TI Likely To Post Stronger Q3’16 Results With Lift From iPhone 7 Launch

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TXN: Texas Instruments logo
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Texas Instruments

Leading analog chip maker, Texas Instruments (NYSE:TXN) is set to report its Q3 2016 earnings on 26th October. We expect the company to report that the top-line in Q3 to remained flat on a year-over-year basis and increased in the mid-single digits sequentially. Q3 has usually been a seasonally strong quarter for the company. One factor that can be attributed to stronger sales of TI in Q3 is the launch of a new version of iPhone by Apple, around this time of the year. TI derives approximately 10% of its revenues from Apple, which is its single largest customer. Thus, the recent launch of iPhone 7, which has likely given Apple an earnings lift in the quarter, should also help TI report stronger revenues in the personal electronics segment. It should be noted that when Apple’s sales declined in Q2, Texas Instruments also witnessed a revenue decline in its personal electronics segment. (For more details check: How Is Texas Instruments’ Sales Dependent Upon Apple?) Furthermore, we can continue to expect more margin improvement from the company in the near-term. Additionally, TI’s communication equipment revenue is likely to improve in 2016, due to a revival in the wireless infrastructure spending.

More Margin Improvement For Texas Instruments Going Forward

TI’s effective manufacturing strategy has helped it improve its gross margins by approximately 9 percentage points in the last five years. At 61.2%, the company’s gross margins were at its highest levels in Q2’16. Shifting to 300mm analog production has helped TI reduce its chip costs by around 40%. This is due to the fact that TI can put 2.3 times more chips on a larger 300 mm wafer as compared to a 200 mm wafer.

We believe that TI should continue to benefit from an efficient manufacturing strategy going forward, which includes shifting to a 300mm analog production and purchasing assets ahead of demand. In 2015, the company had about $2 billion of its Analog revenues coming in from the 300mm analog production, which translates to only 25% of its overall analog segment revenue. The proportion of TI’s revenues from 300mm production is likely to go up in the coming quarters, driving the margins higher for the company. To increase its 300mm production, the company is likely to ramp up its production from its RFAB and DMOS6 facilities, which cater to the 300mm production, and were largely under-utilized until 2015. TI’s RFAB and DMOS6 production facilities were operating at 45% and 25% of their full production capacity, respectively, in 2015.

Revenue Growth From Communication Equipment Back On Track

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TI saw its revenue from communication equipment, which contributed to 13% of its revenues in 2015, decline by around 20% in 2015. The company attributed this decline to a 30% decline in the sales of wireless infrastructure. However, we believe that TI’s revenue growth from the segment is picking up as there have been signs of improvement. This is being led by a recovery in communication infrastructure spending. Furthermore, the company is is bound to benefit when major wireless technology changes happen. As data consumption increases and new wireless technologies such as 5G and small-cells are deployed, wireless infrastructure companies will need to ramp up their network infrastructure in a bid to stay ahead of their competitors. This will directly benefit TI, as the demand for its communication segment would then intensify.

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