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Texas Instruments: Closing, Not Selling OMAP

 November 15, 2012 12:53 PM

(By Mani) Chip maker Texas Instruments, Inc. (NASDAQ:TXN) announced cost reduction actions that would yield $450 million in annualized savings by the end of 2013. While some kind of restructuring in the OMAP business was expected, the magnitude of the planned cuts at 1,700 jobs is larger than expected.

The Dallas, Texas-based company announced that it would reduce costs related to its previously communicated plan to reduce exposure to wireless in favor of growth in the broader embedded marketplace.

However, some investors will be disappointed that a buyer for the smartphone/tablet business did not emerge as hoped. Israeli financial newspaper Calcalist reported that Amazon.com, Inc. (NASDAQ:AMZN) is in advanced talks to buy the mobile chip business of Texas Instruments in a deal worth probably "billions of dollars."

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However, Amazon may not be interested in acquiring the OMAP business as it doesn't fit with its current business model. Texas Instruments' smart multicore OMAP processors provide a scalable, high-performance ultralow power platform from smartphones to tablets, and e-readers to enterprise and industrial applications.

If Amazon wants to have its own chipset then the easier and cheaper alternative would be getting an ARM architecture license and hire an application processing team since Texas Instruments does not have an architectural license to customize the chipset design to the likes of Apple, Inc. (NASDAQ: AAPL), Samsung, Qualcomm, Inc. (NASDAQ: QCOM) and Nvidia, Inc. (NASDAQ: NVDA).

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In September, Texas Instruments said it would wind down operations in smartphone and tablet oriented OMAP chips and instead focus on embedded platforms, thereby putting a question mark on the latest OMAP 5 chips.

The OMAP 5 platform includes applications processors with supporting wireless connectivity, power management, battery management and audio management devices for next-generation smartphones, tablets, and other mobile devices. Texas' OMAP processors are used in Amazon's Kindle Fire tablet.

Texas Instruments will now focus its OMAP processors and wireless connectivity solutions on embedded applications with long life cycles, instead of its usual focus on the mobile market where customers increasingly make their own chips.

Meanwhile, Texas Instruments has stated they do not want to sell the embedded design team that accounts for about one-third of present R&D spending, making selling a design team for tablet and smartphone more difficult.

The company outlined the expected costs related to its latest OMAP effort on Wednesday. The total one-time charges are expected to be about $325 million, with the majority of the impact in the fourth quarter.

Moreover, the 1,700 trim in headcount equates to 5 percent of the workforce, however, the operating expense savings are anticipated to be 13 percent, suggesting that reduction in workforce targets a business segment that has very high operational costs as they work on expensive process technologies.

"With this announcement we believe TXN will move quickly to disengage from the tablet and smartphone applications processor market (~90% of current OMAP revs) and therefore anticipate a faster than expected year-over-year decline in CY13 OMAP revs," Deutsche Bank analyst Ross Seymore said in a client note.

Last month, the company reported a drop in quarterly revenues. Analog revenue jumped 18 percent. However, revenue at Embedded Processing and Wireless dropped 4 percent and 44 percent, respectively.

Recently, research firm IHS iSuppli downgraded the outlook for the semiconductor market chip revenue, saying weakening economic conditions are causing reduced demand for PCs and related electronic components. The firm expects global semiconductor revenue to contract by 0.1 percent, compared to an earlier forecast that called for marginal growth of less than 3 percent. This would be the first time revenue in the semiconductor market has contracted since 2009.



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