Texas Instruments (
), a leading semiconductor manufacturer, will report its Q3
2013 earnings on October 21. Backed by a strong order book, the
company narrowed its revenue outlook to $3.15 - $3.29
billion compared to its initial estimate of $3.09 - $3.35
billion last month.
TI reported a 6% sequential growth in revenues and marked
its second consecutive quarter of growing order rate in Q2
2013, on account of increasing strength in its core business
of analog and embedded processors. It witnessed strong order growth
in Q3 as well, backed by robust demand from automotive and
industrial products, which was partially offset by the decline in
the PC market.
TI anticipates a $90 million sequential decline from its legacy
wireless business and expects them to phase out by the end of 2013.
Though we estimate revenues to be more or less flat this year,
we believe that a robust product portfolio, one of the best
sales and field application team and strong manufacturing capacity
will help spur TI's top line in the future. 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.
our complete analysis of Texas Instruments here
Strong Growth In Industrial & Automotive Markets To
Drive Demand For Analog & Embedded Products
Though TI claims that growth is returning to the handset,
game-console and notebook markets, strong demand
for automotive and industrial products and ongoing recovery in
the communications infrastructure market are the main factors
driving its business. TI ships a broad range of analog and embedded
products for the industrial, automotive and communications
infrastructure markets, which contribute 17%, 11% and 31% to the
company's overall revenues, respectively.
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 registered a 6% and 10% sequential rise in its analog and
embedded processor revenues in Q2 2013, respectively, and we expect
the growth momentum to continue in Q3 2013.
TI now derives 78% of its revenue from these segments compared
to approximately 72% a year ago. The company remains focused on
building a diverse analog and embedded processing business across
customers and markets. With an expanding product portfolio combined
with an industry leading sales force, TI has managed to
consistently gain market share in the analog and embedded divisions
in the last few years.
Improving Gross Margins
The declining revenue base combined with additional
manufacturing capacity acquired in the last few years
increased TI's under-utilization charges, which in turn put
pressure on margins. TI's gross margins declined from 53.6% in 2010
to 49.7% in 2012. A lower revenue base contributed to a 10% annual
decline in gross profits in Q1 2013 as well. However, higher
revenues combined with an improving product mix increased TI's
factory utilization which in turn contributed to a significant
improvement in gross margins in Q2 2013 (51.5%).
Below are a few reasons that support our belief that gross
margins will continue improving over our review period -
- 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.
- Exiting the wireless business:
As TI derives an increasing proportion of its revenue
from high-quality 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 margins.
- Saving from the closure of two factories:
At the start of 2012, TI announced its decision to close down two
old factories in Japan and Texas by the second half of 2013. The
move will lower its expenses, easing pressure off margins.
We will update
our price estimate of $36.37 for TI
after its Q3 2013 earnings release.