TI Reports A Strong Q3’14 & Believes Its Business Remains Healthy
Defying the general view that chip demand might slow down into the year end and early next year, Texas Instruments (NASDAQ:TXN) reported a strong Q3 2014 and believes that its business remains healthy. Microchips’s revenue miss earlier this month triggered a sell-off of most chip stocks in the belief that the next industry correction had begun.
At $3.5 billion, TI’s Q3 2014 revenue grew 8% annually and was in the upper half of company’s guided range. Growth in the quarter was driven by strong performance in TI’s core businesses of analog and embedded processing. Combined revenue of the two segments grew 10% from a year ago. In terms of end markets, TI saw growth in communications equipment, industrial, automotive as well as the enterprise market. Earnings per share of $0.76 was at the top of TI’s guided range and beat the Thomson Reuters consensus estimate of $0.71, by $0.05.
TI’s orders in the quarter were $3.34 billion, up 6% from a year ago and its book-to-bill ratio was 0.95. The company claims that the ratios would have been higher except for the effect of the conversion to consignment of some products sold at distribution.
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TI’s strategy is centered around analog ICs and embedded processing and is bolstered by an efficient manufacturing operation and a broad sales channel. The company is growing its 300 millimeter output and continues to follow the strategy of purchasing assets ahead of demand at the stressed prices. It estimates its sales force team to be three to four times larger than its nearest competitors. Possessing scale others lack, it is beginning to get a lot more revenue per sales person which gives it the ability to grow revenue without having to grow operating expenses as fast as revenues.
Our price estimate of $42 for TI is at a marginal discount to the current market price. We are in the process of updating our model for the Q3 2014 earnings.
See our complete analysis of Texas Instruments here
Analog & Embedded Divisions To Drive Growth
After its planned exit from the smartphone and tablet market in September 2012, TI has transitioned its operations to become a pure analog and embedded processing company, segments that it believes will offer long term growth and less volatility, compared to the past. The company derived 82% of its revenue from these segments in Q3 2014 compared to approximately 72% in the quarter ended September 2012.
TI’s analog revenue grew 11% annually led by power management, high volume analog and logic, high performance analog and silicon valley analog. (The last categoy refers products and assets acquired with National Semiconductor.) The company accounts for 18% of the analog market and it expects to gain additional market share in 2014. Since 2006, TI has increased its R&D investments in the sector by 77%, resulting in steady increases in market share over the years.
The embedded processing division reported its eighth quarter of consecutive year-on-year growth as TI’s investments over the past few years in strategic areas yield favorable results. In Q3 2014, embedded revenue grew 6% annually, driven by growth in processors, connectivity and micro-controllers. With increased investments over the past few years and new product launches, TI continues to expand its embedded portfolio every quarter. TI’s plan to reduce investment in certain embedded processing product lines, that either have matured or do not offer the return opportunities it is looking for, has resulted in higher margin from this business segment. The company has clarified that is does not plan to exit any market or discontinue any existing embedded products, but is simply realigning its resources to better cater to market opportunities.
Gross Margin Hit New Record In Q3’14
Having seen its gross margin decline from 53.6% in 2010 to 49.7% in 2012, on account of lower revenue increased capacity, under-utilization charges and the acquisition of its large analog competitor, National Semiconductor, TI has marked a continuous improvement in gross margin since 2013. At 58.4%, gross margin hit another new record, increasing 1.2% sequentially and 3.5% annually, driven by higher revenue and an improved product portfolio focused on analog and embedded processing. The analog and embedded processing products are more profitable and less capital intensive compared to wireless products. Thus, the company benefits by deriving a larger portion of its revenue from these two divisions.
In addition to a favorable revenue mix and improved manufacturing efficiency, the gross margin will also benefit from lower depreciation in the future. At present, depreciation is ahead of TI’s capital expenditures. The company expects its capital expenditure to remain at low levels (4% of revenue) for the next few years. As depreciation starts to work itself down over the next couple of years, it will boost gross margins.
Q4 2014 Outlook
– Revenue in the range of $3.13 billion to $3.39 billion, an 8% annual increase at the mid-point of the guided range.
– Earnings per share in the range of $0.64 to $0.74.
– Effective tax rate of 28%.
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