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Future Looks Brighter for TI

The chipmaker hits a 52-week high after raising its margin targets.

Texas Instruments

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jacked up its profitability targets Wednesday, saying it's been bolstered by an expanding market for semiconductors and changes to its operating model.

The Dallas-based chipmaker unveiled new margin projections at a two-day confab with financial analysts. "The simple bottom line is it's time to raise our margin goals at TI," CEO Rich Templeton told the crowd.

Templeton set a new gross margin target of 55% and an operating margin target of 30%. That's up from the previous yardstick of a 50% gross margin and a 25% operating margin that the company had held itself to.

Shares of TI gained 2.9%, or $1.03, to hit $36.20 in midday trading Wednesday, setting a new 52-week high.

The decision to raise the margin goals wasn't completely unexpected. Even amid the chip industry's current downturn, TI was already consistently exceeding the gross margin target and coming close to the operating margin goal.

But it also comes during a time of increased competition, particularly in TI's stronghold of providing chips for cell phones, where it is the world's No. 1 player. Rivals have made inroads among some of TI's handset customers, and the pressure on chip prices has been fierce.

Templeton said the company was in good shape in wireless, thanks to its strong customer relationships, its broad range of chips for different types of handsets and the increasing size of the cell-phone market.

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The key to TI's new profitability aspirations lies in the analog chips, which go into a broad range of electronic products and command rich profit margins. Continuing with a strategy that TI has implemented for several years, the company is seeking to make analog chips account for a greater portion of its overall revenue.

The market for analog chips is massive and still highly fragmented, providing plenty of opportunity for TI to increase its market share.

"We can address every company in the world that designs an electronic product, because every company in the world that designs an electronic product needs at least one analog part," Templeton said.

By using analog to get a foot in the door, TI can then cross-sell customers its other chips, he explained.

TI's gross margin will also get a boost from continuing tweaks to its manufacturing model. In January, TI took the latest step in its strategy of outsourcing a chunk of its chip production to third-party manufacturers, by announcing it would cease developing its own processes for advanced digital chips.

As for operating expenses, Templeton said TI would achieve the new operating margin targets without sacrificing R&D, which he intends to maintain at the current level of 15% of total revenue, or roughly $2.2 billion in 2006.

The company will look for savings on the selling, general and administrative side, with Templeton aiming for a 10% spending level going forward, down from 11.9% in 2006.

Even so, Templeton stressed that the company's worldwide sales force will continue to grow and said it is central to the company's future ambitions.

"People get excited about margins, especially in this room" Templeton said, "But if we're going to grow earnings over time, we are going to do it with top-line growth."