Texas Instruments
(
TXN
) reported first quarter earnings that were down 18.4% sequentially
and 28.6% year over year. However, the Zacks Consensus Estimate
dropped 5 cents since the company announced its third quarter
results, helping the adjusted earnings to exceed the estimate by 13
cents. Shares appreciated 3.7% in after-hours trading, more than
making up for the 1.8% decline during the day.
On March 8, TI lowered earnings expectations from 20 cents to 17
cents citing weak demand for wireless products. However, management
stated in the first quarter earnings call that the first quarter
should be regarded as the bottom, with growth returning in the
second.
Revenue
TI reported revenue of $3.12 billion, which was down 8.7%
sequentially and down 8.0% year over year (in the middle of the
originally guided range of$3.02 billion to $3.28 billion and just
over the revised guidance range of $2.99 billion to $3.11 billion).
A full quarter of National's contribution and a stronger wireless
business offset weakness in other areas. The top line ultimately
came in 5.2% higher. Revenue also fell short of the Consensus
Estimate, missing by 1.9%.
Distributor inventory levels remained at the historic low of 6.5
weeks, as sell-in more or less mirrored sell-outs, according to TI.
Management mentioned that improving demand had driven internal
inventory growth and as a result, the company was ramping up
production.
End Market Backdrop
The secular drivers of the
wireless
infrastructure market are data capacity expansion in North America
and Europe and infrastructure build-outs in Asian countries such as
China and India. Additionally, broader market trends, such as
increasing data traffic and capacity expansions all over the world,
as well as an increased share of BOM at customers through its
integrated offerings should continue to drive growth in this
market.
The
industrial
market appears to be recovering faster than expected, and the
addition of National's solid product lineup should drive strong
overall results for TI this year.
Similar to trends noticed by other technology companies with
automotive
exposure, TI is seeing particular strength in this market.
Automotive products grew double-digits on a sequential basis and
were also strong when compared with the year-ago quarter. The
business is related to the broader economy, consumer buying power
as well as issues in Japan and China, where a significant
percentage of automotive semiconductors and automobile
manufacturing is done.
Computing and consumer
markets remain soft, although with the alleviation of the HDD
issue, computing markets may be expected to look up. The first
quarter is typically a slow one for the consumer market and
management said that there was limited visibility here.
Segment Revenue
The core
Analog
business, comprising the HVAL, HPA and power management product
lines declined year over year. The inclusion of revenue from the
newly acquired business (
SVA
) was therefore the main reason for the 9.8% increase in analog
revenue. Sequentially, the segment was about flat (down 0.5%), as
growth in SVA offset decline in HVAL while the other two categories
remained flat.
With catalog products -- mainly Digital Signal Processors (DSPs)
and microcontrollers (MCUs) -- and communications infrastructure
remaining weak, the
Embedded Processing
segment declined 11.3% from the year-ago quarter. The increase in
automotive revenue could not offset this negative. However, segment
revenue was up 7.0% from the previous quarter, as both auto
applications and communications infrastructure increased with
catalog products staying flat.
TI's focus in the
wireless
segment is on the proprietary OMAP and connectivity products.
Segment revenue in the last quarter was down 48.3% sequentially and
43.3% year over year.
Baseband products, which shrunk to 3% of revenue ($87 million)
was the major driver of the declines from both periods.
Connectivity products were impacted by relative weakness in
smartphones and tablets, declining from both periods.
OMAP, on the other hand, grew strongly from the year-ago
quarter, although it declined sequentially from the fourth quarter
when customers launched new products.
The Other segment was up 5.0% sequentially and down 11.4% year
over year. The decline from last year was on account of weakness in
DLP, as well as the end of transitional supply agreements,
especially the one with Spansion. The sequential increase was
solely on account of $65 million received from insurance claims
related to the disaster in Japan.
Orders
Net product orders were $3.24 billion in the last quarter, up
12.9% sequentially and down 9.5% year over year. We estimate that
backlog jumped 10% sequentially, even as turns sales imrpoved by
around 15%. This was the second straight quarter of double-digit
increases in turns sales. The level of turns seems to indicate that
customers are either less cautious, or building inventory for new
product launches -- either of which would be positive for
TI.
Margins
TI's gross margin of 49.7% benefited from the insurance claim
received. It expanded 379 bps sequentially, while declining 189 bps
from the year-ago quarter. The decline was mainly on account of low
utilization rates as factory loadings stayed at around 50%. Some of
the new designs (analog and embedded processing products) getting
into volume production should help the gross margin move up toward
the long term target of 55%.
Operating expenses of $971 million were higher than the previous
quarter's $918 million. The operating margin was 18.6%, up 19 bps
sequentially and dpwn 821 bps from the year-ago quarter. All except
cost of sales increased as a percentage of sales from both the
previous and year-ago quarters, although R&D increased the most
followed by SG&A in both periods. Cost of sales dropped
sequentially, and even the increase from last year was not as
significant.
The Analog, Embedded Processing, Wireless and Other segments
generated operating margins of 21.1% (down 337 bps sequentially),
7.6% (up 490 bps), -6.7% (down 2,221 bps) and 8.7% (up 3,950 bps),
respectively.
Net Income
The pro forma net income was $491 million, or a 15.7% net income
margin compared to $563 million, or 16.5% in the previous quarter
and $668 million, or 19.7% in the year-ago quarter. The fully
diluted pro forma earnings per share were 42 cents compared to 49
cents in the previous quarter and 56 cents in the March quarter of
last year. The pro forma calculations for the last quarter exclude
the impact of restructuring and acquisition-related charges.
On a fully diluted GAAP basis, the company recorded a net profit
of $307 million, or 26 cents a share compared to a net profit of
$298 million, or 26 cents per share in the previous quarter and a
net profit of $666 million (56 cents per share) in the comparable
prior-year quarter.
Balance Sheet
Inventories increased 3.6% to $1.85 billion, this resulted in
inventory turns of 3.4X, down from 4.2X in the previous quarter.
Days sales outstanding (DSOs) went up from 41 to around 43. TI
generated $449 million in cash from operations, spending $103
million on capex, $300 million for repayment of commercial paper
borrowings, $300 million on share repurchases and $195 million on
cash dividends. At quarter-end, TI had $4.2 billion in long-term
debt, $1.1 billion in short-term debt and net under-funded
retirement plans of $647 million.
Guidance
TI provided guidance for the second quarter and provided some
limited estimates for fiscal year 2012.
Accordingly, TI expects second quarter revenue to come in
between $3.22 billion and $3.48 billion (up 7.4% sequentially at
the mid-point). Normal seasonality is around a 5% sequential
increase, so the company certainly appears to be past the
bottom.
The EPS for the quarter is expected to be 30 to 38 cents, well
below the Zacks Consensus Estimate of 39 cents.
For 2012, TI expects R&D expenses of $2.0 billion, capex of
$0.7 billion, depreciation of $1.0 billion and an annual effective
tax rate of 28% (could change with re-instatement of federal
R&D tax credit that expired at 2011-end).
In Summary
Texas Instruments is prudently investing its R&D dollars
into several high-margin, high-growth areas of the analog, embedded
processing and wireless markets, which has led to important design
wins. The addition of National Semiconductor strengthens its
product lineup and brings on board additional capacity. Therefore,
with improving end markets, order rates have started picking up,
which should translate to attractive topline growth in the next few
quarters.
The phasing out of the low-margin baseband business also remains
on track. Revenue dropped significantly in the last quarter and is
expected to be totally wiped out by the end of 2012.
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.
Moreover, in 2011, TI has announced the closure of a couple of
6-inch facilities in Hiji, Japan and Houston, Texas, transitioning
the remaining products to more advanced facilities. Of the $215
million in charges, $112 million were taken in the fourth quarter
of 2011, with the remainder to be spread out over the next seven
quarters. The restructuring is expected to generate annual savings
of $100 million a year.
Therefore, despite near-term gross margin issues, we see the
business looking up and expect strong earnings growth this
year.
Another point to keep in mind is National's huge debt balance,
which has negatively impacted the balance sheet. A significant
portion of this debt is short-term, so there could be a near-term
impact on cash (TI could choose to cut share repurchases).
Therefore, similar to analog peers
Intersil Corp
(
ISIL
) and
Linear Technology Corp
(
LLTC
), we have a short term Hold recommendation (Zacks Rank #3) on TI
shares.
INTERSIL CORP (
ISIL
): Free Stock Analysis Report
LINEAR TEC CORP (
LLTC
): Free Stock Analysis Report
TEXAS INSTRS (
TXN
): Free Stock Analysis Report
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