TI To See Continued Growth In Q1 2015 Backed By A Strong Analog & Embedded Portfolio

Texas Instruments (NASDAQ:TXN), which designs and manufactures semiconductors, will report its Q1 2015 earnings on April 22nd. After its planned exit from the smartphone and tablet application processor 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 businesses. The combined revenue from the two divisions grew 12% in FY14, with analog up 13% and embedded up 12%. These two key businesses were 83% of TI’s revenue for the year, up from 79% in 2013.

On account of TI’s improved product portfolio, the efficiencies of its manufacturing strategy and the opportunistic purchase of assets ahead of demand, free cash flow for 2014 was $3.5 billion, up 18% from a year ago. Turning to TI’s Q1’15 outlook, the company guided revenue to be in the range of $3.07 billion to $3.33 billion, a 7% year on year growth at the midpoint of the range. TI guided first quarter earnings per share to be in the range of $0.57 to $0.67. ^[1]

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’s growth is being driven by its progressing restructuring efforts and strong demand for its microcontrollers (MCUs). ^[2] The company 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 $50 for TI is at an approximate 15% discount to the current market price. We will update our valuation after the Q1 2015 earnings release.

See our complete analysis of Texas Instruments here

Analog & Embedded Divisions Continue To Be Key Growth Drivers

With a market share of 17%, TI is one of the leading players in the analog semiconductor market, and derives over 60% of its revenue from this division. Revenue from the analog segment grew 14% year over year in Q4 2014, led by strong growth in power management. 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. The analog division’s robust growth is supported by the breadth of  its offering and the scale of its selling, distribution and fabrication capabilities.

Texas Instruments’ embedded processing division accounts for 23% to its total revenue. The embedded processing business has been growing about twice as fast as the entire company, and increased 16% in 2014. Texas Instruments is significantly expanding its MCU portfolio  in an effort to capitalize on the potential growth in the Internet-of-Things (IoT) space. MCUs are the building blocks of IoT devices, especially those having controller, rather than processor, requirements. The company recently launched its MSP432 microcontroller (MCU) platform, which enable designers to develop ultra-low-power embedded applications such as industrial and building automation, industrial sensing, industrial security panels, asset tracking and consumer electronics.

TI continues to invest in its embedded business at a healthy level, though at a lower level compared to the past. The company continues to expand its embedded portfolio every quarter, which combined with the benefits of heavy investments in the past will drive its future growth in the embedded market.

Gross Margins Will Continue To Improve As TI Takes Some Cost Cutting Initiatives

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 loadings, and an improved product portfolio focused on analog and embedded processing. 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 part of its restructuring strategy, TI laid off as many as 1,700 workers (approximately 3% of its workforce) over the last few years. The company expects its restructuring efforts to lead to annual savings of about $130 million every year. ((2014 Annual Report, Company Website, January, 2015)) The cost-cutting initiatives have been trickling right to TI’s bottom line, and has helped it grow its dividend at a CAGR of 22% over the last five years.

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1. Texas Instruments’ (TXN) Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, January 26th, 2015 [↩]
2. A Rejuvenated Texas Instruments Is Great For Steady Returns, Seeking Alpha, April 2nd, 2015 [↩]