Texas Instruments Is Ready For A Recovery As Results Mark The Bottom

Texas Instruments (NYSE:TXN), the semiconductor company which competes with Qualcomm (NASDAQ:QCOM) and  Broadcomm (NASDAQ:BRCM) amongst others, posted its Q1 2012 results on Monday. With revenues of $3.1 billion, the company saw a sequential decline of 9% and a y-o-y decline of 8%, led by a substantial reduction in revenues from the wireless segment and continued lower level of factory utilization. However, sequentially strong growth from the automotive segment and a double-digit gain in communications infrastructure revenue, offered some respite. The results were better than what TI expected and were in line with its mid quarter guidance. The company anticipated its business to bottom out in Q1, with Q2 showing signs of recovery. TI is confident that it is well positioned to service the rising demand in 2012.

See our complete analysis of Texas Instruments here

Decline in Revenue from the Wireless Segment

Much of the decline in the overall sales was attributed to lower wireless revenue. In the wireless segment, revenues came down to $373 million, a sequential decline of 48% and a y-o-y decline of 43%. Revenue from OMAP application processors was up strongly from a year ago but declined from the fourth quarter level, when the company primarily benefited from several customer product introductions ahead of the holidays. The decline was also partly due to the final phase of exiting the baseband business, which contributed less than 3% to total sales in Q1. TI targets a complete exit from the baseband business by the end of this year.

However, the company expects its wireless business to grow going forward as they are trying to deliver the technology from their non-baseband products into adjacent markets that can give them more diversity, both of markets and customers.

Low Levels of Factory Utilization

Gross margin for the quarter, at 49% saw a y-o-y decline of 2%. There were a number of factors that impacted gross profit and margin in the first quarter. The underutilization expense in the quarter was essentially unchanged from the fourth quarter. Although there was an increase in the wafer starts, wafer output declined compared with the fourth quarter as the effects of lower production that started in Q4 worked its way through the manufacturing operations in Q1 as well. Thus, the average utilization levels of the manufacturing operations were more or less unchanged. Higher utilization benefits should come early in the second quarter, with starting up the factories a little bit more from Q1 onwards.

Also, over the last couple of years, between the factories acquired and the acquisition of National Semiconductor, the company added around $7 billion worth of incremental revenue generating capacity. All things being equal, it leads to a lower utilization than what it would be at the same revenues last year. On the positive side, it leads to an incremental revenue generating capacity, which the company can leverage on in the long run. The company feels it is well-positioned to service its customers’ rising demand as they end their inventory correction and ultimately, begin to replenish their inventory from current low levels.

Primary Growth Engines

With orders up 13% and a growing backlog, the company is showing early signs of recovery, and forecasts revenue in the range of $3.22 billion to $3.48 billion for Q2. TI expects Analog and Embedded Processing to be their primary growth engines in the years ahead and aim to focus their resources primarily on these two segments. We believe that TI’s market share in Analog and Embedded processing segment will go up to 19.3% and 11.9% respectively, by the end of the forecast period.

TI is well equipped with a diverse business across customers and geographical regions. The acquisition of National Semiconductor should contribute revenue and share gains, as customers across the world embrace the strength of this portfolio, combined with the attraction of TI’s market channels. The broadening of market reach for both applications processors and connectivity products, in areas outside of smartphones and tablets, adds to TI’s potential which we believe is well positioned to maintain its dominant position in the Industry.

We are in the process of reviewing our model, and will soon update our current price estimate of $45.15 for Texas Instruments

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