Taking the Pulse at Texas Instruments

CEO Templeton discusses the company's desire to capture even more of the analog chip market and hints at future involvement in advanced medical devices

The future's looking pretty good at chipmaker Texas Instruments. As the main chip supplier to the makers of cell phones, it has enjoyed steadily growing sales in recent years, from $12.6 billion in 2004 to $14.3 billion last year, while profits have zipped along from $1.8 billion to more than $4 billion over the same period.

While its supply contracts with mobile-phone manufacturers including Nokia (NOK) and Motorola (MOT) grab all the headlines, the bulk of Texas Instruments' business comes from chips that are nowhere near as attention-getting. Accounting for about 40% of the company's sales in 2006 are its so-called analog chips. Analog chips measure "real world" inputs—from the temperature in a room or the sound of a voice to the touch of a button—so they can be converted into a digital signal that a computer or other device can understand. Texas Instruments (TXN) is easily the world's biggest supplier of these analog chips.

They may not sound as advanced as the newest Intel (INTC) microprocessor, and in many cases they aren't built on the latest semiconductor technology, but as long as human beings use gadgets of practically any stripe—cell phones, camcorders, PCs—there will be a need for analog chips like those that Texas Instruments makes.

On May 14, Texas Instruments Chief Executive Richard Templeton sat down with BusinessWeek Senior Editor Dan Beucke and Senior Technology Writer Arik Hesseldahl to talk about the state of the company's many businesses, from the analog operation, to its Digital Signal Processor (DSP) chips that are widely used in wireless phones, to opportunities with medical devices.

How are the profit margins on analog chips?
The profit margins, depending on which part of the analog market you're in, are very good. And they [analog chips] use older [manufacturing] technology, so they generate very good cash flow. There is some leading-edge technology as well, but they tend to be a great business model. So analog tends to be a great business, but overlooked.

Intel has been talking lately about introducing either a new chip design or a new manufacturing technology every year. It sounds as though with analog it's a different story.
To put it in perspective, we've got some analog parts that are 25 years old. We've got some DSP parts that are more than 20 years old. But the newest ones, say the DSPs that go into the new Voice-over-Internet-Protocol (VoIP) base stations and gateways, they're ramping at, the latest, 65 nanometers, and a family that will follow at 45 nanometers. So we'll bring the latest and greatest out, but what's different is the older ones tend to stick around for a very long time. In the wireless phone business we'll have some products that turn over almost as fast as Intel's microprocessors.

One company that has buzz right now is Apple, and its forthcoming iPhone device. Since you're so active in the wireless handset business, what's your impression of the device and how it may shake things up?
First, I think it's great when we have customers in a market where people invest in research and development, who innovate and grow. And I put that up there in contrast with the PC industry. PC companies invest what amount of their revenue in R&D?

The biggest ones, not very much.
The fact is, if it's a point or a point and a half, that's very little. And so when people sit back and ask why there isn't anything new, it ought to be an obvious answer. The PC companies aren't investing. When I say I think it's wonderful that there are companies like Apple (AAPL) investing in R&D, improving the user interface, new features, [and] companies like Nokia, Ericsson, Motorola all working on R&D, that's all good stuff because when those people are doing that, it's going to lead to new ideas and growth. And the last time I checked, chip companies can't grow if the people they sell to are not growing accordingly.