Texas Instruments Earnings Results: Optimistic But No Near-Term Drivers as Sector Is Peaking

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Texas Instruments Inc. (TXN) reported first quarter earnings that were down 21% sequentially and up 3.7% year over year, missing the Zacks Consensus estimate by 2 cents, or 3.4%. The earthquake in Japan, which impacted both TI's own operations and that of its customers and a weaker-than-expected baseband revenue from a key customer -- possibly Nokia Corp (NOK) -- contributed to the weakness.

Estimates have been moving downward since the Japan quake, but this did not affect the Zacks Consensus for the March quarter and only lowered the second quarter, fiscal 2011 and fiscal 2012 estimates by a penny each.

This pulled down the TI share prices by 1.55% in after-hours trading yesterday.

Revenue

TI reported revenue of $3.39 billion, which was down 3.8% sequentially, up 5.8% year over year and at the lower end of the originally guided range of$3.27 billion to $3.55 billion (down 3.3% sequentially at the mid-point). Revenue was more or less in line with the Zacks Consensus Estimate of $3.41 billion.

TI stated that the first two months were going on track to deliver above-seasonal results in the quarter, but the disaster in Japan changed the course of business flow. Overall inventory concerns related to the computing and consumer markets that impacted results in the back half of 2011 did not persist in the first quarter.

End Market Update

TI was positive about growth prospects in the communications infrastructure market. While the last quarter saw some negative seasonality, mostly in the Americas, sales of legacy products into China were steady. Going forward, TI expects to see continued strength, driven by broader market trends, such as increasing data traffic and capacity expansions all over the world, as well as through an increased share of the bill of materials at customers through its integrated offerings.

The industrial market was robust in the last quarter, with growth trends accelerating across not only the developed markets of the Americas and Europe, but also a growing contribution from developing countries, such as China.

The automotive market, while strong in the last quarter due to steady demand and increasing electronic content, is expected to turn sluggish going forward. This is because many of the automotive semiconductors are manufactured at Japanese fabs and a significant percentage of automobile manufacturing is also carried out in the region. Although it is as yet hard to tell, the Japan crisis may be expected to impact this side of the business.

Although internal inventories grew during the quarter, distributor inventory dropped a couple of days due to the extremely strong sell through during the quarter. Around 2/3 of the internal build was attributable to strategic product buildups, while the remaining 1/3 was on account of baseband inventory accumulated as a result of weak sales.

Segment Revenue

All except the analog segment declined sequentially, although both analog and embedded processing segments were up strong double-digits from last year.

The Analog segment was up 1.2% sequentially, Embedded Processing down 0.9%, Wireless down 14.2% and Other down 5.3%. The baseband business dropped to around 10% of revenue, declining 23.0% sequentially and 21.2% from the year-ago quarter. Excluding the baseband business, the wireless segment revenue would have been down 2.7%, in line with normal seasonal trends.

All three major product lines within TI's Analog business (roughly 40-30-30 mix) - high volume analog and logic ((HVAL)), high-performance analog ((HPA)) and power management – grew from last year. The increase in HPA (used in computing and consumer devices) was the most significant, while HVAL (industrial markets) and power management saw similar growth rates. However, power management products were the strongest in the sequential comparison, with HVAL coming in flat and HPA actually seeing a small decline.

While catalog products -- mainly Digital Signal Processors (DSPs) and microcontrollers (MCUs) -- declined sequentially, the Embedded Processing segment was also impacted by slowdown in the communications infrastructure market. The automotive market was particularly strong in the last quarter. Growth of 21.1% from the year-ago quarter was however due to a higher level of business from catalog products, with both the communications infrastructure and automotive markets helping.

TI's focus in the wireless segment is on the proprietary OMAP and connectivity products. However, while OMAP grew year over year, it saw a sequential decline, which along with the decline in baseband offset the growth in connectivity products.

The decline in the baseband business, which TI is phasing out hurt both sequential and year-over-year comparisons. The bulk of the baseband revenue comes from a single customer, Nokia and TI is committed to meeting Nokia's requirements until other vendors, such as Broadcom Corp (BRCM) are able to take over. However, TI remains on track to phase out this lower-margin business by 2012.

The Other segment was down 2.3% from last year, impacted by lower royalties, partially offset by transitional supply agreements. TI benefited from its DLP and calculator business in the last quarter, which increased sequentially, although offset by weakness in royalties and custom ASIC products.

Orders

Net product orders were $3.58 billion in the last quarter, up 14.4% sequentially and down 1.6% year over year. We estimate that backlog declined 14.9% sequentially, despite the 19.1% increase in turns. First quarter pickup in orders is in line with seasonal trends. Of course the higher turns are encouraging and seem to validate what TI said about improving demand. In this context, the additional capacity should be most welcome.

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