Texas Instruments (TXN) reported fourth quarter results that beat the Zacks Consensus Estimate by 5 cents. Revenue was in line with the consensus, exceeding by 0.8%.
Revenue
Revenue of $3.01 billion was up 4.3% sequentially, up 20.6% year over year and at the high-end of the guided range of down 3.5% to up 4.9% sequentially. There have been no year-over-year revenue increases since the first quarter of 2008. The sequential trend is also encouraging, as the December quarter is usually a down quarter for the company. There seems to be no doubt that TI has exited the recession, given the growth in revenue, orders and backlog, as well as the lean inventories throughout the supply chain.
Segment Revenue
The three largest segments contributed to the revenue increase, while the other segment declined, impacted by the seasonal decline in calculator revenue. The Analog business increased 8.9%; Embedded Processing was up 4.8%, Wireless up 8.4% and Other down 8.9%.
The three major businesses within Analog—power management, high volume analog and logic (HVAL), and high-performance analog (HPA) all contributed to the increase. Power management revenue was particularly strong, with the company gaining share in the computing market and seeing very strong growth in battery management products, gauges and chargers used in LCD displays for TVs, notebooks and smart phones. HVAL products were driven by a pickup in automotive demand, while in HPA, the fastest growing products were low-power wireless devices.
Strength in Embedded Processing continues to be driven by catalog products, although automotive products also gained momentum in the last quarter.
The increased demand for application processors and connectivity products used in smart phones continued to drive Wireless sales. This portion of the business was up 18% sequentially and down 8% year over year. The baseband business remains strong. Basebands currently contribute around 15% of total TI revenue, although management is in the process of phasing this business out by 2012.
Orders
Net product orders were $3.26 billion in the last quarter, up 4.8% sequentially and 75.3% year over year. We estimate that backlog was up 16.6%. Turns were down 6.7% sequentially, indicating that lead times stretched out beyond the 12-week range in the last quarter. Management has stepped up spending on capital equipment and also built finished good inventory, which could help address supply issues in the following quarters.
The pro forma gross margin for the quarter was 52.9%, up 121 basis points (bps) from the previous quarter’s 51.7%. The reason for the continued improvement in gross margins is the higher level of revenue, higher utilization rates, an improving mix of analog and embedded processing business, as well as production efficiencies. Utilization rates have been going up over the last few quarters, so this may cease to be a driver of gross margins going forward.
Operating expenses of $702 million were higher than the previous quarter’s $657 million. The operating margin was 29.5%, up 66 bps sequentially from 28.9%. Most of the increase was related to the lower COGS (as a percentage of sales), helped by flattish R&D and offset by slightly higher SG&A expenses (as a percentage of sales). The Analog, Embedded Processing, Wireless and Other segments generated operating margins of 29.9%, 21.6%, 24.3% and 38.8%, respectively.
Net Income
The pro forma net income was $683 million, or a 22.7% net income margin compared to $586 million, or 20.3% in the previous quarter and $311 million, or 12.5% in the prior-year quarter. Fully diluted pro forma earnings per share were $0.54 compared to $0.42 in the previous quarter and $0.20 in the December quarter of last year. The pro forma calculations for the last quarter exclude the impact of restructuring charges, amortization of intangibles and a $16 million discrete tax benefit.
On a fully diluted GAAP basis, the company recorded a net profit of $655 million ($0.52 per share) compared to $538 million ($0.42 per share) in the previous quarter and a net profit of $107 million ($0.08 per share) in the prior-year quarter.
Balance Sheet
Working capital management continued to improve. While inventories increased 7.7% to $1.2 billion, this resulted in inventory turns of 4.7X, compared to turns of 5.0X in the September 2009 quarter. Days sales outstanding (DSOs) decreased from 45 to 39 days. TI generated a billion dollars in cash from operations and spent $436 million on capex, $351 million to repurchase 14.8 million shares and $149 million on cash dividends. The company did not have any long-term debt, although long-term liabilities totaled $810 million at quarter-end.
Guidance
Management provided guidance for the first quarter. Accordingly, revenue is expected to range between $2.95 billion and $3.19 billion (down 1.8% to up 6.2% sequentially). The EPS is expected to be $0.44 to $0.52.
For 2010, TI expects R&D expenses of $1.5 billion, capex of $0.9 billion, depreciation of $0.9 billion and an annual effective tax rate of 31%.
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