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Texas Instruments (TXN) Beats on Earnings and Revenues in Q1

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Texas Instruments (TXN - Free Report) or TI’s first-quarter 2017 earnings and revenues came ahead of expectations.

Earnings of 89 cents per share (excluding 8 cents discrete tax benefit) surpassed the Zacks Consensus Estimate by 6 cents. Revenues of $3.4 billion beat the consensus mark by nearly a billion.

Shares were up 1.59% at the end of Tuesday’s trading in response to the better-than expected results. Year to date, the stock has outperformed the Zacks Semiconductor - General industry. It gained 12.4% compared with the industry’s gain of 3.6%.

The strong results were driven by strengthening auto and industrial markets. The communications market grew slightly year over year. The personal electronics market was stronger compared to the year-ago quarter. Enterprise systems declined.

Internally, the company has always executed rather well. It, along with chipmaker Intel (INTC - Free Report) , remains 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.

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 the industrial and automotive markets and increasing dollar content at customers, while reducing exposure to volatile consumer/computing markets.

At the call, management stated that the company will remain focused on increasing free cash flow per share and strengthening competitive advantages. Overall, we remain optimistic about TI’s compelling product line, the differentiation in its business and lower-cost 300mm Analog output. We note that channel inventories remain very low, meaning that demand is likely to remain strong.

Let’s see what the numbers say.

Revenue

Revenues of $3.41 billion were slightly down sequentially but up 13.1% year over year (within the guidance range of $3.17 billion and $3.43 billion) and beat the Zacks Consensus Estimate by 3%.

The automotive market continued to be strong. The company also saw broad-based improvement in the industrial market.

Growth of analog and embedded processing applications business was strong. The Other segment declined. The company continues to return cash to investors in the form of share repurchases and dividends.

Segment Revenues

The Analog, Embedded Processing and Other Segments generated 66%, 24% and 10% of quarterly revenues, respectively.

The Analog business was down 1.5% sequentially but up 20.1% from the year-ago quarter. The year-over-year growth was driven by strong performance in all three product lines - power, signal chain and high volume.

The Embedded Processing segment, which includes processor, microcontroller and connectivity product lines, was up 7.9% sequentially and 10.2% year over year. The year-over-year growth was driven by stronger sales across all product lines - processors and connected microcontrollers.

The Other segment, which includes DLPs, custom ASICs, calculators, royalties and some legacy wireless products was down 10.8% sequentially and 16.6% year over year. The decline was mainly due to royalties moving to other income and expenses.

Net product orders were $3.5 billion in the quarter, up 14% year over year.

Margins

Texas Instruments’ gross margin of 63% was up 54 basis points (bps) sequentially and 222 bps from the year-ago quarter. The company’s gross margin has been improving consistently as more production shifts to its 300mm line. Reducing depreciation on its fixed assets is also a contributing factor. Fab utilization remains steady and mix relatively consistent at these levels. Therefore, these factors aren't likely to remain gross margin drivers in the future.

Operating expenses of $892 million were up 9.6% sequentially and 5.6% from the last year. Operating margin was 36.8%, down 183 bps sequentially but up 409 bps from the year-ago quarter. All expenses increased sequentially as a percentage of sales.

The Analog, Embedded Processing and Other segments generated operating margin of 41.4%, 29.9% and 22.4%, respectively. Analog and Other segment margin contracted 140 bps and 1130 bps, respectively on a sequential basis while that of Embedded Processing expanded 170 bps. Analog and Embedded segment margins expanded 482 bps and 424 bps, respectively year over year by while Other contracted 481 bps.

Net Income

Pro forma net income was $1 billion, or a 29.3% net income margin compared with $1.05 billion, or 30.7% in the previous quarter and $711 million, or 23.6% in the year-ago quarter.

On a GAAP basis, the company reported net profit of 97 cents a share compared with a net profit of $1.02 per share in the previous quarter and 69 cents per share in the comparable prior-year quarter.

Balance Sheet and Cash Flow

Cash and short-term investments balance was $3.05 billion, up $44 million during the quarter.

The company generated $795 million in cash from operations, spending $127 million on capex, $550 million on share repurchases and $500 million on cash dividends.

Texas Instruments is one of the few technology companies that return a significant amount of cash to investors. It has increased dividend by 20% over the trailing 12 months, although the amount spent on share repurchases dropped 24%.

At quarter-end, TI had $3 billion in long-term debt and $378 million in short-term debt. As of Mar 31, 2017, the company’s net debt position was $309 million.

Guidance

The company provided guidance for the second quarter.

It expects revenues between $3.40 billion and $3.70 billion (down 10.8% sequentially at the mid-point). The mid-point of the guidance is higher than the Zacks Consensus Estimate of $3.49 billion.

The annual effective tax rate and the rate to be applied for the second quarter is around 28%.

Earnings for the quarter are expected to be 89 cents to $1.01 per share. The Zacks Consensus Estimate is pegged at 91 cents.

The capex target remains at 4% of revenues.

Zacks Rank & Stocks to Consider

Texas Instruments carries a Zacks Rank #2 (Buy). Other stocks in the broader technology sector worth considering include Alphabet Inc. (GOOGL - Free Report) and Internap Corporation , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings per share growth for Alphabet and Internap are projected to be 16.3% and 3%, respectively.

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