TI Reports A Strong Q3’15 Despite Macro Weakness

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TXN: Texas Instruments logo
TXN
Texas Instruments

Despite a weak macroeconomic environment, Texas Instruments (NASDAQ:TXN) reported a strong Q3 2015 with both revenue ($3.4 billion) and earnings ($0.76 per diluted share) beating company guidance. While the company closed 2014 on a strong note, its growth has slowed down this year on account of the delay of investments by carriers and capacity upgrades for wireless infrastructure equipment, a weaker than expected refresh cycle for Windows XP commercial desktops, and adverse currency headwinds. Though TI’s Q3 2015 revenue declined 2% year on year, as the overall demand remained weak, it was up 6% quarter on quarter, driven by stronger than expected performance in most segments, especially wireless infrastructure and industrial. TI’s stock was up almost 10% in after hours trading yesterday.

Though TI continues to operate in a weak macro environment, the company continues to focus on execution and and leveraging its strong market position. Aspects of this strong position include:  1) a great strength in manufacturing and technology;  2) the great breadth of its product portfolio; 3) the wide reach of its market channels; and, the diversity and and long product life of its offering. The company continues to benefit from an expanding product portfolio, efficient manufacturing operation, and a broad sales channel—all factors that will drive its long-term growth.

We are in the process of updating our $50 price estimate for TI.

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See our complete analysis of Texas Instruments here

Analog & Embedded Portfolio Remain Strong and Are Well Positioned For Future Growth

Even in the weak macro environment, the combined revenue of TI’s analog and embedded processing business grew for the ninth consecutive quarter (on a year-on-year basis). The two segments accounted for 85% of the company’s Q3 2015 revenue, up from 79% in 2013.

TI’s analog revenue reported a record quarter in Q3 2015, with revenue increasing 2% year on year. Growth was driven by high-volume analog, logic and silicon valley (i.e., NatSemi) analog. Embedded processing revenue also increased by 2% year-on-year, driven by growth in microcontrollers and connectivity.

In terms of end-market segments, automotive remained strong in Q3 2015, with  all sectors growing and three of the five sectors growing in double digits. Industrial revenue was about even, with about half of the 14 sectors growing and the other half declining. Personal electronics was up in the quarter, primarily because of demand from one key customer. Communications equipment was down, driven by wireless infrastructure, which was down about 30% from a year ago. Although weak, it did grow sequentially.

In the last few months, TI has accelerated its chip development cycles and is penetrating speedily in fast growing markets such as automotive and industrial machines. We believe that a strengthening analog portfolio will enable TI to retain, or even marginally increase, its market share over the next few years. The company currently accounts for approximately 18% of the analog semiconductor market.

TI claims that its investments in the embedded business are translating into tangible results, improving both revenue and profitability. In late 2010-early 2011, the company significantly stepped up its investments in the embedded market in order to accelerate its product introductions. In Q3 2015, TI’s operating margin for embedded processors improved by 8% year-on-year, as the company began to reap the benefits of its focused investment on the best growth opportunities. TI continues to invest energetically, 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, in our view.

Gross Margin Will Continue To Improve 

TI has seen a significant improvement in gross margin since 2013. The company’s gross margin increased from 52.1% in 2013 to 56.9% in 2014, and hit a new high of 58.2% in Q2 2015 (despite the slow top line growth). This metric remained flat in Q3 2015. Increased factory load-ins, and an improved product portfolio focused on analog and embedded processing that benefits from an efficient manufacturing strategy, are some of the key factors that have enabled the company to improve its gross margins.

TI believes that it will continue to see improvement in gross margin as an increasing proportion of its production moves to 300 millimeter, which offers up to 40% chip cost benefit from an overall cost of goods standpoint. In addition, the company continues to see an increasing revenue contribution from the  industrial and automotive markets, which generally tend to offer higher gross margins.

Long term gross margin will also benefit from lower depreciation in the future. At present, depreciation is ahead of TI’s capital expenditures by a couple of points, which is slowly beginning to close. The company expects the gap between the two to close some more in 2016. As depreciation starts to work itself down, it will boost gross margins.

Q4 2015 Outlook

– Revenue in the range of $3.07 billion to $3.33 billion.

– EPS in the range of $0.64 to $0.74.

– Acquisition charges of $80 million to $85 million.

– Tax rate of 30%.

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