Texas Instruments (TXN, or TI) reported
first-quarter earnings that were down sequentially but up year over
year. More importantly, earnings beat the Zacks Consensus Estimate
of 31 cents by 4 cents or 14.3%. Investors were upbeat about TI’s
results, so shares remained buoyant during the day and appreciated
an additional 1.7% in extended trading.
Revenue
TI reported revenue of $2.89 billion, which was down 3.2%
sequentially and 7.6% year over year (slightly better than the
mid-point of the recently narrowed guidance range of $2.80 billion
to $2.91 billion).
With lead times remaining very low (they dropped to 6 weeks
going into the second half of 2012), visibility remains low.
Additionally, inventories remain lean at all customers and
particularly at distributors, which further reduced inventories
during the quarter.
Segment Revenue
TI changed the segment reporting structure in the last quarter,
with the wireless segment being dissolved and relevant portions
being included in the remaining segments.
The Analog business fell 1.3% sequentially and
2.3% year over year. TI attributed the year-over-year decline
primarily to SVA, which continues to shift to a consignment model.
HVAL and HPA also declined and were offset by increase in the power
management product line. HVAL and power management product lines
negatively impacted the sequential performance.
The Embedded Processing segment, which now
includes the processor, microcontroller and connectivity product
lines grew 2.7% sequentially and 3.9% from last year. The
year-over-year increase was driven by microcontrollers and
connectivity products supported by flattish processor sales.
Microcontrollers also increased on a sequential basis.
The Other segment, which now includes DLPs,
custom ASICs, calculators, royalties and some legacy wireless
products was down 11.5% sequentially and 24.5% year over year. All
except DLP products and royalties declined from the year-ago
quarter. Insurance proceeds received in the year-ago quarter also
made comps difficult.
The sequential decline was driven by legacy wireless, custom
ASIC and royalties as offset by increase in calculator revenue and
consistent DLP revenue. The legacy wireless products target the
volatile smartphone and tablet markets and are being phased out by
TI. Therefore they were responsible for much of the decline in
segment revenue from both the previous and year-ago quarters.
Orders
Net product orders were $2.96 billion in the last quarter, up
8.8% sequentially and down 8.6% year over year. We estimate that
backlog increased sequentially, with turns sales increasing by
around 9%. TI currently generates around 45% of its revenue from
the consignment model, which is having a positive impact on turns
sales.
Margins
TI’s gross margin of 47.6% was down 88 bps sequentially and 210
bps from the year-ago quarter. The gross margin was the net result
of weak revenue and low utilization rates. In addition,
year-over-year comps were difficult because of insurance proceeds
received in that quarter. The gross margin remains well below the
long-term target of 55%.
Operating expenses of $878 million were higher than the previous
quarter’s $855 million. The operating margin was 17.2%, down 261
bps sequentially and 142 bps from the year-ago quarter. All
expenses increased sequentially as a perentage of sales. However,
the decline from the year-ago quarter was mainly because of the
lower gross margin, as the decline in R&D more than offset the
increase in SG&A.
The Analog, Embedded Processing and Other segments generated
operating margins of 18.2% (down 690 bps sequentially), 1.2% (down
77 bps) and 13.0% (up more than 51 percentage points),
respectively.
Net Income
The pro forma net income was $398 million, or a 13.8% net income
margin compared to $417 million, or 14.0% in the previous quarter
and $400 million, or 12.8% in the year-ago quarter. The fully
diluted pro forma earnings per share were 35 cents compared to 37
cents in the previous quarter and 34 cents in the Mar quarter of
last year. The pro forma calculations for the last quarter exclude
the impact of restructuring and acquisition-related charges, as
well as discrete tax items.
On a GAAP basis, the company recorded a net profit of $362
million, or 32 cents a share compared to a net profit of $264
million, or 23 cents per share in the previous quarter and a net
profit of $265 million (23 cents per share) in the comparable
prior-year quarter.
Balance Sheet
Inventories dropped 3.2% to $1.70 billion, which resulted in
inventory turns of 3.6X, up slightly from 3.5X in the previous
quarter. Days sales outstanding (DSOs) went up from 38 to around
42. TI generated $360 million in cash from operations, spending $84
million on capex, $679 million on share repurchases and $232
million on cash dividends.
At quarter-end, TI had $4.2 billion in long-term debt and $1.5
billion in short-term debt. During the quarter, the net debt
position moved up slightly. It also had underfunded retirement
plans of $196 million.
Guidance
TI provided guidance for the second quarter and provided some
limited estimates for fiscal year 2013.
Accordingly, TI expects first quarter revenue to come in between
$2.93 billion and $3.17 billion (down 5.7% sequentially at the
mid-point), which is more or less in line with the consensus
estimate of $3.04 billion. Legacy wireless products are expected to
decline by around $60 million, or 30% sequentially. The rest of the
business is expected to be up 8.5% (in line with normal
seasonality.
The EPS for the quarter is expected to be 37 to 45 cents, below
the Zacks Consensus Estimate of 41 cents.
For 2013, TI expects R&D expenses of 1.5 billion, capex of
0.5 billion, depreciation of $0.9 billion and an annual effective
tax rate of 22%.
In Summary
Texas Instruments is prudently investing its R&D dollars
into several high-margin, high-growth areas of the analog and
embedded processing markets. This is gradually increasing its
exposure to the industrial and automotive markets, while reducing
its exposure to the volatile consumer/computing markets.
The last few years have also seen other analog companies, such
as Linear Technology (LLTC) and Maxim
Interated Products (MXIM) increasing focus on these areas.
These markets have better secular drivers (energy efficiency in
industrial and increasing electronic content in automotive). They
also generate higher margins. Therefore, this strategy along with
higher utilization rates may enable the company to move closer to
its long-term margin targets.
We therefore remain optimistic about TI’s compelling product
line, the increased differentiation in its business and lower-cost
300mm capacity that should in combination drive earnings in the
longer term.
However, while improved growth prospects are driving results for
analog peers such as Analog Devices (ADI) and
Maxim, TI is going through a transition where its declining
wireless revenue and extra capacity are likely to restrict earnings
growth. TI shares therefore carry a Zacks Rank #3 (Hold), while
most of its peers have a Zacks Rank #2 (Buy).
ANALOG DEVICES (ADI): Free Stock Analysis Report
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MAXIM INTG PDTS (MXIM): Free Stock Analysis Report
TEXAS INSTRS (TXN): Free Stock Analysis Report
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