement that into their 16-meg production to shrink the size of the silicon and shrink the cost. That will start in the second half of 1996 and will extend into 1997.
Finally, TI is making their DSP solution stronger with two previously announced acquisitions -- SSi (Silicon Systems Inc) and Tartan. SSi is a leading supplier of components to the mass storage industry and Tartan doubles TI's software development resources for DSP customers. TI believes that combining their manufacturing strength and process technology with the strong mixed-signal design capability of SSi gives them a winning combination and a real boost to their DSPS strategy. They closed on the SSi acquisition in July and plan to take a one-time charge in Q3 for the value of acquired in-process R&D. That charge is estimated to be approximately $180 million or about $0.95 a share in Q3.
They continue to see imbalances in the DRAM market. Signs of excess industry production remain. Although they are seeing unit demand strong in the near term, they expect those competitive pressures to remain.
They continue to see the bit growth rate in the 70% range and, as they had expected, the tax rate on computer CPUs is increasing. It looks like 16 megabytes is becoming the standard in the industry, up substantially from where it was a year ago. That crossover, in terms of bits, occurred in Q4 1995. For TI it crossed over in Q1 and they are continuing to see the 16-megs ramp up and the 4-meg production went down in Q2 for TI. TI-Acer has announced that they will be phasing out of the 4-meg in the next couple of months, leaving only one Fab making 4-megs for TI. That facility is also ramping up their Phase II of 16-meg in the second half of this year. By Q4, TI expects that 16-meg units will exceed 4-meg units.
Because of the sharp declines in DRAM prices, they now expect the semiconductor market will decline this year. Year-to-date the market is down slightly worldwide. They expect downside this year to range from zero to -10%, barring any sudden change on the upside and a faster recovery in DRAM prices than most people expect. In Q3, they expect to see some seasonality (which is normal for the market but was not seen last year as a result of the strength in the marketplace -- growing 30-40%).
They don't have a specific number for 1997, but believe that the semiconductor market, on average, will exceed its historical long-term growth rate of 12-15%. With the increased penetration of semiconductors, more value-added on a chip, and emerging markets in Asia/Pacific, TI believes it's more likely that we will see above-average growth rates (going as high as 20%) over the next 5 years. Lower DRAM prices are stimulating higher bit growth and more memory per computer. But, they think there needs to be a pickup on the PC side to pull through some of this remaining inventory. Part of the reason that we are seeing the inventory and production excesses is that last year, around Christmas time, the PC did not come in as high as some expected, so the market is still working off some of those excesses. Nonetheless, TI still thinks that the PC market will grow 15% or higher, year after year, through the balance of the decade.
Longer term, they remain positive about the semiconductor market, which is expected to more than double in the next 5 years to $300 billion -- in part because of the emerging opportunities in the Asia/Pacific region. TI is already well-positioned there and wants to continue to strengthen their base in this part of the world.
They are continuing to emphasize they system-level design activities as part of their longer-term strategy of shifting more of their business to high value-added solutions. They plan to maintain the appropriate levels of investment in the next generation products, which keeps the pressure on the near term financial performance. They will work to improve and strengthen their strategies and they think that one thing that will come out of the current market correction they're in is even more emphasis on the Digital Signal Processing Solution side of their business. They think we will see even more emphasis on that. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Transmitted: 7/15/96 | |
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