Texas Instruments Inc. (TXN: 24.61 -0.94 -3.68%) reported second quarter earnings that were up 20.1% sequentially and 159.9% year over year, beating the Zacks Consensus estimate by 2 cents. The strong earnings growth was driven by healthy revenues (although just short of our estimate), a better mix of business, cost control and good execution.Despite the relatively strong performance, shares tumbled 5.28% after hours on concerns regarding the slowing of demand due to much weaker order growth.
The company has been reporting very strong revenue growth over the past three quarters, indicative of share gains at the expense of its analog peers, particularlyNational Semiconductor Corp (NSM: 14.21 -0.18 -1.25%) and also, possiblyAnalog Devices, Inc. (ADI: 29.69 -0.32 -1.07%). Share gains should continue over the next few quarters as well, as operation of the RFAB starts lowering costs, enabling TI to cut prices without sacrificing margins. We expect analysts and investors to have their eyes on the gross margin line, which is currently almost at TI’s long term target of 55%.
Revenue
Revenue of $3.50 billion was up 9.1% sequentially, up 42.3% year over year and toward the middle of the revised guidance range of $3.45 billion to $3.59 billion, or up 7.6% to up 12.0% sequentially. Revenue was just short of the Zacks Consensus estimate of $3.52 billion.
Strength was broad-based across all geographies except Japan, which declined sequentially. All regions were up on a year-over-year basis. Although internal and distributor inventories remain relatively lean, there was some build-up in the last quarter.
Segment Revenue
All segments witnessed sequential increases in the last quarter. The Analog segment was up 10.6%, Embedded Processing up 17.3%, Wireless (excluding baseband) up 6.1% and Other up 8.8%. The baseband business shrunk to 11.9% of revenue, declining 1.9% sequentially. All segments increased strong double-digits from the year-ago quarter.
All three major businesses within Analog (roughly 40-30-30 mix)—high volume analog and logic (HVAL), high-performance analog (HPA) and power management—contributed to the increase in analog revenue. HVAL products witnessed strength in the last quarter, with revenues growing 50% from a year ago.
What is more encouraging however, is the higher level of differentiation in these products, which will prevent share losses when competition becomes stronger. The HPA business has exposure to the industrial sector. Therefore, the ongoing recovery in the industrial market was again a positive impact on results. Management did not comment on the power management business in particular, although recent share gains in the fast-recovering computing market would have contributed to its growth.
Strength in Embedded Processing continues to be driven by catalog products, with catalog microcontroller products driving both the sequential and year-over-year increases. TI has been investing in the microcontroller product line and management believes there is significant room for share gains in this market. Digital signal processors (DSPs) were also very strong in the last quarter.
Management’s focus in the wireless segment is on the proprietary OMAP and connectivity products. The baseband business, which it is phasing out was down sequentially, impacting segment performance in the fiscal second quarter. The company’s capacity constraints resulted in its inventory falling out of mix, which impacted business at its only baseband customer, Nokia Corp (NOK: 8.9299+0.1099 +1.25%). According to industry sources, this led Nokia to increase orders at Broadcom Corp (BRCM: 36.39 -0.77 -2.07%). Management is in the process of phasing out this business by 2012. The rest of the wireless business continues to benefit from the strong growth in the smartphone market.
The Other segment remained strong in the last quarter, growing 41.7% from the year-ago quarter. TI is benefiting from its DLP products here, which fueled growth from the year-ago quarter. Calculators were up sequentially on seasonality, while royalties declined.
Orders
Net product orders were $3.73 billion in the last quarter, up 2.5% sequentially and 33.2% year over year. We estimate that backlog grew 10.5%, with turns sales declining 10.2% sequentially. The declining turns and significantly lower order growth rates (orders were up 11.7% in the last quarter and 27.9% in the year-ago quarter) seem to indicate that the momentum in TI’s business is losing steam.
Strength in Embedded Processing continues to be driven by catalog products, with catalog microcontroller products driving both the sequential and year-over-year increases. TI has been investing in the microcontroller product line and management believes there is significant room for share gains in this market. Digital signal processors (DSPs) were also very strong in the last quarter.
Management’s focus in the wireless segment is on the proprietary OMAP and connectivity products. The baseband business, which it is phasing out was down sequentially, impacting segment performance in the fiscal second quarter. The company’s capacity constraints resulted in its inventory falling out of mix, which impacted business at its only baseband customer, Nokia Corp (NOK: 8.9299+0.1099 +1.25%). According to industry sources, this led Nokia to increase orders at Broadcom Corp (BRCM: 36.39 -0.77 -2.07%). Management is in the process of phasing out this business by 2012. The rest of the wireless business continues to benefit from the strong growth in the smartphone market.
The Other segment remained strong in the last quarter, growing 41.7% from the year-ago quarter. TI is benefiting from its DLP products here, which fueled growth from the year-ago quarter. Calculators were up sequentially on seasonality, while royalties declined.
Orders
Net product orders were $3.73 billion in the last quarter, up 2.5% sequentially and 33.2% year over year. We estimate that backlog grew 10.5%, with turns sales declining 10.2% sequentially. The declining turns and significantly lower order growth rates (orders were up 11.7% in the last quarter and 27.9% in the year-ago quarter) seem to indicate that the momentum in TI’s business is losing steam.
Backlog increases are a healthy sign, although some of this increase could be from customers ordering well in advance due to TI’s long lead times. Although more capacity is coming online, management avoided giving a lead time number, which makes us think that lead times are not too different from the 12-week+ range that were announced in the first quarter.
Margins
The gross margin was 54.2%, up 148 basis points (bps) sequentially and 843 bps from the year-ago quarter. The reasons for the continued improvement in the gross margin is primarily related to the higher level of revenue and an improving mix of analog and embedded processing business.
Operating expenses of $770 million were higher than the previous quarter’s $729 million. The operating margin was 32.2%, up 220 bps sequentially and 1,473 bps from the year-ago quarter. The higher gross margin was the major driver of the sequential increase, although both R&D and SG&A also declined slightly as a percentage of sales. All expenses declined as a percentage of sales compared to the year-ago quarter, an indication that TI is now operating with a much leaner cost structure.
The Analog, Embedded Processing, Wireless and Other segments generated operating margins of 31.7% (up 227 bps sequentially), 22.9% (up 582 bps), 23.4% (up 93 bps) and 48.2% (up 89 bps), respectively. The lower baseband revenue helped the wireless margin in the last quarter.
Net Income
The pro forma net income was $786 million, or a 22.5% net income margin compared to $668 million, or 20.8% in the previous quarter and $315 million, or 12.8% in the prior-year quarter. Fully diluted pro forma earnings per share were 65 cents compared to 54 cents in the previous quarter and 25 cents in the Jun quarter of last year. The pro forma calculations for the last quarter exclude the impact of restructuring charges.
On a fully diluted GAAP basis, the company recorded a net profit of $769 million (63 cents per share) compared to $658 million (53 cents per share) in the previous quarter and a net profit of $260 million (20 cents per share) in the comparable prior-year quarter.
Margins
The gross margin was 54.2%, up 148 basis points (bps) sequentially and 843 bps from the year-ago quarter. The reasons for the continued improvement in the gross margin is primarily related to the higher level of revenue and an improving mix of analog and embedded processing business.
Operating expenses of $770 million were higher than the previous quarter’s $729 million. The operating margin was 32.2%, up 220 bps sequentially and 1,473 bps from the year-ago quarter. The higher gross margin was the major driver of the sequential increase, although both R&D and SG&A also declined slightly as a percentage of sales. All expenses declined as a percentage of sales compared to the year-ago quarter, an indication that TI is now operating with a much leaner cost structure.
The Analog, Embedded Processing, Wireless and Other segments generated operating margins of 31.7% (up 227 bps sequentially), 22.9% (up 582 bps), 23.4% (up 93 bps) and 48.2% (up 89 bps), respectively. The lower baseband revenue helped the wireless margin in the last quarter.
Net Income
The pro forma net income was $786 million, or a 22.5% net income margin compared to $668 million, or 20.8% in the previous quarter and $315 million, or 12.8% in the prior-year quarter. Fully diluted pro forma earnings per share were 65 cents compared to 54 cents in the previous quarter and 25 cents in the Jun quarter of last year. The pro forma calculations for the last quarter exclude the impact of restructuring charges.
On a fully diluted GAAP basis, the company recorded a net profit of $769 million (63 cents per share) compared to $658 million (53 cents per share) in the previous quarter and a net profit of $260 million (20 cents per share) in the comparable prior-year quarter.
Balance Sheet
Working capital management continued to improve. While inventories increased 5.7% to $1.35 billion, this resulted in inventory turns of 4.8X, unchanged from the previous quarter. Days sales outstanding (DSOs) increased from 43 to 45 days. TI generated $562 million in cash from operations and spent $283 million on capex, $750 million on share repurchases and $147 million on cash dividends. The decline in operating cash flow was the result of TI paying off income taxes. The company did not have any long-term debt, although long-term liabilities totaled $871 million at quarter-end.
Guidance
Management has provided guidance for the third quarter. Accordingly, revenue is expected to range between $3.55 billion and $3.85 billion (up 1.5% to 10.1% sequentially), a pretty broad range. The EPS is expected to be $0.64 to $0.74.
For 2010, TI expects R&D expenses of $1.5 billion, capex of $1.2 billion, depreciation of $0.9 billion and an annual effective tax rate of 31% (unchanged from previous guidance). All except the capex guidance was reiterated. Capex was guided up from $0.9 billion, most probably to account for the Spansion assets in Japan, which the company recently acquired.
Working capital management continued to improve. While inventories increased 5.7% to $1.35 billion, this resulted in inventory turns of 4.8X, unchanged from the previous quarter. Days sales outstanding (DSOs) increased from 43 to 45 days. TI generated $562 million in cash from operations and spent $283 million on capex, $750 million on share repurchases and $147 million on cash dividends. The decline in operating cash flow was the result of TI paying off income taxes. The company did not have any long-term debt, although long-term liabilities totaled $871 million at quarter-end.Guidance
Management has provided guidance for the third quarter. Accordingly, revenue is expected to range between $3.55 billion and $3.85 billion (up 1.5% to 10.1% sequentially), a pretty broad range. The EPS is expected to be $0.64 to $0.74.
For 2010, TI expects R&D expenses of $1.5 billion, capex of $1.2 billion, depreciation of $0.9 billion and an annual effective tax rate of 31% (unchanged from previous guidance). All except the capex guidance was reiterated. Capex was guided up from $0.9 billion, most probably to account for the Spansion assets in Japan, which the company recently acquired.
| Analysts' Targets | |
| UBS Securities | $30 |
| Add | |
| Wednesday, June 09, 2010 | |
| Stifel Nicolaus | $32 |
| Hold | |
| Wednesday, May 12, 2010 | |
| Kaufman Brothers | $30 |
| Hold | |
| Tuesday, April 27, 2010 | |
| RBC Capital Markets | $34 |
| Sector Perform | |
| Tuesday, April 27, 2010 | |
| Credit Suisse | $32 |
| Outperformer | |
| Monday, April 12, 2010 | |
| Roth Capital Partners | $34 |
| Neutral | |
| Tuesday, January 26, 2010 | |
| Robert W. Baird & Co. | $30 |
| Neutral | |
| Tuesday, January 26, 2010 | |
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