The chip sector can be a scary place for investors these days. It seems everywhere you look, there are reasons to worry that the tech recovery can't keep up its torrid pace. Just look at Texas Instruments (TXN ). The world's No. 3 chipmaker, behind Intel (INTL ) and Samsung, TI has generated sharply higher sales and profits this year -- so much so that it's paying profit-sharing to employees for the first time since 2000. Yet on Aug. 4, shares closed at $20.33, their lowest point in almost a year.
Richard Templeton, who took over as TI's top executive on May 1, is no stranger to the company -- or to the boom-and-bust cycles that roil the chip industry. He joined TI in sales and marketing in 1980 and took over the company's semiconductor business in 1996. In 2000, he added chief operating officer to his title, running day-to-day operations for then-CEO Tom Engibous as the industry entered its worst-ever slump.
He recently spoke with BusinessWeek Dallas Correspondent Andrew Park about TI's recent performance and the potential growth in sales and earnings he sees ahead. Here's an edited transcript of their conversation:
Q: Were you surprised to see TI shares fall so sharply following your report of strong second-quarter earnings?
A:We've got to keep our total organization focused on what we can do. TI has been doing an excellent job in terms of revenue growth and market share. Those results are showing through quite well. If you put our year-over-year revenue growth up against almost any semiconductor company that we compete with, I think you'll see that we get a very good grade.
Q: One issue that concerns Wall Street the most right now is rising inventories among large chip companies like Intel and TI. Many worry it's a sign that the tech recovery is losing steam. Is there reason to worry?
A:If you look at them on a days-of-inventory basis, our inventories are sitting at very low levels compared to many of our competitors in the semiconductor industry. We're guiding for growth in the third quarter, and you have to have product in position.
Q: You've said in the past that you expect TI's gross profit margins to exceed their prior peaks once sales return to peak levels. You had record second-quarter revenues, but the improvement in gross margins wasn't as great as many investors had hoped. Do you still believe you'll accomplish that goal?
A:That's absolutely the case. When you look at businesses like DSP [digital signal processing] and you look at businesses like high-performance analog, they've got the ability to earn very good gross margins. We certainly would like to be performing at a higher level.
Q: TI's success in analog chips often goes unnoticed. How important is the analog business to TI's future?
A:We're good at it. And it's big today, and we can make it even larger. The analog market doesn't tend to get the same visibility. Walk into any company in the world that builds an electronic product, and they're a customer for an analog chip. The faster the world goes digital, analog is going to grow even more rapidly.
Q: You've put a focus on strengthening TI's customer relationships, even sending managers through a rigorous boot camp to help them understand customer frustrations. Has that effort paid off?
A:The real measure of that happening is TI's market share. That's the purest test of what customers think. You can see why we think that's a very important thing. There's no replacement for a lot of time with customers. We hear that in the words. I know we see that in the market share.
Q: Is TI better positioned for the coming convergence of technologies than companies such as Intel?
A:Just look at the markets and the customer relationships we have. I don't think it's a secret that we're in an era where communications and digital consumer are the most important end-equipment [markets]. The chances of companies moving from an old space to a new space are limited. If you weren't working on this 10 years ago...you're coming from way behind.
Q: There's already a pitched battle brewing between TI and Qualcomm (QCOM ) for leadership in third-generation mobile-phone chips. Today, TI has a leading share in the technology that underlies three-quarters of the world's cell phones, GSM. But Qualcomm dominates the competing CDMA standard, a precursor to the technology expected to win in the future WCDMA. Can you overcome that edge?
A:We expect to have as much success as WCDMA develops as we had in GSM. What WCDMA is, it's really the follow on to GSM. It will migrate over time. There was a lot of hype about 2.5G. But if you look at what became really hot, it was camera phones, color displays, and ring tones.
Q: Another key market for you is broadband, which accounts for about 5% of your total sales. TI is working hard for wins in the emerging Voice-over-Internet-Protocol (VoIP) market, including phones that will place calls over home and office broadband connections. Why?
A:I would view voice as a killer app. VoIP has moved from being a fascination to where it's starting to becoming a more mainstream technology. Somewhere around 20% of the homes have high-speed access today in the U.S. -- and probably a little bit under that average on a global basis. We're very early in the broadband game. Broadband has got many many years of growth.