TI’s Q1’15 Earnings Impacted By Weak Demand And Currency Fluctuations
Texas Instruments (NASDAQ:TXN) witnessed an approximate 7% fall in its stock price in the wake of its Q1 2015 earnings, which came in at the lower end of its guidance. The company’s top line growth slowed down as it reported revenues of $3.15 billion, witnessing a 6% growth year on year. Earnings per share stood at $0.61, reflecting the company’s continued attention to cost controls although the vast majority of TI’s revenue was transacted in U.S. dollars. Free cash flow for the quarter was $609 million, up 2% from a year ago.
TI’s weak performance in Q1 2015 was driven by a weak demand in the last month of the quarter, particularly PCs and wireless infrastructure. These markets specific issues were due to delay of investments by carriers and capacity upgrades for wireless infrastructure equipment and a weaker than expected refresh cycle for Windows XP commercial desktops in particular. Another reason for the tepid performance was a steep decline in the exchange rate for the Euro relative to the U.S. dollar. The Euro dropped about 10% during the quarter. Even though only 5% of TI’s revenues were transacted in Euros, it was a sharp enough drop to negatively impact the company’s revenue by about 20 million, more than what TI had anticipated.
Even with these pockets of weaknesses, TI’s core businesses of analog devices and embedded processing turned in their seventh and tenth consecutive quarter of year-over-year growth, respectively. Combined revenue of these two businesses grew 9% and accounted for 86% of the company’s total revenue. Analog revenue grew 11% from a year ago primarily due to power management and high-volume analog and logic while embedded processing revenue grew 2% from a year ago due to micro controllers and connectivity devices.
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Our price estimate of $50 for TI shares is at an approximate 15% discount to the current market price. We are in the process of updating our valuation for the Q1 2015 earnings release.
See our complete analysis of Texas Instruments here
Weak Demand in PC and Communication Equipment Dragged Down Revenue
TI’s PC and communication equipment segment revenues declined by 10% year on year primarily due to weakeness in custom ASIC products. TI’s communications equipment decline was driven by wireless infrastructure, which was 10% of the revenue. Along with this, the company witnessed a muted growth in its personal electronics business, completely driven by a steep decline in TI’s PC circuits offering, which accounted for 4% of the company’s total revenue. Demand was particularly tepid in the last month of the quarter in PCs. The demand in the wireless infrastructure market has been very choppy over the last few quarters. TI expects to see the weakness in PCs and wireless infrastructure in the next few quarters as well.
TI’s Analog and Embedded Segments Witnessed Another Quarter Of Strong Growth
TI reported the seventh consecutive quarter of year-over-year growth for its analog business. Revenue from the segment grew 11% 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 35.4%. 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 tenth consecutive quarter for the embedded processing segment, growing 2% year over year in Q1 2015, driven by growth in microcontrollers and connectivity. This was partially offset by lower processor revenue. The significantly small upside in the embedded segment growth was primarily driven by DSPs, given the muted wireless infrastructure spending environment. 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 18%) 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.
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.
Q2 2015 Outlook
– Revenue in the range of $3.12 billion to $3.38 billion.
– Earnings per share in the range of $0.60 to $0.70.
– 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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