Texas Instruments (NYSE:TXN) reported a decline in earnings for 3Q11, with a gloomy outlook. Profits fell to $601 million from $859 million in 3Q10. The outlook for the fourth quarter is expected to be below the seasonal average, as uncertainty in demand continues to impact almost every major market segment. Texas expects a revenue of $3.26 billion to $3.54 billion for 4Q11, which is below our and market expectations.
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Texas completed its acquisition of National Semiconductors on September 23rd, 2011, and therefore, had 7 days of its results consolidated. The revenue contribution over this 7-day period was $18 million, and there was $2 million of associated operating profit consolidated into TI’s Analog segment under the organizational name, Silicon Valley Analog. Analog segment revenue has declined 2% from 3Q10 and 2% from 2Q11. Analog is TI’s largest segment by value and accounts for nearly 50% of the company’s value. TI is the world’s largest analog semiconductor maker with 18% market share.
Growth seen in wireless segment
Revenue from OMAP applications processors was a major contributor to Wireless revenue growth. We expect to see OMAP revenue growth for the quarters ahead, as Texas continues to ramp production for its latest customer programs. Recently announced programs that are based on TI’s OMAP 4 platform include Samsung’s Nexus smartphone, which will be its first OMAP production program based on Google’s Ice Cream Sandwich reference platform; Samsung’s Galaxy SII smartphone; Motorola’s Droid Bionic and Droid RAZR smartphones; LG’s Thrill smartphone, which is the first to feature 3D playback and capture; and the recently announced Amazon’s Kindle Fire tablet.
Market expected to bottom out in 4Q2011, recovery seen from 1Q2012
There was weak demand in the third quarter and we expect revenue to again decline in the fourth quarter. Even with this outlook, conditions suggest the market has started to bottom out. TI’s book to bill declined from 1.04 in 2Q11 to 0.89 in 3Q11 (compared to 0.92 for 3Q10), but bookings have been stabilizing over the past two months. The rate of decline in orders slowed considerably in August and September.
National’s product line to strengthen TI’s portfolio
TI had 30,000 analog products before the National acquisition and is likely to add about 500 new products in 2011. Similarly, the addition of 5,000-plus employees, will add technical hard-to-find expertise in analog design, analog process technology, packaging and manufacturing. Finally, National’s 3 factories have lots of room for growth, and thus no further capacity expansion would be needed to drive growth from its portfolio.
As such, while demand remains elusive and tough for the overall industry, we think TI’s shares have room for growth. We have revised our price estimate to $36.50, indicating 18% upside from the current market price.