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TI braces for prolonged recession

Posted: 29 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:TI job cut? recession market? DSP?

It is understandable why Rich Templeton isn't doing press interviews. In his first full year of holding the three titles of chairman, president and CEO at Texas Instruments Inc., the analog and DSP company is setting records Templeton would rather not have to explain to reporters.

This quarter, TI's factory capacity utilization is expected to tumble to a record 33 percent from 48 percent and almost 70 percent in the fourth and third quarters of 2008, respectively. The last time TI's plant utilization levels fell to even the mid-40s was in the second half of 2001, during the height of what was then said to be the semiconductor industry's worst downturn.

At least one other unpleasant milestone looms for TI. The company's revenue is forecast to slump to a seven-year low in 2009, falling 28 percent to approximately $9 billion from $12.5 billion in 2008 and the record high of $14.2 billion in 2006. With sales tanking and margins under pressure, TI expects to post a net loss for the current quarter, which would be another unusual event for the Dallas-based company.

TI is not standing still. The company is cutting 12 percent of its workforce, about 3,400 jobs, and clamping down on expenses while redirecting resources away from support functions. This is designed to ensure enough funds are available for critical operational activities in product design, engineering and sales operations, according to an internal memo sent by Templeton to employees.

"We are choosing to do fewer things internally, such as live with lower levels of IT support and facilities upgrade so that a greater percentage of our dollars can go directly toward developing and delivering what our customers need," Templeton said. "Likewise, we are moving R&D and marketing investments into products, applications and regions that hold the greatest promise for future growth."

Banking on analog
Beyond the cost-cutting actions, TI is renewing its commitment to the analog and DSP market, which executives said they expect would power the company's future growth. As part of its current reorganization efforts, TI is likely to direct scarce resources to these two business units, according to executives.

"Where do we see revenue growth coming?" asked Ron Slaymaker, TI's VP and head of investor relations. "Certainly analog. It's going to be impacted by economic weakness given its diversity. But at the same time that growth engine is well proven and not only in terms of top line but also the contribution it can provide to our bottom line."

Analysts said TI is being more aggressive in paring down operating costs than other semiconductor companies caught in the vortex of a weakening global economy. The company's capacity utilization is seen falling to about 33 percent, not just because of dwindling demand but also because TI plans to idle plants for several weeks during the quarter.

Longer downturn
Company executives also appear to be preparing for a steeper economic downturn than some of its peer in the semiconductor market, according to Mark Lipacis, an analyst with Morgan Stanley & Co. Inc. Lipacis sees TI's operating expenses falling by as much as 30 percent "peak-to-trough" compared with a range of 6 percent to 17 percent at Xilinx, Intel and Linear Technology.

"We think TI is ahead of the [cost-cutting] curve on three dimensions," Lipacis said in a report. "It is setting a more conservative outlook, it is aggressively tackling its cost structure and it is addressing its inventories. We are modeling that TI will burn $400 million in inventories in the first quarter, which will position it to increase its utilization from 33 percent to the low-40 percent in the second quarter."

TI executives admit the company is aggressively whittling down inventories and working with component distributors to sharply reduce stocks. Current sales are largely being met through existing inventories "because visibility is pretty rough," said Kevin March, TI's chief financial officer.

The impact will initially be felt in earnings, the company said. "Earnings per share and profitability in the first quarter will be pressured by lower capacity utilization as we once again drive significant inventory reduction," March said during a conference call Jan. 26. "We are not anticipating an upturn anytime on the horizon. We think that the economy is shaping up to beas we've heard so many economists talk about recentlyprobably the worst many of us have experienced in our working life."

TI has set conservative targets for the first quarter and also appears to be prepping its operational structure to support what it assumes would be a significantly lower sales base, not just in the first half of the year but perhaps for the foreseeable future. Doug Freedman, an analyst with Broadpoint AmTech Research said TI is aiming for an operating structure that would support about $10 billion in annual sales.

The reorganization actions announced this week, Templeton said, should not be seen as "a temporary fix for a short-term recession, but as a new cost structure intended to preserve TI's health, even in the midst of an economic decline that I believe will be deep and prolonged."

- Bolaji Ojo
EE Times

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