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Chips Look Cheap

Posted on Monday, Feb 25th 2008

I had earlier covered ST Micro, Texas Instruments, and ARM in the iPhone and The Future series and the iPhone’s Component Ecosystem series. Let’s take a look at them based on the Q4 earnings and current market dynamics.

On January 22, STMicroelectronics (NYSE: STM) reported Q4 and fiscal year 2007 financial results. Q4 net revenues were $2.74 billion, up 6.9% sequentially and 10.4% y-o-y. Net income was $20 million, or $0.02 per diluted share and operating loss was $15 million. ST expects to complete the divestiture of its Flash Memories Group (FMG) in Q1 2008. Excluding FMG, Q4 net revenues increased 7.7% sequentially with growth led by imaging products, data storage, application-specific wireless, and industrial products.

Net revenues for the full year were $10.0 billion, an increase of 1.5% compared to 2006 net revenues of $9.9 billion. Net income before restructuring and one-time charges was $698 million. Gross profit was $3.54 billion, with a gross margin of 35.4% compared to 2006 gross profit and gross margin of $3.52 billion and 35.8% respectively.

Segment-wise, Application Specific Product Groups (ASG) revenues grew 9.1% sequentially and 13.3% y-o-y, led by imaging products, data storage and application-specific wireless products. Industrial and Multisegment Sector IMS’s sales grew 5.3% sequentially and 11.3% y-o-y reflecting strength in MEMS and advanced analog products while operating profit improved to $131 million. FMG sales grew 1.6% sequentially, but were down 4% y-o-y.

In November, it completed acquiring Nokia’s IC design team and intellectual property and in December announced the acquisition of Genesis Microchip. ST’s closeness to Nokia positions it well for the fiercely competitive smartphone / convergence device market.

For Q1 2008, STM expects revenues to decline sequentially (in line with traditional seasonality) between -5% and -11%. Gross margin is expected to be about 36.3%. Its stock is currently trading around $12 and the price hit a 52-week low of $11.39 on February 11. Market cap is around $11 billion.

The overall IC market is expected to be soft in the first half of 2008, but is projected to recover in the second half, and grow at between 6-12%. Europe’s share of the IC market is steadily declining in favor of Asia. ST, however, is doing a good job of divesting its lower ASP product businesses, and focusing on higher ASP products. The stock should recover in Q3.

Chart for STMicroelectronics NV (STM)

The same day, Texas Instruments Incorporated (TI) (NYSE:TXN) also reported its Q4 and 2007 financial results. Q4 revenue was $3.56 billion, up 3% y-o-y and down 3% q-o-q. The y-o-y gain is the first gain in four quarters while the sequential decline is due to expected seasonal decrease in graphic calculators. EPS was $0.54, up 20% y-o-y and 4% q-o-q.

For 2007, revenue was $13.83 billion, down 3% due to decline in revenue from RISC microprocessors, semiconductors used in cell phone applications and DLP products, which offset strong growth from high-performance analog products. EPS was $1.83, up 8%.

Segment-wise, Q4 revenue in the Semiconductor segment increased 0.4% q-o-q and 3% y-o-y to $3.475 billion due to higher demand for its DSP and analog products. Analog products revenue declined 2% sequentially due to divestiture of DSL CPE product line in Q3 while DSP products revenue increased 4% sequentially due to increased demand for products used in cell phone applications. High-performance analog was up 1% sequentially driven by power management as well as precision and high-speed data converters and amplifiers. Education Technology segment revenue was $81 million (down 60% q-o-q and up 4% y-o-y).

2007 revenue in the Semiconductor segment declined 3% to $13.309 billion and Education Technology segment grew marginally by 0.2% to $526 million.

During Q4, TI announced that Samsung would be using its OMAP applications processor and Bluetooth products in its next-generation smartphones. The smartphone component business is going to become very competitive.

For Q1 2008, TI expects total revenue to be in the range of $3.27 to $3.55 billion, EPS to be in the range of $0.43 to $0.49, Semiconductor revenue in the range of $3.20 billion to $3.46 billion, and Education Technology revenue in the range of $70 million to $90 million. Its stock is trading around $30 and price hit a 52-week low of $28.00 on January 22. Market cap is around $40 billion.

TI continues to focus on cutting edge R&D, and recently announced breakthroughs in its 45nm technology including reducing power by 63% and increasing performance by 55% compared to its 65nm process, and is sampling its first 3.5G baseband and multimedia processor using this 45nm process. TI will face stiff competition from Qualcomm and Broadcom in the smartphone component market, but the market is large enough to support multiple players. As a long term bet, TI is also an excellent company, short term stock gyrations notwithstanding.

Chart for Texas Instruments Inc. (TXN)

On February 5, ARM Holdings Plc. (Nasdaq: ARMHY) reported its Q4 and 2007 financial results. Q4 dollar revenues increased 4% sequentially to $130.3million. US GAAP reported EPS was 0.74 pence, down 15%. 2007 dollar revenue increased 6% to $514.3 million and US GAAP EPS declined 16% to 2.7 pence. Q4 gross margins were 89.4% against 89.0% in Q4 2006. 2007 gross margins were 89.6% versus 88.7% in 2006.

Segment-wise, Q4 revenue from Processor Division (PD) went up 9% y-o-y to $87.2 million, Physical IP Division (PIPD) declined 30% y-o-y to $19.5 million, Development Systems grew 10% to $15.5 million, and Services declined 2% to $8.1 million.

For 2007, revenue from PD grew 12% to $340 million, PIPD declined 13% to $86.7 million, Development Systems grew 5% to $55.6 million, and Services grew 10% to $32 million.

Total dollar license revenues in Q4 2007 decreased by 11% to $49.2 million, representing 38% of group revenues, compared to $55.5 million in Q4 2006. License revenues comprised $38.4 million for PD and $10.8 million for PIPD. Full-year dollar license revenues were $217.9 million, up 8% on 2006.

Total dollar royalty revenues in Q4 2007 were up 10% versus Q4 2006 and up 14% sequentially at $57.5 million, representing 44% of group revenues. Royalty revenues comprised $48.8 million for PD, a 15% sequential increase, and $8.7 million for PIPD (including $0.3 million of “catch-up” royalties), a 9% sequential increase. Full-year dollar royalty revenues were $208.8 million, up 5% on 2006.

Its stock is trading around $6 and price hit a 52-week low of $5.43 on February 7. Market cap is around $2.6 billion. ARM is in an excellent strategic position in the semiconductor ecosystem, its processor cores nicely perched inside the world’s most successful designs. This stock looks positively cheap to me!

Chart for ARM Holdings plc (ARMHY)

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