Owing to significantly lower revenues from its wireless segment, Texas Instruments (NASDAQ:TXN) marked an 8% y-o-y decline and a 3% q-o-q decline in its Q1 2013 revenues ($2.89 billion). While seasonal factors led to a marginal decline in revenues from the analog division, growing strength in microcontrollers was primarily responsible for the 4% annual increase in embedded processor sales. Additionally, TI witnessed a 10% annual decline in gross profits in Q1 2013, mainly due to a lower revenue base. The absence of the business interruption insurance proceeds this quarter also contributed to the sharp decline.
After its planned exit from the smartphone and tablet market in September last year, 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. Though the wireless revenue will continue declining in the subsequent quarters and phase out completely by the end of 2013 – we believe that TI’s core strength in the analog and embedded processor division will help it accelerate its growth in the future.
Despite macro headwinds, TI registered a 9% increase in orders last quarter, confirming the company’s claim that its orders bottomed out in Q4 2012. Raising its dividend payout by 33% and adding $5 billion of share repurchase authorization in Q1 2013, TI believes that it has strong cash generating capability. Backed by increasing strength in its business, it is confident of generating 0.20 to 0.25 of free cash flow, for every $1 of revenue that it earns in the future.
We believe that a robust product portfolio, one of the best sales and field application team and strong manufacturing capacity will drive TI’s future growth.
Increasing Dependence On Analog & Embedded Processors
Generating strong cash flow and investment returns, the analog and embedded processor divisions remain the focus areas for TI. The two segments combined presently account for 77% of TI’s revenue, 5% higher than a year ago. With an expanding product portfolio combined which an industry leading sales force, TI has managed to consistently gain market share in the two divisions in the last few years.
TI witnessed a 1% annual and 2% sequential decline in its analog processor revenue, as the strength in silicon valley analog and high performance analog was offset by lower revenue from high volume analog, logic and power management products. Though the weakness in computing, communication infrastructure and gaming markets is offsetting the increasing strength in the industrial and automotive markets in the short term, we believe the situation will improve in the long term, as the overall economic situation stabilizes.
TI accounts for over 15% of the analog market. It is the market leader in voltage regulators, which contributes around 30% to its analog division revenue. According to iSuppli, voltage regulators are set to grow at an annual rate of 16% compared to the overall analog segment’s rate of 6.3%.  With the acquisition of National Semiconductors, a strengthening product portfolio and growth in high volume analog and logic segments, we believe that TI is well equipped to leverage increasing demand for analog products.
Exiting the smartphone and tablet markets, TI is now focused on expanding the OMAP footprint in embedded applications such as automotive, industrial equipment, enterprise communications, etc. The company feels that the embedded markets currently valued at $19 billion offers greater potential for sustainable growth compared to mobile devices. In the last year, TI has expanded its product portfolio by almost 20%.
Gross Margins To Increase In The Future
With the acquisition of National Semiconductor and some other companies’ fabrication, equipment and factories, TI has added close to $7 billion worth of incremental revenue generating capacity in the last few years. As a result, the slowdown in the overall semiconductor industry has lowered its factory loading in turn increasing its under-utilization charges.
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. But apart from that it has no plans to take any more capacity offline in the near future. Managing its operations efficiently, the company registered a slight increase in gross margins last year if we adjust for the acquisition-related charge. In Q1 2013, cost reductions from the wireless business and positive synergy from the National Semiconductor acquisition led to a 10% decline in TI’s operating expense.
TI claims to be on track to reach its target of achieving $450 million in annualized saving from restructuring its wireless business. Additionally, with an increase in orders last quarter, the company anticipates higher factory utilization in the current quarter. TI’s underutilization expense declined from $170 in Q4 2012 to $150 in Q1 2013, and the company forecasts the downward trend to continue this quarter as well.
Also, 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 over our review period.
– Q2 2013 revenue in the range of $2.93 – $3.17 billion
– 30% decline in revenue from wireless products in Q2 2013
– Q2 2013 EPS to be in the range of $0.37 to $0.45
– $1.5 billion R&D expense in 2013
– Full year Capex expected to be approximately $500 million
– Estimated effective tax rate of 22% for 2013
We are in the process of updating our price estimate of $34.27 for TI and our model to incorporate the reporting structure change.Notes:
- Voltage Regulators Set to Grow to $16.3 Billion by 2015, iSuppli, July 4, 2011 [↩]