Texas Instruments (
), a leading semiconductor manufacturer, reported its Q3 2013
earnings on October 21. At $3.24 billion, TI's revenue grew by 6%
sequentially but declined by 4% annually due to diminishing
revenues from its legacy wireless business. However, excluding
the wireless revenue, the company's top line climbed by 10%
sequentially and 3% annually and it marked its first quarter of
y-o-y growth since Q3 2012. Additionally, backed by higher factory
utilization and an improving product mix, TI reported record gross
margin of 54.8%.
Due to seasonal variations, TI anticipates its Q4 2013 revenue
to decline by around 8% (excluding wireless revenue). Despite the
weak guidance, we believe in TI's long-term growth potential. A
robust product portfolio, one of the best sales and field
application team and strong manufacturing capacity will help spur
its top line. Additionally, as the company completely exits
the comparatively lower margin wireless business and increases the
proportion of profitable analog and embedded products in its
portfolio, it can report improving gross margins going forward.
TI remains confident that its business model is
well-positioned to generate $0.20 to $0.25 of free cash flow for
every dollar of revenue that the company earns in the future. In Q3
2013, it returned $1 billion to shareholders via dividends and
We are in the process of updating
our price estimate of $36.37 for TI
, which is at an approximate 10% discount to the current market
price of $41.
our complete analysis of Texas Instruments here
Rising Proportion Of Analog & Embedded Products To
After its planned exit from the smartphone and tablet market, TI
has been focusing on transitioning its operations to become a pure
analog and embedded processing company, segments that it believes
will offer it long-term growth and less volatility, compared to the
past. It derived 80% of its revenue from these segments in Q3
2013 compared to approximately 72% a year ago.
Backed by strong growth in power management and high volume
analog and logic, TI's analog revenues grew by 11% q-o-q. Its
embedded processing revenues registered 8% q-o-q growth with
processors up the most, followed by growth in microcontrollers
and connectivity. TI's legacy wireless revenues fell by $91 million
to $57 million in Q3 2013 and now account for a mere 2% of the
company's overall revenues.
The continuous growth in communications
infrastructure, automotive and industrial segments as well a
revival in computing, game consoles and handset markets in Q3
2013 drove demand for TI's analog and embedded products in the
quarter. In the first half of 2013, communication, industrial ,
automotive, computing and consumer segments accounted for
27%, 23%, 13%, 23% and 11% of TI's revenue respectively.
TI accounts for over 15% of the analog market and it expects to
gain additional market share in 2013. With the acquisition of
National Semiconductors, a
strengthening product portfolio and growth
in high volume analog and logic segments, we believe that TI
is well-equipped to leverage increasing demand for analog
With new product launches TI continues to expand its
embedded portfolio every quarter. It believes that the
embedded markets currently valued at $19 billion offers greater
potential for sustainable growth compared to mobile devices. Last
year, TI expanded its product portfolio by almost 20%. Generating
strong cash flow and investment returns, the two divisions will
drive growth for the company.
TI Can Maintain Its Gross Margin At The Current
An improving product mix and better factory utilization
supported by a higher revenue base increased TI's gross margins by
3.3% sequentially in Q3 2013. TI's under-utilization expense
declined from $100 million in Q2 2013 to $70 million in Q3 2013.
Though the company expects its under-utilization charges to
increase in the current quarter as revenue declines, we believe
that the company will manage to retain its current gross margins in
the long run. Our belief is supported by the following factors
- Increasing factory utilization:
With an improvement in the macro environment TI can leverage its
low-cost manufacturing capacity to cater to higher market
demand. Though its excess manufacturing
capacity might be detrimental to its short term growth, we
feel it will serve as a competitive advantage to the company
in the long run. Higher demand for its products will increase TI's
factory utilization, in turn lowering its under-utilization
expense. The increasing scale of operation also gives TI a
greater control over its operational costs.
- Higher proportion of revenue from analog and embedded
As TI derives an increasing proportion of its revenue from more
diverse, more profitable and less capital intensive analog and
embedded processing products, and lower revenue from the less
profitable wireless products, we expect its gross margins to
increase marginally going forward. The cost saving incurred from
exiting the wireless business will further ease pressure off gross
- Lower depreciation in the future:
At present, depreciation is running at around 400 basis points
ahead of TI's capital expenditures. As depreciation starts
to work itself down over the next couple of years it will
boost gross margins.
Q4 2013 Outlook
- Revenue in the range of $2.86 billion to $3.10 billion.
- Legacy wireless products to decline to approximately $50
- Operating expenses to decline by 3% to 5%.
- Tax rate of 24%.
- EPS to be in the range of $0.42 to $0.50.