Texas Instruments Reports A Strong Quarter, Despite A Slow Down In The Personal Electronics Segment

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TXN: Texas Instruments logo
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Texas Instruments

Leading analog chip maker, Texas Instruments (NASDAQ:TXN) reported a strong Q1 2016 with both revenue ($3.1 billion) and earnings ($0.80 per diluted share) beating the consensus estimates. Despite strong headwinds faced by the company in wireless infrastructure and personal electronics segments, and due to foreign currency fluctuations, its revenue in the Analog and Embedded processing grew at a combined rate of 3%. Further, TI’s gross margins improved by 130 basis points in 2015 and hit a new high in the Q4, owing to the restructuring and cost management initiatives taken by the company . TI had the highest market share in the analog IC market in a 2015 survey and it remains confident of maintaining the leadership position going ahead. We believe that the company will continue to benefit from an expanding product portfolio, efficient manufacturing operation, and a broad sales channel in 2016.

We are in the process of updating our $51 price estimate for TI.

See our complete analysis of Texas Instruments here

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Quick Snapshot Of Q4 2015 Earnings:

At $ 3.1 billion, TI’s revenue declined by 2% year over year, but was well within the company’s guided range. TI reported a gross profit of $1.87 billion, a decline of 2% year over year, primarily due to lower revenue. However, gross profit margin as a percentage of revenue was 58.5%, setting a new record for the company. Operating Expenses for TI totalled $711 million for the quarter, down by $29 million year over year. The company attributed this decline to the cost initiatives and targeted reductions in Japan. While TI’s operating margin in the analog and embedded segments were 38% and 24% respectively, overall operating profit for the company stood at $1.14 billion, a 4% increase year over year. The company’s net income and earnings per share came in at $826 million and 80 cents which translate to 1% and 5% increase year over year respectively.

Personal Electronics Segment Seeing A Slowdown

TI saw a weak demand in the personal electronics segment in the current quarter. The weak demand can be partially attributed to a weak quarter for Apple, which contributed to 11% of the overall sales for TI in 2015. Furthermore, TI guided a decline of $150 million in the personal electronics segment in Q1’2016.

We believe that the weak demand in the personal electronics segment can prevail throughout 2016, owing to a slowdown in the consumer electronic device sales. A report from the Consumer Technology Association (CTA) of the U.S, which forecasts a two percent drop in global consumer electronics spending in 2016, further supports our point.

However, the company claims that personal electronics segment constituted only 30% of its overall revenues in 2015. This figure is half as compared to the contribution of the segment to the overall semiconductor market. Given that TI has lesser exposure to the segment, there will be lesser effect of the slowdown in the consumer electronics spending on the company. [1]. Furthermore, the company has exposure to a broad range of segments such as medical devices, industrial, automotive, space, avionics and defense, where the company can continue to see growth, despite a weakness in consumer electronics space.

Gross Margins Hit A New High In Q4 2016

TI has seen a significant improvement in gross margin since 2013. The company expanded its gross margins by 130 basis points in 2015, and hit a new high of 58.5% in Q4 2015 (despite a slow macro environment). TI underwent a restructuring in Japan, and some other segments of Embedded Processing over the last two years, which eased some of the operating and manufacturing costs for the company in 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.

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Notes:
  1. Earnings Transcript, Seeking Alpha, January 2016 []