Texas Instruments (NASDAQ:TXN) is set to announce its Q3 2012 earnings on Monday, October 22. While we believe the company remains strong in the analog and embedded processor divisions, the lack of order visibility in the two last quarters could lead to a slowdown in its growth rate in Q3. Additionally, we expect the wireless division to remain weak this quarter, as well as the company continues to report declining revenues from the baseband division and struggles to hold its ground in the application processor market. The stock has been treading a downward path for quite some time as well.
Last quarter, however, the company reported a 7% sequential increase in revenues as it registered strong growth in orders and an expanding backlog in Q1. Driven by growth in power management and communication infrastructure, TI registered strong growth in its analog and embedded processor divisions. However, on account of lower OMAP revenues, the wireless division continued to weigh down the company's performance.
Here we list some key trends to watch for in the Q3 earnings release, which could have a significant impact on TI's long-term growth prospects.
Low Level of Factory Utilization
Texas Instrument has added around $7 billion worth of incremental revenue generating capacity in the last few years, with the acquisition of National Semiconductor and some other companies' fabrications and equipment and factories. Amid a slowdown in the semiconductor industry, the additional manufacturing capacity has led to lower factory utilization which in turn has put downward pressure on gross margins. Barring a sudden jump in 2010, TI's gross margins have witnessed a y-o-y decrease from 2007 to 2011.
While the additional capacity will help TI leverage the long-term growth in demand, it can be detrimental to the company's short-term growth as the current macroeconomic headwinds have resulted in sluggish demand in the industry. The increased costs associated with the incremental capacity will negatively impact the margins till the company witnesses strong growth in demand.
Though the factory utilization levels were up slightly in the second quarter, with a flat revenue guidance and inventory being at the desired level, we expect the utilization levels to decline in the third quarter.
Revenue From OMAP Processors
While TI witnessed a rapid increase in revenues from OMAP processors in Q1 2012, winning both the application processor as well as the Wi-Fi socket in Amazon's (NASDAQ:AMZN) Kindle Fire, the revenues slipped slightly in the subsequent quarter. Amid macro headwinds and intense competition in the smartphone application processor market, TI has been struggling to hold its ground in the wireless division.
We expect the OMAP processors and connectivity solutions to save TI's declining market share in the wireless division in the long run. However, with the company's recent decision to reduce its efforts to further leverage the OMAP processors in smartphones and tablets, we might have to revisit our stance. (Read: Texas Instruments' Shift Away From Wireless Will Weigh Its $43 Valuation)
We expect the company to report a further decline in revenue from the wireless segment. But what is the extent of that decline and how TI intends to leverage its OMAP processors in the future, including the upcoming OMAP 5 processors, is something we will watch for in the upcoming earnings.
We will update our price estimate of $43.48 for Texas Instruments post the Q3 2012 earnings release.
Disclosure: No positions