This Chip Maker Is Down, but Not Out

Chip maker Texas Instruments (NAS: TXN) managed to beat analyst expectations for its first quarter, a small victory in an otherwise stale environment for the Dallas-based company. Unfortunately, slightly beating tempered expectations hasn't done much for shares, which are down roughly 4% since the company reported a drop in its top and bottom lines, attributed to weak demand for its wireless products.

Despite this, the company seems to be optimistic about the future, as it sees demand coming back across its portfolio of products. Texas Instruments gave better guidance for second-quarter earnings than what some analysts were expecting. That leads to the obvious question: What went wrong during this quarter for the company, and what makes it optimistic about the future? Time to find out.

A quick recap
The first-quarter numbers weren't anything to cheer about, as revenue declined to $3.12 billion, down by about 8% from the prior-year quarter. Charges related to the company's acquisition of National Semiconductor pulled down the company's bottom line, too, with a whopping 60% decline in net income to just $265 million.

Why did this happen?
A 43% decline in revenue for Texas Instruments' wireless-chip division in the first quarter has contributed to its poor show, but that has been prompted by the weak demand faced by some of its clients. For instance, Texas Instruments has been a supplier of chips to Nokia (NYS: NOK) for a long time. And as we all know, demand for Nokia mobile phones hasn't been great for a while now. The Finnish mobile-handset maker recently posted an operating loss for the first quarter this year, followed by a lowered outlook for the coming quarter. Texas Instruments has also been supplying chips to another laggard in the mobile-device space: Research In Motion (NAS: RIMM) . The BlackBerry maker recently reported a 25% drop in revenue for the first three months of the year.

In addition to the fall in demand for its traditional baseband wireless products, demand for the company's OMAP line of processors, which are mainly used in smartphones and tablets, has also weakened. Some analysts have said Texas Instruments may have been hurt by softening sales of Amazon's (NAS: AMZN) Kindle Fire tablets, which use OMAP processors.

A glimmer of hope
Having said all of that, there are definite signs of demand picking up. The company's first-quarter orders increased by 13% on a sequential basis. At the same time, the company is also addressing the problems with its wireless-products business by phasing out its baseband chip division altogether.

On the other hand, industry rival Qualcomm (NAS: QCOM) , the world's leading supplier of 4G baseband modems, is facing a supply shortage, which may in turn make some of its customers consider switching over to Texas Instruments.

The way ahead
Texas Instruments' order book is looking up, which could be a sign of good times ahead. The company also seems to be taking determined steps to correct a weak wireless-products division. I'd certainly be keeping an eye on Texas Instruments for now. You can do so by adding to your free watchlist.

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At the time thisarticle was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of QUALCOMM and Motley Fool newsletter services have recommended buying shares of Nokia and The Motley Fool has a disclosure policy.
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