Strong Demand In Automotive And Industrial Markets Drove TI’s Q4’16 Results

by Trefis Team
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Leading analog semiconductor maker, Texas Instruments ( NYSE:TXN) reported its Q4’16 earnings on January 24th. The company’s revenue growth of 7% in the quarter was driven by 10% growth in the Analog segment and 6% growth in the Embedded processor segment. Despite a decline in personal electronics segment, TI’s overall revenues increased on the back of strong demand in automotive and industrial segments. Furthermore, the company’s gross margin rose to 62.5%, representing an increase of 400 basis points in the quarter. Going ahead, we can expect more margin improvements for TI as it is focused on increasing the proportion of analog production on 300mm fabrication facilities. The effect of margin improvements and revenue growth percolated to the bottom-line. The company’s earnings per share increased by 35% for the quarter to reach $1.08, higher than its previous guidance and consensus estimates. Around $0.14 of the earnings per share could be attributed to intellectual property agreements and a one-time tax benefit related to the new accounting standards for stock compensation. With not much change in any demand factors, the company has guided a revenue growth of $3.3 billion for Q1’17, which translates to a year over year growth of 10%.

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TI’s Margin Outlook:

The company’s effective manufacturing strategy has helped it improve its gross margins by approximately 10 percentage points in the last five years. At 62.5%, the company’s gross margins were at its highest levels in Q4’16. TI should continue to benefit from an efficient manufacturing strategy for the next couple of years depending on the pace at which it shifts its production to 300mm analog capacity. It is worth noting that manufacturing analog ICs in 300mm fabs (i.e., fabrication facilities) is 40% cheaper for TI as compared to production on 200mm wafers. To increase its 300mm production, the company is likely to ramp up its production from its RFAB and DMOS6 facilities, which have 300mm production equipment and were largely under-utilized until 2016. Thus, there is still room for the company to expand its margins in the next couple of years.

Automotive Market Presents A Huge Opportunity For TI

Automotive revenues constituted around 18% of TI’s overall revenues in 2016, up by 3 percentage points. It should be noted that TI’s High Volume Analog & Logic (HVAL) products and Embedded processors are widely used in the automotives application. The company caters to the following sectors of the automotive market:

  • Infotainment and the Instrument cluster
  • Passive safety
  • ADAS
  • Body electronics and lighting
  • Hybrid/electric vehicle and powertrain

We should expect this segment to constitute a higher percentage of TI’s overall revenues going ahead. As more and more customers look for improved digital experience in the car, in addition to other parameters, car companies are banking on technological advancements in their interiors to compete with each other. This has led to an exponential increase in the semiconductor content per vehicle. The growth in the semiconductor content in automotives is likely to increase further with the rise in the autonomous cars and hybrid/electric vehicles. According to an analysis of the electric-vehicle market by Bloomberg New Energy Finance (BNEF), around 35% of all the new vehicle sales in 2040 is likely to come from electric vehicles. This is likely because of dramatic reductions in battery prices, making electric vehicles affordable.

Infrastructure Spending In U.S. Can Boost Revenues From Industrial Segments

TI’s revenues from the industrial segment constituted around 33% of its overall revenues in 2016, up by 2 percentage points. Going forward, TI is likely to witness more demand for its products in this market, if there is an increase in the infrastructure spending by the Trump administration. It should be noted that the new administration has been vocal about its intention to boost infrastructure spending. A fiscal stimulus by the government to boost infrastructure is likely to drive growth in the industrial, consumer and telecommunications markets. [1] This, in turn, should result in an increased capex in these sectors. Given that TI derives revenues from each of these segments, an uptick in infrastructure spending will be beneficial for the company.

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Notes:
  1. Trump indicates he’s serious on infrastructure spending, The Washington Times, November 2016 []
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