Texas Instruments (TXN) reported first quarter earnings that were up 3.5% sequentially and 461.2% year over year, beating the Zacks Consensus Estimate by 3 cents. The strong earnings growth was driven by solid revenue growth, a better mix of business, cost control and good execution.
Revenue
Revenue of $3.21 billion was up 6.7% sequentially, up 53.6% year over year and over the high end of the guided range of $2.95 billion to $3.19 billion. Revenue also beat the Zacks Consensus by 2.1%. This was the second straight quarter of double-digit year-over-year increase in revenue and followed six quarters of decline. Management stated that the company continued to see very strong demand across end markets, which resulted in channel inventories remaining lean. Asia and the Americas saw particular strength.
Segment Revenue
All except the wireless segment witnessed sequential increases in the last quarter. The Analog segment was up 8.2%, Embedded Processing up 6.8%, Wireless (excluding baseband) flat and Other up 19.1%. All segments increased strong double-digits from the year-ago quarter. Management reclassified its low-power wireless products, which have been moved from the Analog segment to the Wireless segment. Results in historical periods were restated accordingly and the performance mentioned here is according to the new classification.
The three major businesses within Analog (roughly 40-30-30 mix)—high volume analog and logic (HVAL), high-performance analog (HPA) and power management—contributed to the increase. HVAL products were driven by increased demand for computing and peripherals (such as printers and HDDs), which saw some momentum in the Mar quarter. The HPA business has exposure to the industrial sector. Therefore, the ongoing recovery in the industrial market had a positive impact on results.
The strongest products in the last quarter were industrial interface products, operational amplifiers and data converters. Management did not comment on the power management business in particular, although recent share gains in the fast-recovering computing market are likely to have driven this growth.
Strength in Embedded Processing continues to be driven by catalog products, with catalog microcontroller products driving the 39.2% increase from the year-ago quarter.
The increased demand for application processors and connectivity products used in smart phones continued to drive Wireless sales. The baseband business declined 8.8% sequentially and increased 6.0% from the year-ago quarter. Basebands currently contribute around 13% of total TI revenue (down from 15% in the Dec 2009 quarter). Management is in the process of phasing out this business by 2012.
The Other segment was very strong in the last quarter, growing 68.1% from the year-ago quarter. TI is benefiting from its DLP products here, as well as higher royalties, custom ASICs and calculators.
Orders
Net product orders were $3.64 billion in the last quarter, up 11.7% sequentially and 66.2% year over year. We estimate that backlog was up 24.3%, with turns sales declining 3.7% sequentially.
Although management is bringing more capacity online, the very strong demand is responsible for lead times continuing to stretch out beyond the 12-week range. However, management initiatives, such as increased spending on capital equipment and the building up of finished goods inventory, is helping TI address supply issues.
The gross margin was 52.7%, down 18 basis points (bps) sequentially and up 1,406 bps from the year-ago quarter. The reasons for the continued improvement in gross margins from the year-ago quarter are the higher level of revenue, an improving mix of analog and embedded processing business, higher utilization rates and production efficiencies. Higher profit-sharing expenses in the quarter were responsible for the slight negative impact on a sequential basis.
Operating expenses of $729 million were higher than the previous quarter’s $702 million. The operating margin was 30.0%, up 44 bps sequentially and 2,444 bps from the year-ago quarter. Despite the slight decline in the gross margin, both R&D and SG&A (as a percentage of sales) declined both sequentially and year over year.
The Analog, Embedded Processing, Wireless and Other segments generated operating margins of 29.4%, 17.0%, 22.5% and 47.3%, respectively.
Net Income
The pro forma net income was $668 million, or a 20.8% net income margin compared to $651 million, or 21.7% in the previous quarter and $122 million, or 5.8% in the prior-year quarter. Fully diluted pro forma earnings per share was $0.54 compared to $0.22 in the previous quarter and $0.10 in the Mar quarter of last year. The pro forma calculations for the last quarter exclude the impact of restructuring charges.
On a fully diluted GAAP basis, the company recorded a net profit of $658 million ($0.53 per share) compared to $655 million ($0.52 per share) in the previous quarter and a net profit of $17 million ($0.01 per share) in the comparable prior-year quarter.
Balance Sheet
Working capital management continued to improve. While inventories increased 6.2% to $1.3 billion, this resulted in inventory turns of 4.8X, just slightly over turns of 4.7X in the Dec 2009 quarter. Days sales outstanding (DSOs) increased from 39 to 43 days.
TI generated $710 million in cash from operations and spent $219 million on capex, $504 million on share repurchases and $149 million on cash dividends. The company does not have any long-term debt, although long-term liabilities totaled $846 million at quarter-end.
Guidance
Management provided guidance for the first quarter. Accordingly, revenue is expected to range between $3.31 billion and $3.59 billion (up 3.3% to 12.0% sequentially). The EPS is expected to be $0.56 to $0.64.
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% (unchanged from previous guidance).
In Summary
Texas Instruments is prudently investing its R&D dollars into several high-margin, high-growth areas of the analog, embedded processing and wireless markets, which resulted in double-digit order growth in four of the last five quarters and double-digit backlog growth in each of the last five quarters. The company is also phasing out the low-margin baseband business, which is generating some margin expansion every quarter. This is resulting in great earnings momentum and solid cash flow.
However, part of the reason for the growth in backlog is due to extending lead times, as TI continues to see stronger orders than it is able to fulfill. This trend started moderating in the last quarter and we expect further improvement as the company brings more capacity online. But all said and done, this is a good problem to have, since TI has not lost any customers in the process.
The shares are up 20.7% since Jan 29 and there could be further upside as investors see continued above-average growth.
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