Texas Instruments Says Analog-Chip Unit Can Grow 20% (Update4)

Oct. 2 (Bloomberg) -- Texas Instruments Inc. is sticking to a prediction that demand for chips used in products such as electric saws and disposable hearing aids can more than make up for revenue lost from mobile phones.

Sales of so-called analog chips can grow as much as 20 percent a year once the semiconductor industry recovers, Chief Executive Officer Rich Templeton said this week in an interview at Texas Instruments’ headquarters in Dallas.

“I don’t think we’ve delivered on the potential of what’s fully there,” said Templeton, 50. “The exciting story about analog is the size of the opportunity.”

Templeton is trying to convince investors that Texas Instruments can return to the double-digit annual sales growth from earlier this decade, when its products were used in more than half of the world’s mobile phones. The company, the second- largest chipmaker in the U.S., told investors last year that it plans to get out of the radio-chip market and instead focus on analog semiconductors.

Analog chips convert physical inputs such as sound and touch into electrical signals, and are used in virtually all electronic devices. The worldwide market for analog products will fall to $35 billion this year from $43 billion in 2008, according to El Segundo, California-based researcher ISuppli Corp. Sales will probably climb about 14 percent to $40 billion next year, ISuppli says.

Market Growth

The challenge for Texas Instruments is to grow faster than the industry, said Srini Pajjuri, an analyst at Calyon Securities in San Francisco. The company’s revenue from analog chips fell 1.4 percent to $4.86 billion in 2008, compared with an 18 percent gain in 2006.

“They’ve outgrown the market, but only modestly,” said Pajjuri, who rates the stock “underperform.” “That’s not enough to offset the declines in wireless.”

Templeton first made his 20 percent growth prediction for the analog business in May 2008, saying that if the market grows at 10 percent a year, Texas Instruments can grow at twice that pace.

Texas Instruments fell 16 cents to $22.49 at 4 p.m. in New York Stock Exchange composite trading. The shares have advanced 45 percent this year.

Of the 35 analysts covering the company, 14 suggest buying the stock, 18 say hold and 3 say sell, according to data compiled by Bloomberg.

Stock Slump

Templeton’s decision to get out of the market for mobile- phone radio chips came after Nokia Oyj, the world’s biggest mobile-phone maker, decided in 2007 to seek other suppliers, ending an exclusive relationship with Texas Instruments. Along with the global economic slowdown, that contributed to Texas Instruments stock falling from a five-year high of $39.18 in July 2007 to as low as $13.77 in March this year.

The stocked has since rallied because the company is financially stronger than its rivals and will weather the recession better, said Michael Shinnick, a South Bend, Indiana- based fund manager at Wasatch Advisors Inc.

“Good business model, well run and good execution is probably the top reason,” said Shinnick. His firm, which manages about $6 billion, owns Texas Instruments shares. “Potential for growth is not the most important variable. It’s really about balance sheet.”

In the second quarter, analog chips made up 40 percent of Texas Instruments’ $2.46 billion in revenue, with the wireless business accounting for about 24 percent. While getting out of the market for radio chips, the company will continue to make application processors, which run software on mobile phones.

Analog Share

Texas Instruments can increase its share of the analog market -- which stands at about 13 percent -- because its sales force and product range are much larger than those of its competitors, Templeton said. The company’s biggest rivals include Norwood, Massachusetts-based Analog Devices Inc. and Milpitas, California-based Linear Technology Corp.

Texas Instruments introduces between 800 and 1,000 new analog chips a year and has a portfolio of over 30,000 products.

Unlike in the computer industry, where chips quickly are made obsolete, some analog chips have been selling for 20 years, said Gregg Lowe, who heads the company’s analog unit. Lowe said the size of his sales force means the company can serve small customers that wouldn’t be attractive to competitors.

The rising demand for chips that require very little power and run for years without new batteries will also spur growth in the analog business, Templeton said. For example, engineers could blanket bridges with sensors that monitor wear and tear, without having to install wires or batteries, he said.

“Analog is 10 years of a great growth opportunity for the company,” Templeton said. “The game is in front of us.”

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Jonathan Thaw at jthaw@bloomberg.net