TI’s Results: Light In The Semiconductor Tunnel?

Yesterday Texas Instruments (NYSE:TXN), a leading semiconductor company with annual revenue of $12.5 billion, reported second quarter results that beat estimates and gave positive guidance for the third quarter. After Intel’s encouraging results last weeks, this is another shot in the arm for the semiconductor sector. Let’s take a closer look.

Q2 revenue was down 27% and up 18% q-o-q to $2.46 billion. The sequential increase in revenue was driven by strength in TI’s analog segment as well as a seasonal increase in calculator sales. Net income was down 56% to $260 million or $0.20 per share. Excluding charges, earnings were $0.25 per share. Analysts expected earnings of $0.18 per share on revenue of $2.41 billion.

Gross margin fell to 45.7% from 52.1% but beat analyst estimates of 43.8%. Capital expenditure was $47 million, down from $271 million last year and up from $43 million last quarter. TI bought back shares for $251 million and paid dividends of $139 million. Cash and cash equivalents plus short-term investments increased to $2.56 billion at the end of the quarter. Q1 analysis is available here.

TI is the leader in the analog market with about 14% market share, and as guest author Vijay Nagarajan pointed out in his deep-dive analysis of the company, it has a huge opportunity to grow in this $36 billion market. It is followed by STMicroelectronics with 10.9% and Infineon with 7.8%. TI built up its leading position in the market with a series of acquisitions, including the $7.6 billion Burr-Brown acquisition in 2000. Speculations are rife about consolidation in the highly fragmented analog market as the valuations of most companies have fallen sharply. Analysts expect TI to make small but strategic acquisitions that add to its expertise rather than large acquisitions that would duplicate expertise and be too big to digest.

Analog revenue in the quarter was down 24% y-o-y but up 21% q-o-q to $983 million, or about 40% of total revenue. Wireless business revenue was down 33% y-o-y and up 9% q-o-q in the quarter to $601 million or about 25% total revenue, with the sequential increase driven by TI’s connectivity product line for smartphones. Other revenue from products, including calculators, was down 28% y-o-y and up 29% q-o-q to $523 million.

Embedded Processing is another strong area of focus for TI. The company has about 60% market share in the digital signal processors (DSP) market and it recently acquired Luminary Micro, which has a strong lineup of advanced 32-bit microcontrollers based on ARM’s Cortex-M3 architecture. Q2 revenue in the segment declined 20% y-o-y and grew 11% q-o-q to $350 million, accounting for about 14% of total revenue.

Baseband revenue was $410 million in the second quarter, up 3% sequentially and down 40% from a year ago. TI will be winding down its baseband business over the next few years. Earlier, it had announced plans to sell this business but failed to find a buyer.

TI said that inventories and chip demand are now close to moving into balance and that it is planning to increase its inventories to better align them with current demand. Orders declined 19% y-o-y but increased 27% q-o-q to $2.8 billion, while inventory decreased $588 million to $1.06 billion from a year earlier.

TI expects Q3 revenue in the range of $2.5 billion to $2.8 billion and EPS between $0.29 and $0.39. Analysts expect earnings of $0.28 on sales of $2.53 billion. The stock is currently trading around $24 with market cap of about $30 billion. It was upgraded yesterday by Jefferies & Company from Underperform to Hold.