TI Closes 2014 On A Strong Note: Earnings Review
Texas Instruments (NASDAQ:TXN) closed 2014 on a positive note, reporting yet another quarter of strong growth in Q4 2014. At $3.27 billion, revenue grew 8.0% year over year and 6.6% sequentially, in line with company guidance as well as Wall Street consensus estimates. Earning per share ($0.76) beat both company guidance and analysts’ expectations, on account of the benefit accrued from the reinstatement of the federal R&D tax credit and gains on sales of assets. For 2014, TI’s revenue and net income grew 7% and 30% respectively. Free cash flow for the year was $3.5 billion, up 18% from a year ago.
TI’s strong performance in 2014 was driven by an improved product portfolio and the efficiencies of its manufacturing strategy, which includes growing 300 mm output and the opportunistic purchase of assets ahead of demand. 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, which now form the company’s core business. The combined revenue from the two division grew 13% in Q4 2014, compared to a year ago.
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.
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We are in the process of updating our price estimate of $45 for TI for the 2014 earnings.
See our complete analysis of Texas Instruments here
TI Gained Additional Market Share In Analog & Embedded In 2014
TI’s reported the sixth consecutive quarter of year-over-year growth for its analog business. Revenue from the segment grew 14% year over year in Q4 2014, led by strong growth in power management. The high volume analog and logic, high performance analog and Silicon Valley analog divisions also grew in the quarter. The operating margin came in at 38.7%. The company increased its share in the analog market to 18.3% in 2014, compared to 16.8% in 2013. TI has increased its R&D investments in the sector by more than 75% since 2006, which has resulted in steady increases in market share over the years.
Revenue increased for the 9th consecutive quarter for the embedded processing segment, growing 11% year over year in Q4 2014, driven by growth in processors, microcontrollers and connectivity. The connectivity business grew at the fastest rate as rising number of devices become connected. Operating margin for embedded processing products more than doubled (to 17%) in the quarter, as TI benefited from its investments for growth and strong execution of its restructuring plan to better align resources with the opportunities that they are pursuing. In late 2010-early 2011, TI significantly stepped up its investments in the embedded market in order to accelerate its product introductions. The company expects the operating margin for the division to continue to increase, as top line increases and R&D and SG&A expenses remain relatively flat.
TI continues to invest at a healthy level, though at a lower level compared to the past. The high level of investment and an expanding product portfolio from heavier levels of investment in the prior few years, will continue to drive growth in the future as well.
Gross Profit Hit New Record In 2014
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.
TI’s overall gross margin increased by 3.8 percentage points, from 54.2% in Q4 2013 to 58% in Q4 2014, reflecting higher revenue, increased factory load-ins, and an improved product portfolio focused on analog and embedded processing that benefits from an efficient manufacturing strategy. 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.
Q2 2015 Outlook
– Revenue in the range of $3.07 billion to $3.33 billion, a 7% annual increase at the middle of the range.
– Earnings per share in the range of $0.57 to $0.67.
– Restructuring charges to be essentially nil. Acquisition (non-cash amortization) charges to remain about even and hold at about $80 million to $85 million per quarter for the next five years.
– Effective tax rate of 30%, higher than 2014 because of an expected increase in profits and does not assume the reinstatement of the R&D tax credit.
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