, or TI) reported second-quarter earnings that were up
sequentially but down year over year. Earnings fell short of the
Zacks Consensus Estimate of 46 cents by 4 cents or 9.7%.
Investors clearly reacted to the GAAP numbers, which included
one-time gains of 16 cents. As a result, shares appreciated 1.95%
following the announcement.
TI reported revenue of $3.05 billion, which was up 5.6%
sequentially and down 8.6% year over year (in the middle of the
recently narrowed guidance range of $2.99 billion to $3.11
With lead times remaining very low (mostly at 6 weeks),
visibility remains low. However, distributor inventories remain
lean, so TI is largely shipping to consumption. Internal
inventories increased only slightly, which is not a concern given
the growing backlog.
TI changed the segment reporting structure in the fourth
quarter, with the wireless segment being dissolved and relevant
portions being included in the remaining segments. TI provided
pro forma numbers for historical periods to enable suitable
business grew 5.9% sequentially while declining 3.1% year over
year. TI attributed the sequential increase to a resurgent SVA
(both industrial and automotive), which the company stated was
already taking market share, ahead of plan. Both HVAL and HPA
also contributed to the sequential increase. Power management was
a dampener, as timing-related weakness at certain handset and
gaming customers offset strength in other areas.
segment, which now includes the processor, microcontroller and
connectivity product lines grew 10.2% sequentially and 6.6% from
last year. Processors were the strongest product line in the last
quarter, although microcontrollers and connectivity products also
segment, which now includes DLPs, custom ASICs, calculators,
royalties and some legacy wireless products was up 1.2%
sequentially and down 28.4% year over year. The legacy wireless
business was a drag, offsetting the growth in all other
Net product orders were $3.14 billion in the last quarter, up
6.0% sequentially and down 8.0% year over year. Backlog increased
nicely for the second straight quarter, with turns sales
increasing by over 4%. TI currently generates around 50% of its
revenue from the consignment model, which is having a positive
impact on turns sales.
TI's gross margin of 51.5% was up 390 bps sequentially and 202
bps from the year-ago quarter. Two factors are contributing to
the improving gross margins at TI. The first is the improving
leverage from its low-cost manufacturing capacity, as production
The second is the improving mix, as low-margin wireless
becomes a smaller percentage of TI's total revenue. These factors
are driving the gross margin toward the long-term target of
Operating expenses of $860 million were down 2.1%
sequentially. The operating margin was 23.3%, up 611 bps
sequentially and 186 bps from the year-ago quarter. All expenses
declined sequentially as a perentage of sales although cost of
sales declined the most, followed by R&D and then SG&A.
Cost of sales was also the main reason for the increase from last
year, since lower R&D was more than offset by higher
The Analog, Embedded Processing and Other segments generated
operating margins of 23.8% (up 564 bps sequentially), 8.7% (up
749 bps) and 63.7% (up more than 50 percentage points),
The pro forma net income was $513 million, or a 16.8% net
income margin compared to $398 million, or 13.8% in the previous
quarter and $536 million, or 16.1% in the year-ago quarter. The
fully diluted pro forma earnings per share were 42 cents compared
to 35 cents in the previous quarter and 46 cents in the Jun
quarter of last year. The pro forma calculations for the last
quarter exclude the impact of restructuring gains and
acquisition-related charges, as well as tax adjustments.
On a GAAP basis, the company recorded a net profit of $660
million, or 59 cents a share compared to a net profit of $362
million, or 32 cents per share in the previous quarter and a net
profit of $446 million (39 cents per share) in the comparable
Inventories were up 1.2% to $1.72 billion, which resulted in
inventory turns of 3.4X, down slightly from 3.6X in the previous
quarter. Days sales outstanding (DSOs) went up from 42 to around
45. TI generated $674 million in cash from operations, spending
$97 million on capex, $721 million on share repurchases and $309
million on cash dividends.
At quarter-end, TI had $4.17 billion in long-term debt and
$1.00 billion in short-term debt. During the quarter, the net
debt position moved up slightly. It also had underfunded
retirement plans of $134 million.
TI provided guidance for the third quarter and updated its
limited estimates for fiscal year 2013.
Accordingly, TI expects third quarter revenue to come in
between $3.09 billion and $3.35 billion (up 5.7% sequentially at
the mid-point), which is a shade better than the consensus
estimate of $3.20 billion. Legacy wireless products are expected
to decline by around $90 million sequentially. The rest of the
business is expected to be up 9%.
The EPS for the quarter is expected to be 49 to 57 cents, the
mid-point being slightly lower than the Zacks Consensus Estimate
of 56 cents.
For 2013, TI expects R&D expenses of 1.5 billion
(unchanged), capex of 0.5 billion (unchanged), depreciation of
$0.9 billion (unchanged) and an annual effective tax rate of 24%
(up from previous guidance of 22%).
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. In the
last quarter, TI's SVA business saw notable strength, so the
strategy is likely paying off.
The last few years have also seen other analog companies, such
Maxim Interated Products
) increasing focus on industrial and automotive markets. 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. For TI, the turnaround in the communications
infrastructure market is an added positive that should contribute
to its top and bottom lines this year.
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
However, unlike analog peers such as Microchip Technology,
), its declining wireless business is likely to be a drag on TI.
Therefore, TI shares carry a Zacks Rank #3 (Hold), while most of
its analog peers have a more favorable rank.
ANALOG DEVICES (ADI): Free Stock Analysis
LINEAR TEC CORP (LLTC): Free Stock Analysis
MAXIM INTG PDTS (MXIM): Free Stock Analysis
TEXAS INSTRS (TXN): Free Stock Analysis
To read this article on Zacks.com click here.