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Weakness In Consumer Chip Markets

Posted on Wednesday, Oct 27th 2010

Chipmakers Texas Instruments (NYSE:TXN) and Atheros (NASDAQ:ATHR) in their recent earnings results reported some weakness in the semiconductor markets due to slowing consumer demand. Market research firm iSuppli has also trimmed its 2010 semiconductor revenue forecast to 32%, down from its previous outlook of 35.1%. Let’s take a closer look.
Texas Instruments’ Financials
Texas Instruments (TI), the world’s largest producer of analog chips with annual revenue of $10.43 billion and the second-largest U.S. chipmaker, reported strong third quarter results but gave a weak outlook that fell short of estimates. Third quarter revenue was $3.74 billion, up 30% y-o-y and 7% q-o-q. Net income increased 60% to $859 million or $0.71 per share from $538 million or $0.42 per share last year. Analysts estimated profit of $0.69 per share on sales of $3.7 billion. The company repurchased shares for $600 million and paid dividends of $143 million.

An area of strong focus for TI has been its analog segment, which grew 35% to $1.58 billion. It has been investing in increasing its manufacturing capacity overseas. These investments will help it decrease the cost of production and gain market share in the analog market. In the quarter, it purchased a 200-millimeter analog manufacturing facility in Aizu, Japan, and this month it began its first semiconductor manufacturing operations in China with the purchase of a facility in the high-tech region of Chengdu. It will soon begin shipments from RFAB, the world’s first 300-millimeter manufacturing facility for analog semiconductors.

Embedded Processing segment, another strong focus area for TI, grew 47% to $0.58 billion. Wireless revenue grew 11% to $767 million, including $416 million from the company’s baseband business, which is being phased out. Basebands are now 12% of total TI revenue compared with 17% last year. Revenue of $311 million from applications processors and connectivity products for smartphones was up 6% sequentially and 52% from a year ago. TI is a major supplier to Nokia and also has design wins in the iPad and the iPhone 4. We earlier saw that TI could make about $20 million from the estimated sales of 10 million iPads and 10 million iPhone 4s this year.

For the fourth quarter, TI expects revenue of $3.36 billion–$3.64 billion and EPS of $0.59–$0.67. Analysts estimate EPS of $0.63 on revenue of $3.52 billion. CEO Rich Templeton said the lower revenue reflects a combination of seasonal patterns, continued soft demand in computing and consumer markets, and slowing growth in the industrial market. It is currently trading around $21 with market cap of about $34.3 billion. It hit a 52-week high of $28.98 on October 11.

Chart forTexas Instruments Inc. (TXN)

Atheros’ Financials
Another chipmaker Atheros, with annual revenue of $542.5 million, also reported seeing weakness in certain markets. Third quarter revenue was up 58% y-o-y and 4% q-o-q to $247.1 million. Net income was $28.1 million or $0.41 per share compared to $38.6 million or $0.60 per share last year and $29.7 million or $0.41 per share last quarter. Analysts expected earnings of $0.67 on revenue of $248.4 million. The company ended the quarter with a cash balance of $475 million.

Atheros has been diversifying away from its PC original equipment manufacturer business, which accounted for 23% of total revenue in the third quarter, down from 40% last year. It recently strengthened its networking portfolio with the $72 million acquisition of Opulan, a privately held Chinese fabless semiconductor company specializing in passive optical networking and broadband access aggregation.

Atheros expects fourth quarter revenue of $220 million to $225 million and adjusted EPS of $0.48 to $0.51. Analysts were looking for adjusted earnings of $0.65 on sales of $251.1 million. The company believes there will be a sequential drop in its computing segment as demand for wireless LAN and ethernet products remains soft. The stock is trading around $30 with market cap of about $2 billion. The weakness in the market has effected Atheros’ stock badly. From a 52-week high of $43.90 on April 21, it has nosedived to a 52-week low of $22.77 on September 10.

Chart forAtheros Communications Inc. (ATHR)

Chip Market Growth Slowing

DaleFord of iSuppli reports that there are indications that semiconductor revenue growth is slowing compared to the vigorous first half. He adds

“Despite the resumption of growth in the semiconductor markets, enthusiasm is muted at best as the ghost of the recent economic downturn continues to haunt the industry. Several factors bearing witness to the wretched effects of the recession– among them stubborn unemployment, tight credit availability and the lack of recovery in the housing market – are hindering consumer spending, the largest contributing factor to the U.S. Gross Domestic Product.
Global semiconductor revenue in 2011 will reach $317.4 billion, up a modest 5.1 percent from $302.0 billion projected for this year. However, with the worst of the recession behind us, revenue will continue to climb steadily after this year. Semiconductor revenue will rise to approximately $357.4 billion in 2014.”

The going is tough for the semiconductor market, but the iSuppli report brings some hope.

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