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No. of Recommendations: 10
All,

My latest ranker for TXN, Texas Instruments, the DSP
(embedded processors and other analog devices and
ASIC's) king. I ranked them late last year and mid
last year as well. Overall, I have liked TI for
focusing on the embedded chips that run all the
handheld and other devices that are becoming 
ubiquitous in our everyday lives. I.e. everyday you
use devices that use TI chips, they're everywhere and
this I know as an engineer at a DSP and ASIC's
company/competitor in the tech sales and applications
area. They're very tough technically and in terms of
mindshare.

Competitors are Analog Devices (ADI) with their ASIC's
and Sharc DSP, Motorola (MOT) home of the top end
Starcore DSP (w/ Lucent), and LSI Logic a major 
ASIC's player and owner of the ZSP DSP core and a 
licensee of the popular Oak (DSP Group) and Carmel
(Infineon) DSP cores as well tho they dont push them.
Infineon (IFX) or ST MicroElectronics (STM), both of 
Europe might be better third competitors but financial
statements are tough to get that follow GAAP and IFX
at least lost money in the most recently found report,
so LSI seemed a stronger competitor.

That said they scored a 44 up from mid last years 42.
So, the directioin is good. Here's the ranker and 
other comments follow it.

--------------------------------------------------

Financial AnalysiCompany Being Evaluated                        Competitor #1   Competitor #2  Competitor #3

                 Texas Instruments (TXN)                             MOT             ADI         LSI Logic
                 Current Period Year-ago PeriodYear-over-Year  Current Period  Current Period Current Period
                     4/21/00        4/21/99       Growth           4/1/00          2/1/00         3/31/00
Income Statement . . .
  Sales                   2,653          2,039     30.1%                 8,768            490            615
  Cost of Goods S         1,370          1,127     21.6%                 5,200            225            365
  Net Income                426            233     82.8%                   448             93             86
  Shares Outstand   819,415,000    813,926,025     0.7%

Balance Sheet . . .
  Cash & Equivale         2,430          2,209     10.0%                 3,872            894            868
  Current Assets          5,974          4,968     20.2%                18,659          1,559          1,662
  Short-term Debt           385            260     48.1%                 3,703             99              2
  Current Liabili         2,518          2,043     23.3%                13,390            565            441
  Long-term Debt            991            989     0.2%                  3,086             13            980
                                                                              1              1              1Competitors
Margins & Ratios . . .
  Gross Margins            48.4%          44.7%     3.6                   40.7%          54.1%          40.7%      45.1%
  Net Margins              16.1%          11.4%     4.6                    5.1%          19.0%          14.0%      12.7%
  Cash-to-Debt              1.77           1.77    -0.1%                   0.57           7.97           0.88       0.71
  Net Cash                1054.0          960.0    9.8%                 -2917.0          781.8         -113.8     -749.7
  Fool Flow Ratio           1.66           1.55    7.4%                    1.53           1.43           1.81       1.59


                  Continue Here

Ranking Rule Makers

1) Brand          Points (0-1)                                3) Financial Dire Points (0-3)
Familiarity                    1                              Sales Growth                   3
Openness                       1                              Gross Margins                  3
Optimism                       1                              Net Margins                    3
Legitimacy                     1                              Shares Outstandin              2
Inevitability                  1                              Cash-to-Debt                   1
Solitariness                   1                              Fool Flow Ratio                0
Humor                          1                              Expansion Potenti              3
  Subtotal                     7                                Subtotal                    15

2) Financial Loca Points (0-2)                                4) Monopoly Statu Points (0-4)
Mass Market Habit              2                              Gross Margins                  2
Gross Margins                  1                              Net Margins                    2
Net Margins                    2                              Net Cash                       4
Cash-to-Debt                   2                              Fool Flow Ratio                0
Fool Flow Ratio                0                              Convenience                    4
Your Interest                  2                                Subtotal                    12
  Subtotal                     9
                                                              5) Your  Enjoymen              1

                   Total Score               44 Second Tier
------------------------------------------------

TI have done a lot recently to bring their brand to the
people via TV and other ads that link TI to the
products and goods you use and/or see everyday.

That said they lose (easily) 4 points because their
flow ratio went up! Arrgh. This happened for two main
reasons. First, they upped a debt (ST) that had been
consistently dropping. They did initiate a lot of fab
upgrades so perhaps that's it, but, still disappointing
that with cash rising they still opted for debt and its
drag on profits. Secondly, they let AR increase with
sales (almost). That cant help. They are the dominant
supplier and shouldnt have to wait for anyone except
perhaps RM port member Nokia who uses TI C54x's in 
just about all their handsets (eg).  

They also lose 2 more points because of that increase
in debt. So, they are within reach of 50 and better
net margins, but, they have to be stricter about debt.
And accounts receivable. OTherwise it was a fairly
conservative report.

So I will keep watching and hope this rise in debt and
flowie is like falling off a diet rather than binging
long term.

Comments welcome, cheers,

jgc

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Geoff,

Great analysis!

I think I read somewhere that Intel was moving into the market of embedded chips as well. Might have been in a less than reliable post somewhere on the INTC board. Do you know if thats true. Would Intel be a significant threat to TXN?

-Mark
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No. of Recommendations: 5
Mark,

Intel last year bought a company called DSP Corp. They make custom DSP's which brings up a point I can clarify here (first at least).

There are two basic types of DSP:

1. general programmable: TI and others make these and they are what are in wireless handsets etc. They are generic embedded computers that are typically programmed in C or Assembly. They serve a variety of functions.

2. Custom: these are also typically programmable but have significantly reduced instruction sets and are additionally hardware designed for specific functions that occur in the application they were designed to serve (eg audio). Note that #1 can usually do the function of #2, but not vice versa.

So, why #2 at all. Well two reasons, often you want the simplest, cheapest, lowest power chip you can get to do a job. #2 fits this bill more often than #1 in terms of cost and power dissipation (consumption). Cost is obvious and the more power something dissipates the more energy it requires (read: batteries it eats).

There are also ASIC's Application Specific Integrated Circuits. These are effectively hardwired (may have very small fixed program running) circuits that do very specific tasks. They are even cheaper and typically lower power, not to mention faster, than #1 and #2. Why not ASIC's?? Well, you lose upgrade flexibility and programmability and other useful features for a company planning on future products.

Each has it's own area and region of usefulness and typically complex systems are combinations of these three types of chips.

So, back to Intel. DSP Corp is a big maker of #2 style chips, they dont have a #1 that I know of. They also do many different telecom oriented designs for ASIC's which would include CDMA chipsets (wyhich are a combo of #2 and ASIC's run by a #1 and/or an ARM Microcontroller when someone puts it all together in a product).

Hence, I dont see Intel really competing with TXN very soon. More likely they will both be supplying many similar folks, each from their own area. Tho you cant count Intel out, they are not up to anywhere near the level of TXN and the others yet in that area and it's a very competitive area. More so than many folks think. For example, the japanese are major players with Toshiba and NEC in the #2 and ASIC's area as are many others. IMO, it's awhile before Intel is a major threat to TI in #1 or #2.

cheers,

jgc
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Geoff,

I'm having trouble with the Net Cash part of the TXN analysis. The current definition for Net Cash monopoly status as defined in the RM Ranker (i.e., 5x=0, 2x=2) does not work well when the competitor average Net Cash is negative as is the case with TXN.

Although one competitor (MOT) has significant negative Net Cash which pulls the competitor average way down, another competitor (ADI) has a better relative cash position than TXN when you consider it is 1/4 the size and has a far higher Cash-to-Debt ratio.

In this scenario, TXN Net Cash looks OK but it does not appear to rate a 4 in monoploy status. Any thoughts on Net Cash in general and TXN specifically?

BTW, thanks for the great summarization of the DSP market.
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In this scenario, TXN Net Cash looks OK but it does not appear to rate a 4 in monoploy status. Any thoughts on Net Cash in general and TXN specifically?

I agree in general. Here are some thoughts on why I use them.

1. for DSP in hot items like handsets TXN is in the #1 and #3 handset makers (Nokia and Ericsson) but MOT is the #2 seller using their own co-developed chips so they do belong there.

2. Now MOT is terrible at cash management and they are a major competitor so I didnt feel rigth leaving them out.

3. ADI has great financials but a much lower market presence in sales and in reputation. They are good, but, not as visible as TXN. IMO the good financials will allow them to do well but they arent as serious a competitor in sales. Hence, when they "cancel" (MOT and ADI) on a ranker I dont feel too bad.

4. A ranker is about an industry of competitors not just one. I figure they'd lose a couple of points to if MOT werent included but they'd also gain a couple of another competitor like Infineon (IFX) or STM were used due to their "very average" financials. Bottom line is you're right, but, also compared to the industry average TXN does pretty well, so perhaps they do deserve those points. I guess it's a judgement call.

My overall opinion. ADI is financially, and to an extent technologically, as well as mgmt execution-wise the only serious threat to TXN, but, they are also very very small and lots of cash still helps you in that battle if you're TXN as you have more to invest in the technologies that will break the competitors back. So, overall I suspect the ranker while not perfect is doing OK here, but, it does pay to keep an eye on it and as I noted in my analysis I am not happy with TXN's recent direction in terms of debt and will have to keep a close eye on that. So, while they get a few "free" points this time perhaps it will cost them next time.

Sorry to not have a more definitive answer. cheers,

jgc

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Geoff,

Agree with you wholeheartedly on all points. My remaining question is more of a nit about the RM Ranker spreadsheet than your analysis:

The formula built into the RM Ranker Spreadsheet for Monopoly Status Net Cash returns a 0 when the Competitors' Average Net Cash is < 0 even though the company being analyzed may have a substantial cash position just short of "No Debt".

Two Questions:

1. Did you override the formula and use your judgement to give TXN a 4 or is there something wrong with my calculations?

2. In this type of situation, is there a better ratio to use (e.g., "No Debt" = 4, Cash-to-Debt > 10 = 2, etc.)?

Again, thanks for even more detail on the DSP business - it really helps to get firm grip on the company, competitors, and industry.
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Two Questions:

1. Did you override the formula and use your judgement to give TXN a 4 or is there something wrong with my calculations?

2. In this type of situation, is there a better ratio to use (e.g., "No Debt" = 4, Cash-to-Debt > 10 = 2, etc.)?



sditto,

I took a look at the Monopoly Status Net Cash formula, and I must admit it is on the confusing side. In any event, if you plug in the numbers from geoffchase's TXN spreadsheet, it will yield a score of 4 in this field without any user modification. This is because the logic for the cell is as follows:

1) It first checks to make sure that information exists in the Cash/Debt and Net Cash fields for both the target company (current time period) and the average of the competitors. If any of the data is missing, then a blank will be displayed in this field.

2) Next, it checks the Net Cash fields for both the target company and for the average of the competitors. If they are both positive, then it simply does a ratio of the two values to determine the point scoring (a value of 5 or greater gets 4 points, a value of greater than 2 gets 2 points, and anything below 2 gets 0 points). In our case, the average competitor value was negative, so it fails this test and continues on to condition #3.

3) At this point, at least one of two net cash values are negative. Now, the formula begins comparing the cash/debt ratios of the target company and the average competitor. If the cash/debt ratio value for the target company is equal to "No Debt!" (meaning the company has zero debt), then the target company is awarded 4 points. If the cash/debt ratio for the competitors is "No Debt!", then the target company is awarded zero points. In our case, both TXN and the average competitor have cash/debt ratios that are numeric, so it fails these tests and continues on to condition #4.

4) At this point, both the target company and the average competitors have debt, and at least one of them has a negative value for net cash. Now, the formula then compares the cash/debt ratio of the target company and the average competitor. If our target company's ratio is at least 1.25 times that of the average competitor, then they are awarded four points. If our target company's ratio is greater than that of the average competitor, then they are awarded two points. Otherwise, they get no points. In our specific case, the cash/debt ratio of TXN is 1.77, which is more than 1.25 times the average competitor's value of 0.71 -- therefore, TXN gets four points.

Hope this explanation helps answer your question.

the LanceMan
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Lance,

Thanks for the detailed reply - it answered most of my questions and generated some others.

After some more review I realized the reason our results were different is because I modifed the spreadsheet a while back to reflect a different way of calulating the Competitions' Average.

The formula used by the ranker calculates the average Cash-to-Debt by adding up the cash and debts for each company and then dividing the sums to calculate the ratio. This approach "weights" each of the numbers so a company with a very low result will drag down the average of all companies as MOT did in this example bringing the average down to .71 despite a 7.97 result for ADI.

The formula, as modifed by me, simply calculates the average of the ratios. This eliinates the weighting and results in an average of 3.15 which is why my result for Monopoly Status Net Cash was 0.

My original rational (apparently long since forgotten) was that if you are going to award monopoly status the hurdle should be high. This example is a good case in point since it's hard for me to say MOT has a monopoly when ADI trounces its Cash-to-Debt ratio.

Ultimately, Geoff is right - this boils down to making judgement calls. However, it also shows that depending on how you choose to calculate a formula or interpret the results can create a big swing in the score. Particularly when the monopoly status points are themselves weighted so heavily (only criteria rated on a 0-4 scale) it's really important to make sure you agree with the judgement applied and realize these score are an inexact science.
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Nice analysis! Just a quick comment:
the DSP (embedded processors and other analog devices and ASIC's) king.

TI is the world's leader in DSP's and Analog. One of the main reasons that they lead in these two areas is that they have the widest selection of process technologies in the industry. This allows them great flexibility. They can optimize DSP's and Analog circuits separately or they can integrate them together, ie, they integrate analog and digital circuits together when it makes economic sense, but they are not forced to do so as a general rule. Many of their competitors are forced to make this integration due to lack of multiple optimized processes. My point is that they are NOT primarily known for 'embedded' circuits, even though they can and do make embedded circuits as required. Most of their business in analog is in stand-alone circuits that work with, but are not embedded into, their DSP's. However, it is very common for them to embed microcontrollers (which are digital) into their DSP's.

-rkm
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Just a slight point of clarification:

Intel last year bought a company called DSP Corp. They make custom DSP's

Neither Intel nor DSP Group make their own DSP's. DSP Group buys DSP's and programs them and resells them. They buy from whoever gives them the best price (and whoever will sell to them).

I'm not sure what Intel is planning to do, but at this time, I am certain they do not make any DSP chips. To get into that business would require a huge investment and many years of time. TI started developing their DSP around 1979. Playing catch-up in the DSP market is very very difficult, if not impossible. By the time they could get develop a DSP chip that worked, TI could easily have achieved an unassailable lead.

-rkm

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rkm,

Just a few comments. I'd agree TI doesnt usually integrate their analog and DSP gear tho they could and IMO should. Their dominance really comes from offering a product line that allows someone to put together a complete solution. That and all the application notes to allow them to see it done (at least generically so they know it's out there).

They should do this IMO as system on chip applications and the licensing of IP become a bigger part of everyones technology. I work for a TI competitor in this area and it's one of our (few) advantages in that we allow customers to integrate ASICS and analog with our DSP IP for System on Chip (SoC) integrated silicon solutions.

As for the other note. A final note of clarification. I guess it was DSP Comm. Corp that Intel bought which, I thought I had mentioned it, primarily licenses chip designs (CDMA is their biggest seller). Dont know what Intel will do with them.

And in this area names are too much of a pain. Everyone is DSPsomething. The company, DSP Group, who you referenced is different again. They actually do design their own DSP's, tho not much of note recently. Their main products are called Oak, Teak, and the Palm DSP is their IP as well. What a pain to keep straight.

cheers,

jgc
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As for the other note. A final note of clarification. I guess it was DSP Comm. Corp that Intel bought which, I thought I had mentioned it, primarily licenses chip designs (CDMA is their biggest seller). Dont know what Intel will do with them.

Yes, you are correct. I miswrote DSP Group. I was referring to DSP Comm. DSP Comm does not make DSP chips. They just program them.

TI doesnt usually integrate their analog and DSP gear tho they could and IMO should. Their dominance really comes from offering a product line that allows someone to put together a complete solution. That and all the application notes to allow them to see it done (at least generically so they know it's out there).

You are right that TI offers a more complete solution than many of its competitors, but what I was trying to point out is that another key advantage that TI has is that they provide a price break to the bigger custom manufacturers, because they DON'T necessarily integrate analog with digital unless it makes sense. You see, it almost always costs more (for equal performance) to integrate analog with digital than to leave the two chips separate. TI's competitors don't have the choice to leave the two chips separate, because all they have is a digital CMOS process to design with. This puts them at a distinct disadvantage from a cost perspective. At TI they use the best process for the job. They use a highly refined and focused analog CMOS process to do their precision convertors, op-amps, voice codecs, RF codecs, etc. Then they use a specially optimized analog BiCMOS process for voltage regulators, voltage references, high power amplifiers, power monitoring and control, etc. Lastly, they use a high performance digital CMOS process for their DSPs. This process is easy to migrate from node to node to take advantage of improvements in lithography. These same characteristics make this process extremely good for DSPs but not so good for analog. This focused processe approach allows TI to offer drastically lower prices for all of these functions to TI's customers.

TI also has quite a bit of business doing highly integrated chips, but this is not the area that generates the big profits at TI. You see, most of the time the bottom line to the customer is cost. The customer could care less if it is done with one chip or two.

One other point. When you design a mixed mode chip (ie, put analog circuits on a DSP), you effectively freeze that chip at the current technology node. In order to take advantage of the rapidly decreasing lithographies, you have to redesign the analog circuits every time you move down a node. Then you run into the problem that analog circuits need higher voltages than digital circuits, so you have to make compromises. This is VERY expensive. And, if you stay at the current node, in six months or so your chip is no longer competitive.

-rkm
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sditto writes:

The formula used by the ranker calculates the average Cash-to-Debt by adding up the cash and debts for each company and then dividing the sums to calculate the ratio. This approach "weights" each of the numbers so a company with a very low result will drag down the average of all companies as MOT did in this example bringing the average down to .71 despite a 7.97 result for ADI.


Hey all,

The cash-to-debt logic in the Monopoly Status section of the Ranker was *definitely* a challenge to sort out when I put the thing together last year! Lance did a terrific job (in post 6279) of explaining how the spreadsheet arrives at the correct point total. Here's a little additional explanation from the "criteria" page of the Excel 95 Ranker:
Net Cash Logic
Compared to the competition, Net Cash (measured as Cash minus Debt) is:
4 points: 5x more cash than competition
2 points: 2x more cash than competition
0 points: less than 2x more cash than competition
If any of the companies have negative Net Cash, but none have no debt, then:
4 points: Cash-to-Debt is 25% higher than competition
2 points: Cash-to-Debt is higher but not by 25%
0 points: Cash-to-Debt is lower than competition
Finally, the last possibilities are:
4 points: Company has no debt, while competition has negative net cash
0 points: Company has negative net cash, while competition has no debt

But on to the meat of this post... When I built the Ranker, I intentionally "weighted" the cash and debt quantities when arriving at the average cash-to-debt ratio for the competition. The reason I chose the weighted method is because, IMO, monopoly power belongs to the company with the largest war chest of cash less debt. By averaging all of the competitors' cash and debt components, we get a better idea of the total war chest power of the competition as a whole. In contrast, by averaging the individual cash-to-debt ratios, we would be blind to the potentially enormous cash savings or debt load of a major competitor. Of course, arguments can be made for both methods -- and sditto makes a good argument -- but I just wanted to voice that I had indeed considered both methods, and purposely chose the weighted version.

Best,
Matt
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Hi,Geof,
Thanks for your work on TXN back in April, 2000(post# 6255). I was particularly interested in your list of 3 of TXN's competitors : MOT, ADI, LSI.

I have been looking for competitors for days now, and it was good to see them in your post. How and where did you find them? I have read a lot on the TXN web site, but have only learned that there are competitors..but not who they are.

I am looking to own this company. Its long term prospects look very good to me. Their market share in DSP and analog devices is impressive, but that they are making the chips that are going into more and more products seems like an even better reason to get involved with them. However, I am concerned about their lack of free cash flow as of 9 months ended 9/30/00.

Operating cash flow $1,530
Capital expenditures $1,789
Free cash flow $ (259)

I was unable to find out just what they are spending this money on, but I suspect that it is on expanding their capacity to build DSP's and the like. Have you heard any news about these expenditures?

In the 1999 10-K, Thomas Engibous forecasted that TI would increase mfg. capacity to $2.0 billion in 2000, so the 1.8 above seems about right on target. I just would like to know more about the capex than the CEO's remarks. Any ideas? The quote below is from Mr. Engibous.(http://www.ti.com/corp/docs/investor/ar99/p02.htm)

TI also made substantial investments in manufacturing capacity during 1999. We increased our capital spending budget twice during the year - to a total of $1.4 billion - to focus on technology and capacity for TI's core areas of DSP and analog. In 2000, our capital expenditures are forecasted to be $2.0 billion. Research and Development is expected to be $1.5 billion versus $1.3 billion pro forma in 1999, primarily for DSP and analog. This year we will equip our newest fabrication facility in Dallas (known as DMOS 6) with advanced 300-millimeter equipment with production expected to begin in the second half of 2001. The completion of DMOS 6 and other technology upgrades will help to ensure that we have capacity in place to meet the expected demand for our chips, while providing greater efficiencies in production that should reach our bottom line.

Frank Dwelley..
waiting for the next quarter numbers on TXN



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I was unable to find out just what they are spending this money on, but I suspect that it is on expanding their capacity to build DSP's and the like. Have you heard any news about these expenditures?

You may want to ask on the TXN board whihc is pretty knowledgeable but I'd guess one other sink of money is acquisitions (e.g. Burr Brown).

BTW TXN was down a mere 1.9% in 2000 which is good going considering the carnage in the tech area this year.

DD (long TXN for close to 2 years now)
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