Why Have Texas Instruments’ Expenses Only Grown 4.5% Since 2016, While Revenue Is Up 18%?

Texas Instruments’ (NASDAQ: TXN) expenses as a % of revenue have dropped over recent years, and stand at 64.6% of total revenue in 2018, down from 73.1% in 2016. This has largely been due to their increased focused on the industrial and automotive markets, which requires analog semiconductor chips. Texas Instruments uses the 300-millimeter fabrication vertical, which costs almost 40% less to manufacture, than the 200-mm vertical used by its competitors. This has significantly driven up gross margins.
Besides this, a decrease in the statutory tax rate has also somewhat aided Texas Instruments’ net margin growth.

You can view the Trefis interactive dashboard – Texas Instruments: Breakdown Of Total Expenses – to better understand how the company’s total expenses have moved over the years and what is causing this change.

Following is how each expense head has moved over the years. For more details for each expense please visit our interactive dashboard on Texas Instruments’ Total Expenses:

• Cost of Goods Sold, which makes up almost 35% of total revenue as of 2018, includes the cost of manufacturing analog and embedded devices sold by the company. COGS as a % of total revenue has dropped from 38.2% in 2016 to 34.9% in 2018, mainly due to the cost efficiency of the 300-mm wafer fabrication units, which reduce the cost of manufacture by 40% over the 200-mm verticals. However, with the semiconductor market now in a supply glut, and revenues not expected to rise, we expect COGS to make up about 35.4% of total revenue by 2020.
• Research and development expenses include the cost of research into new technologies and their manufacturing techniques, and any costs involved to get these to the production level. R&D expenses have grown from $1.36 billion in 2016 to $1.56 billion in 2018. We expect it to grow further to $1.68 billion by 2020, as Texas Instruments tries to better its embedded segment.
• Selling, general and administrative expenses include any advertising and marketing costs and selling and distribution expenses. This metric has remained largely flat from 2016 to 2018, even with an increase in revenue, and we don’t expect that to change much going further.
• Other expenses include any restructuring costs and other non-operating expenses. This expense has roughly hovered around 1.5% of total revenue, and again, we don’t expect any significant changes going forward.
• Interest and debt expenses rose YoY in 2018, both in absolute terms and as a % of revenue. We expect expenses from this stream to hover around 1% of total revenue, by 2020. A drop in the statutory tax rate in 2018, saw income taxes as a % of revenue drop from 16% in 2017 to 7% in 2018. We don’t expect any changes in the statutory rate, but a rise in TI’s taxable income, could drive income taxes to over 9% of total revenue by 2020.

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