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Texas Instruments (TXN) Beats on Earnings & Revenues in Q3

Texas Instruments TXN or TI reported better-than-expected third-quarter 2017 results, beating the Zacks Consensus Estimate on both counts.

Earnings of $1.26 per share beat the consensus mark by 14 cents, increasing 34% year over year and 22.3% sequentially. Revenues of $4.15 billion beat the Zacks Consensus Estimate by $199 million and were up 12% on a year-over-year basis and 11.5% sequentially. It came ahead of the guided range of $3.74–$4.06 billion.

Despite strong results, shares fell 1.5% in afterhours trading possibly due to a sluggish top-line outlook. Texas Instruments shares have rallied 31.5% year to date, underperforming its industry’s gain of 35.7%.

The strong results were mainly driven by strength in auto and industrial markets. The communications market and enterprise systems also grew year over year. Personal electronics revenues were flat.

Segment wise, growth of analog and embedded processing applications business was strong. These typically yield a more stable business as well as strong margins. The Other segment declined year over year.

Texas Instruments Incorporated Revenue (TTM)

Texas Instruments Incorporated Revenue (TTM) | Texas Instruments Incorporated Quote

Texas Instruments continues to prudently invest its R&D dollars into several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing its exposure to industrial and automotive markets and increasing dollar content at customers, while reducing exposure to volatile consumer/computing markets.

Internally, the company has always executed rather well. It, along with chipmaker Intel (INTC), is one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. Since the company usually builds out capacity well ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex at up to 4% of sales even while on an expansion plan.

The company remains focused on increasing free cash flow per share and strengthening competitive advantages. Notably, free cash flow over the past 12 months was $4.25 billion or 29% of revenues. Overall, we remain optimistic about TI’s compelling product line, the differentiation in its business and manufacturing efficiencies that include growing 300-millimeter Analog output. However, risks associated with a high debt level persist.

Let’s see what the numbers say.

Revenues in Detail

Analog, Embedded Processing and Other segments generated 65%, 23% and 12% of quarterly revenues, respectively.

Analog, which includes Power, Signal Chain and High Volume products, was up 12% sequentially and 16% from the year-ago quarter to $2.7 billion. The year-over-year growth was driven by strong performance in product lines — power and signal chain.

The Embedded Processing segment, which includes Connected Microcontrollers and Processors, was up 7% sequentially and 17% year over year to $931 million. The year-over-year growth was driven by stronger sales across both product lines — processors and connected microcontrollers.

The Other segment, which includes DLPs, custom ASICs and calculators, was up 18% sequentially but down 13% year over year. The decline was mainly due to custom ASIC and royalties moving to other income and expenses beginning in the first quarter of 2017.

Margins and Net Income

Texas Instruments’ gross margin of 64.5% was up 24 basis points (bps) sequentially and 249 bps from the year-ago quarter. The company’s gross margin has been improving consistently as more production shifts to its 300mm line.

Operating expenses of $868 million were down 2.9% sequentially and 2.9% from last year. Operating margin was 43.4%, up 336 bps sequentially and 573 bps from the year-ago quarter.

The Analog, Embedded Processing and Other segments generated operating margin of 31%, 8% and 5%, respectively. Analog and Embedded Processing segment margin expanded 200 bps and 100 bps respectively while the Other segment stayed flat on a sequential basis. Analog and Embedded margins expanded 500 bps and 200 bps respectively while Other segment margin contracted 100 bps year over year.

Pro forma net income was $1.29 billion, or a 31.2% net income margin compared with $1.1 billion, or 28.6% in the previous quarter and $959 million, or 26.1% in the year-ago quarter.

Balance Sheet and Cash Flow

Cash and short-term investments balance was $3.4 billion, up $400 million during the quarter.

The company generated $1.7 billion in cash from operations, spending $186 million on capex, $650 million on share repurchases and $495 million on cash dividends.

Texas Instruments is one of the few technology companies that return a significant amount of cash to investors. Over the trailing 12 months, the company has returned 4.3 billion of cash through a combination of dividends and stock repurchases.

At quarter-end, TI had $3.1 billion in long-term debt and $499 million in short-term debt. As of Mar 31, 2017, the company’s net debt position was $139 million.

Guidance

The company provided guidance for the fourth quarter.

It expects revenues between $3.57 billion and $3.87 billion (down 10.8% sequentially at the mid-point). The mid-point of the guidance is higher than the Zacks Consensus Estimate of $3.67 billion. The effective tax rate for the fourth quarter is expected to be around 29%.

Earnings for the quarter are expected to be in the range of $1.01 to $1.15 per share. The lower end of the range is in line with the Zacks Consensus Estimate.

The capex target remains at 4% of revenues.

Zacks Rank & Stocks to Consider

Texas Instruments carries a Zacks Rank #1 (Strong Buy).

Other stocks worth considering in the broader technology sector include Micron Technology, Inc. MU, Facebook, Inc. FB and Jabil Inc. JBL, each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings per share growth rate for Micron, Facebook and Jabil is projected to be 10%, 25.6% and 12%, respectively.

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