Texas Instruments (NASDAQ:TXN), a leading semiconductor manufacturer, provided its mid-quarter review for Q3 2013 this week. Backed by a strong order book, the company narrowed its revenue outlook to $3.15 — $3.29 billion compared to its initial estimate of $3.09 — $3.35 billion. Accordingly, TI’s earnings per share target is now between $0.51 to $0.55 compared to its earlier forecast of $0.49 to $0.57.
TI reported a 6% sequential growth in revenues and marked its second consecutive quarter of growing order rate in Q2 2013 on account of increasing strength in its core business of analog and embedded processors. It is witnessing a strong order growth in Q3 as well and claims that growth so far this quarter is on track with the company’s expectations. Strong demand for automotive and industrial products is offsetting the decline in the PC market.
TI anticipates a $90 million sequential decline from its legacy wireless business and expects them to phase out by the end of 2013. Though we estimate revenues to be more or less flat this year, we believe that a robust product portfolio, one of the best sales and field application team and strong manufacturing capacity will help spur TI’s top line in the future. Additionally, as the company completely exits the comparatively lower margin wireless business and increases the proportion of profitable analog and embedded products in its portfolio, it can report improving gross margins going forward.
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Strong Growth In Industrial & Automotive Markets
Though TI claims that growth is returning to the handset, game-console and notebook markets, strong demand for automotive and industrial products is the main factor driving its business this quarter. Additionally, the recovery in the communications infrastructure market that began in Q2 2013 has continued so far this quarter. TI ships a broad range of analog and embedded products for the industrial, automotive and communications infrastructure markets. The industrial, automotive and communications markets contribute 17%, 11% and 31% to the company’s overall revenues, respectively.
After its planned exit from the smartphone and tablet market, 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. TI now derives 78% of its revenue from these segments compared to approximately 72% a year ago. The company remains focused on building a diverse analog and embedded processing business across customers and markets.
With an expanding product portfolio combined with an industry leading sales force, TI has managed to consistently gain market share in the analog and embedded divisions in the last few years.
Improving Factory Utilization To Aid Gross Margin Growth
The declining revenue base combined with additional manufacturing capacity acquired in the last few years increased TI’s under-utilization charges. However, higher revenues combined with an improving product mix has increased TI’s factory utilization, which in turn contributed to a significant improvement in gross margins last quarter. TI’s gross margins declined from 53.6% in 2010 to 49.7% in 2012. For Q2 2013 gross margins stood at 51.5%.
Backed by a strong order base and expanding backlog TI expects its average factory utilization to increase marginally this quarter. Its book to bill ratio (ratio of orders received to units shipped and billed) so far this quarter has been greater than 1. Higher demand for its products increases TI’s factory utilization, in turn lowering its under-utilization expense. The increasing scale of operation also gives the company a greater control over its operational costs.
Additionally, 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 going forward. The cost saving incurred from exiting the wireless business will further ease pressure off gross margins.