Texan Standing Tall

Texas Instruments bucks the recent trend of chipmakers paring back financial forecasts.
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The timing couldn't have been better for

TexasInstruments

(TXN) - Get Report

to brief Wall Streetanalysts on the company's state of affairs and drivehome its point that its chips are now driving the techindustry.

While personal computer stalwarts

Intel

(INTC) - Get Report

and

Dell

(DELL) - Get Report

have both recentlyhad to pare back their financial forecasts, TI CEORich Templeton outlined a bullish outlook for thecommunications and consumer electronics markets, wherethe company's analog- and digital-signal-processorschips are critical components.

"We're leaving a PC world where the ratio ofequipment to people was one-to-one and going to aworld where you have up to 10 devices per person,"said Templeton, pointing to the cell phones, MP3players and portable game devices that many people nowown.

At the same time, said Templeton, emerging marketssuch as India, China and Russia are adding billions ofnew consumers to the market "overnight," as thosenations join the global economy.

This combination of more devices per consumer andmore consumers overall will allow TI to continue tooutgrow the semiconductor industry as it has for thepast four years, said Templeton.

While some analysts have fretted that chipinventories are reaching ominous levels throughout theindustry, Templeton said, TI continues to believe it isin good shape.

During the first quarter, inventories within thecompany -- and at distributors -- increased as TI resolvedsome capacity constraints that had left itunable to fulfill all of its orders at the end of2005. But inventory levels still remain below wherethey were a year ago, Templeton noted.

Still, given the cyclical nature of thesemiconductor business, he said inventory levels weresomething TI monitors very closely.

"History says 'pay close attention because thingsdo change, and they change quickly on that front,'"said Templeton.

Shares of TI were recently down 1.7%, or 57 cents, to$33.77 in afternoon trading Wednesday, closely mirroring a down day in chip stocks; the Philadelphia Semiconductor index was recently off 2.1%.

In a series of briefings with analysts andreporters in Dallas, TI executives dove into thestrategies and opportunities related to the company'svarious chip businesses.

The company's new DaVinci chip is at the heart ofTI's efforts to extend its DSP chips from cell phonesto new-generation video-enabled devices designed forentertainment as well as security and surveillance.

"We believe that next wave of innovation, the nextwave of growth, is really driven by an unprecedentedopportunity in the imaging space," said Mike Hames,senior vice president of TI's application specific products.

Hames said it was still too early to announceparticular products based on the DaVinci platform, asTI has only recently begun providing samples of thechip, and most customers have not yet had time to gettheir products out the door.

Meanwhile, TI said it continues to see opportunityin the wireless business where its DSP and analogchips are key ingredients.

TI said it gained 1.1% of market share in thewireless business last year, thanks to its focus on theGSM standard, which it said grew much faster than theproprietary CDMA standard championed by rival

Qualcomm

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.

And TI said it's stepping up its efforts to wooJapanese cell-phone makers to supplement whatTempleton described as strong relationships with itstwo largest customers,

Nokia

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and

Motorola

(MOT)

.

As proved the case in 2005, TI's management seesthe main wireless drivers continuing to come from theopposite extremes of the market. Sales of high-endso-called 3G phones, which accounted for $1 billion inrevenue in 2005, are expected to remain healthy. Andthe low-cost cell phones sold in developing nationsare particularly important to TI's future, withemerging markets expected to contribute up to 2billion new consumers in the next several years.

"There is a very good chance in China and Indiathat the first electronic product that these peopleare going to own is going to be a cell phone," saidTempleton. "And the good news is that it's probablynot going to be the last electronic product they own."

Despite the company's positive outlook, and afinancial condition that CFO Kevin March said was asgood as it has ever been in its 75-year history, TI'smanagement declined to lift its margin targets, nowthat the company has met its previous goal ofgenerating 50% gross margins and 25% operatingmargins.

Executives said there was room for further gross-margin growth thanks to improvements in its productmix, depreciation and continued cost discipline inareas such as capital expenditures and research anddevelopment. But they declined to set a specificmargin target for the future.

March also declined to discuss any lower-marginbusinesses that TI could potentially shed, as it didwith its sensors-and-controls business last year. Buthe noted that the company regularly looks at itsproduct portfolio for purposes of pruning orexpanding.

"There is a universe of things we take a look at,"said March.