, or TI) shares appreciated 3.4% in extended trading yesterday
after the company reported first-quarter earnings that beat the
Zacks Consensus Estimate. Guidance also exceeded expectations on
both the top and bottom lines.
Revenue was more or less in line with expectations, with the
higher mix of analog and embedded processing products
contributing to profits. The communications equipment market was
TI's strongest, with industrial and automotive also remaining
generally strong. Personal electronics was however impacted by
softness in phones and tablets that previously used its baseband
Expenses as a percentage of sales trended higher on a
sequential basis while remaining below year-ago levels. The tax
rate was also higher.
The numbers in detail-
TI reported revenue of $2.98 billion, which was down 1.5%
sequentially and up 3.4% year over year (slightly better than the
guidance of $2.69 billion at the mid-point). Excluding the legacy
wireless business, which contributed just $8 million in the last
quarter but $210 million in the year-ago quarter, revenue was up
Distributor resales jumped 10% from last year, with both
distributor and internal inventories remaining roughly flat.
The Analog, Embedded Processing and Other Segments generated
62%, 22% and 16% of quarterly revenue, respectively.
business declined 1.7% sequentially while growing 11.5% year over
year. The solid growth from last year was broad-based across
product lines, with power management and HPA being the strongest,
followed by SVA and HVAL.
segment, which includes the processor, microcontroller and
connectivity product lines was particularly strong, growing 8.6%
sequentially and 16.9% from last year. Microcontrollers were the
strongest, with processors and connectivity thereafter.
segment, which includes DLPs, custom ASICs, calculators,
royalties and some legacy wireless products was down 11.7%
sequentially and 27.5% year over year. The decline from the
year-ago quarter was on account of legacy wireless products.
Management is not proving explanations for sequential changes
Net product orders were $3.07 billion in the last quarter, up
8.4% sequentially and 3.7% year over year. Backlog jumped 11.2%
sequentially. Turns sales increased 7.4% and were also up
strongly as a percentage of revenue.
Sequential declines in margins are on account of revenue
declines. Margins were however significantly higher than in the
year-ago quarter, because of efficiencies and cost control.
TI's gross margin of 53.9% was down 29 bps sequentially and up
625 bps from the year-ago quarter. The solid increase from the
year-ago quarter was attributale to better mix (analog and
embedded processing is now 82% of revenue) higher utilization
rates and greater production efficiency at its fabs. TI is now
very close to its long-term gross margin target of 55%. The
low-cost manufacturing capacity will continue to expand margins
as utilization rates increase.
Operating expenses of $845 million were up 4.7% sequentially.
The operating margin was 25.5%, down 197 bps sequentially and up
835 bps from the year-ago quarter. All expenses increased
sequentially as a perentage of sales. All except SG&A
declined from last year.
The Analog, Embedded Processing and Other segments generated
operating margins of 27.1%, 7.9% and 28.6%, respectively. The
Analog margin shrank 291 bps sequentially, with Embedded
Processing and Other expanding 114 bps and 1,326 bps,
respectively. Margins expanded substantially across all
The pro forma net income was $559 million, or a 18.7% net
income margin compared to $618 million, or 20.4% in the previous
quarter and $398 million, or 13.8% in the year-ago quarter.
Earnings excluding restructuring gains and acquisition charges
were 51 cents in the last quarter, compared with adjusted
earnings of 56 cents in the previous quarter and 35 cents in the
Mar quarter of last year.
On a GAAP basis, the company recorded a net profit of $487
million, or 44 cents a share compared to a net profit of $511
million, or 46 cents per share in the previous quarter and a net
profit of $362 million (32 cents per share) in the comparable
Inventories dropped 1.0% sequentially to around $1.71 billion,
keeping inventory turns at around 3.2X. Days sales outstanding
(DSOs) went up from 36 to around 41. TI generated $462 million in
cash from operations, spending $77 million on capex, $720 mllion
on share repurchases and $325 million on cash dividends. At
quarter-end, TI had $4.65 billion in long-term debt and $1.00
billion in short-term debt. During the quarter, the net debt
position increased $291 million. It also had net underfunded
retirement plans of $89 million.
TI provided guidance for the second quarter and raised the tax
rate for 2014 from 27% to 28%.
Accordingly, TI expects revenue of between $3.14 billion and
$3.40 billion (up 9.6% sequentially at the mid-point), above the
consensus estimate of $3.15 billion. Excluding the legacy
wireless business in the year-ago quarter, revenue for the
quarter would be up 13% year over year.
The EPS for the quarter is expected to be 55 to 63 cents,
above the Zacks Consensus Estimate of 52 cents.
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.
Considering the capacity TI already owns, future capex will be
focused on technology upgrades and will be limited to 4% of
sales. So volume increases will lead to higher utilization rates
and stronger gross margins.
While we remain optimistic about TI's compelling product line,
the differentiation in its business and lower-cost 300mm capacity
that should in combination drive earnings, we recognize that the
channel is more conservative than it has been before.
TI shares carry a Zacks Rank #3 (Hold), similar to analog
peers Intersil, Maxim and Linear Technology. But you could
instead consider better-ranked stocks like
), all of which have a Zacks Rank #2 (Buy).
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