June quarter results for Texas Instruments (TXN)were below consensus expectations on both the top and bottom lines. Management reduced production in the last quarter, as distributors started cutting inventories in June. Utilization rates will be cut again in the third quarter, with a corresponding negative impact on margins. The revenue guidance range of down -3% to up 6% appears very broad.

The shares have good long-term potential, but the business is increasingly correlated to macro conditions, which are highly uncertain. Consequently, we are reiterating our Hold rating on TI shares.

TI has been integrating different functionalities into single devices, encouraging customers to go for the simpler, more power efficient and smaller form factor products that could potentially lower the cost of ownership and enable adoption in the smallest of applications. For TI, this increases the dollar content per device, thus helping share gains and margin expansion.

TI is very strongly positioned to benefit from the development of the 3G buildout. The company has a win for the next generation product. Management expects this to translate back into share gains towards the end of fiscal 2009.

The management is very optimistic about the company's third generation high-performance OMAP processors, as they are already being used by all of the top five handset manufacturers.

As one of the largest semiconductor firms in the world, TI faces the challenge of maintaining enough flexibility to respond swiftly to new market opportunities. It is also becoming increasingly apparent that large original equipment manufacturers (OEM) are interested in diversifying their supplier base. This could be in conflict with the company's integrating strategy, and could be a deterrent to increasing dollar content per device.

Sejuti Banerjea contributed to the report.