TI Outlook Disappoints Again - Analyst Blog
Texas Instruments ( TXN , or TI) reported fourth-quarter earnings that were down sequentially but up year over year.
Results were helped by an improving mix of business and good cost control. The guidance was disappointing, sending shares down 1.0% in after-hours trading.
TI reported revenue of $3.03 billion, which was down 6.7% sequentially and up 1.6% year over year (at the high end of the recently narrowed guidance range of $2.92 billion to $3.04 billion).
Distributor resales dropped 3% sequentially, reflecting the decline in revenue. Internal inventories were flattish sequentially and management stated that inventories at distributors were also consistent with the third quarter. It appears that TI continues to ship largely to consumption.
The Analog, Embedded Processing and Other Segments generated 62%, 20% and 18% of quarterly revenue, respectively.
The Analog business declined 3.2% sequentially while growing 12.0% year over year. The sequential decline was broad-based across product lines, with with HPA declining the most, followed by HVAL, power management and then SVA. All product lines contributed to the year-over-year increase in analog revenue although power management products saw the strongest increase.
The Embedded Processing segment, which includes the processor, microcontroller and connectivity product lines dropped 9.6% sequentially and grew 10.6% from last year. Microcontrollers and connectivity products grew sequentially but remained below year-ago levels. Processors were flat sequentially and down year over year.
The Other segment, which includes DLPs, custom ASICs, calculators, royalties and some legacy wireless products was down 14.0% sequentially and 27.0% year over year. The sequential decline was attributable to seasonal softness n the calculator business. The legacy wireless business remained a major drag in the year-over-year comparison.
Net product orders were $2.83 billion in the last quarter, down 10.0% sequentially and up 4.1% year over year. Backlog declined sequentially, as order growth was slower than revenues. Turns sales dropped 5.5%, although they were up slightly as a percentage of revenue.
TI's gross margin of 54.2% was down 68 bps sequentially and up 565 bps from the year-ago quarter. The sequential decline was volume-related. The solid increase from the year-ago quarter was attributale to better mix (analog and embedded processing is now 82% of revenue) and higher utilization rates, especially at the more advanced 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 $807 million were down 3.1% sequentially. The operating margin was 27.5%, down 165 bps sequentially and up 770 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 30.0%, 6.8% and 15.3%, respectively. Analog and Embedded Processing margins shrank 18 bps and 564 bps on a sequential basis. The Other segment margin declined 1,228 bps due to continued decline in the legacy wireless business.
The pro forma net income was $618 million, or a 20.4% net income margin compared to $721 million, or 22.2% in the previous quarter and $417 million, or 14.0% in the year-ago quarter. The fully diluted pro forma earnings per share were 56 cents compared to 65 cents in the previous quarter and 37 cents in the Dec 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 $511 million, or 46 cents a share compared to a net profit of $629 million, or 57 cents per share in the previous quarter and a net profit of $264 million (23 cents per share) in the comparable prior-year quarter.
Inventories were flattish sequentially at around $1.73 billion, keeping inventory turns at around 3.2X. Days sales outstanding (DSOs) went down from 43 to around 36. TI generated $1.20 billion in cash from operations, spending $107 million on capex, $734 million on share repurchases and $326 million on cash dividends.
At quarter-end, TI had $4.16 billion in long-term debt and $1.00 billion in short-term debt. During the quarter, the net debt position declined $239 million. It also had net underfunded retirement plans of $86 million.
TI provided guidance for the first quarter and said that the tax rate for 2014 would be 27%.
Accordingly, TI expects first quarter revenue to come in between $2.30 billion and $3.07 billion (down 11.3% sequentially at the mid-point), well below the consensus estimate of $2.95 billion. Management stated that the decline was because of the legacy wireless business, excluding which, revenue for the first quarter would be flat sequentially and up 10% year over year.
The EPS for the quarter is expected to be 36 to 44 cents, the mid-point being 5 cents lower than the Zacks Consensus Estimate of 45 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.
The last few years have also seen other analog companies, such as Linear Technology ( LLTC ) and Maxim Interated Products ( MXIM ) 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 will likely help improve the company's profitability. For TI, the turnaround in the communications infrastructure market is an added positive that should contribute to its top and bottom lines.
While we 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, we recognize that the channel is more conservative than it has been before.
Therefore, TI shares carry a Zacks Rank #3 (Hold), similar to analog peer Intersil Corp ( ISIL ).
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