- Macro headwinds and weak consumer spending has put pressure on TI’s top line growth. Revenues declined for the second consecutive year in 2012.
- However, witnessing a strong order growth and increasing strength across customers and geographies, TI claims that the demand for its chips strengthened during Q2 2013.
- TI expects its wireless revenue to decline by 30% in Q2 2013 and phase out completely by the end of 2013. Growing strength in the analog and embedded processor division will help it accelerate its growth in the future.
- It is deriving a growing proportion (77% in Q1 2013) of revenue from the analog and embedded processor segments, which it believes to be its core strength areas.
- With an expanding product portfolio and strong sales force, we expect TI to gain additional share in the analog and embedded processors markets in the future.
- TI can manage to improve its gross margins by reducing its operating expenses due to its wireless restructuring initiative, expanding its revenue base as well as the efficient management of its current operations.
Texas Instruments (TXN), a leading semiconductor manufacturer, will announce its Q2 2013 earnings on July 22, 2013. On account of macro headwinds and weak consumer spending last year, TI marked its second consecutive year of annual decline in revenues. However, witnessing a 9% increase in orders in Q1 2013, it believes that its orders bottomed out at the end of Q4 2012. Though the personal computer and game console markets remain weak, TI claims to be witnessing improving demand in the industrial, automotive and communication infrastructure segments.
With a strong order growth and growing strength across customers and geographies, TI declared in its mid quarter review that Q2 2013 has been tracking as per its expectation. In light of the strengthening demand for its chips, the company narrowed its Q2 2013 revenue and earning expectations to $2.99 – $3.11 billion compared to its initial forecast of $2.93 – $3.17 and revised its earnings update from $0.37 – $0.45 to $0.39 – $0.43 per share.
We believe that a robust product portfolio, one of the best sales and field application team and strong manufacturing capacity will be the key factors driving TI’s future growth.
Wireless Revenue To Phase Out By The End Of 2013
In September 2012, TI declared its intention to stop focusing on smartphones and tablets and to instead expand its OMAP footprint in embedded applications, which it believes offers greater potential for sustainable growth compared to mobile devices. Revenues from the wireless division declined sharply in Q1 2013. The company expects its wireless revenue to decline by 30% in Q2 2013 and phase out completely by the end of this year. We believe that TI’s core strength in the analog and embedded processor division will help it accelerate its growth in the future.
Increasing Strength In Analog & Embedded Markets To Spur Demand
After its planned exit from the smartphone and tablet market, TI has been focusing on transitioning its operations to become a pure analog and embedded processing company, segments that it believes will offer it long term growth and less volatility, compared to the past. The two segments generate strong cash flow and investment returns and together account for 77% of TI’s revenue, 5% higher than a year ago. With an expanding product portfolio combined which an industry leading sales force, TI has managed to consistently gain market share in the two divisions in the last few years.
TI accounts for over 15% of the analog market. It is the market leader in voltage regulators, which contributes around 30% to its analog division revenue. With the acquisition of National Semiconductors, a stronger product portfolio and growth in high volume analog and logic segments, we believe that TI is well equipped to leverage increasing demand for analog products.
Since its exit from the smartphone and tablet markets, TI has been focusing on expanding the OMAP footprint in embedded applications such as automotive, industrial equipment, enterprise communications, etc. The company feels that the embedded markets currently valued at $19 billion offers greater potential for sustainable growth compared to mobile devices. In the last year, TI has expanded its product portfolio by almost 20%.
Gross Margins To Widen As Demand Picks Up
Backed by strong revenue growth, TI’s gross margins were at its highest in 2010. However, the declining revenue base combined with additional manufacturing capacity acquired in the last few years increased its under-utilization charges, which in turn put pressure on margins. TI’s gross margins declined from 53.6% in 2010 to 49.7% in 2012. A lower revenue base contributed to a 10% annual decline in gross profits in Q1 2013 as well.
With the acquisition of National Semiconductor and some other companies’ fabrication, equipment and factories, TI has added close to $7 billion worth of incremental revenue generating capacity in the last few years. As a result, the slowdown in the overall semiconductor industry has lowered its factory loading, in turn increasing its under-utilization charges.
Managing its operations efficiently, the company registered a slight increase in gross margins last year if we adjust for the acquisition-related charge. Though the excess manufacturing capacity might be detrimental to TI’s short term growth, we believe that it can provide a competitive advantage to the company as demand picks up. The increasing scale of operation gives TI a greater control over its operational costs.
Additionally, as TI derives an increasing proportion of its revenue from high-quality analog and embedded processing products and lower revenue from the less profitable wireless products, we expect its gross margins to increase marginally going forward. The cost saving incurred from exiting the wireless business will further ease pressure off gross margins.
We will update our price estimate of $36.31 for TI after the Q2 2013 earnings release.