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Texas Instruments Inc. (TXN - Analyst Report) is scheduled to announce its second-quarter fiscal 2012 results on July 23, 2012, and we notice downward movements in analyst estimates.

Prior-Quarter Synopsis

Texas Instruments delivered a decent first quarter with pro forma earnings per share of 42 cents exceeding the Zacks Consensus Estimate by 13 cents.

The company reported revenue of $3.12 billion, which was down 8.7% sequentially but just over the revised guidance range of $2.99 billion – $3.11 billion. The weakness in other areas was partially offset by a full quarter of National’s contribution and a stronger-than-expected wireless business.

Texas Instruments’ gross margin was 49.7%, up 379 basis points (bps) sequentially, benefitting from the insurance claim received. However, it declined 189 bps from the year-ago quarter, mainly on account of low utilization rates as factory loadings stayed at around 50%.

Second-Quarter Guidance

Recently, the company narrowed its revenue and earnings expectations for the second quarter of 2012.

The chipmaker now expects sales of $3.28–$3.42 billion versus its previous guidance range of $3.22–$3.48 billion. The earnings outlook has also been narrowed to 32–36 cents per share from the previous guidance of 30–38 cents.

For 2012, TI expects R&D expenses of $2.0 billion, capex of 0.7 billion, depreciation of $1.0 billion and an annual effective tax rate of 28% (could change with re-instatement of federal R&D tax credit that expired in 2011-end).

(Detailed earnings results can be viewed in the blog titled:  Order Trends Point To Growth at TI

Agreement of Analysts

Out of the 20 analysts providing estimates, none revised the estimate for the second quarter in the last 30 days. Over the same period, 8 out of 23 analysts made downward revisions for fiscal 2012.

The analysts lowered their estimates due to their negative view on weak macro-economic conditions and channel inventory destocking.  Further, the analysts are of the opinion that the wireless segment will not perform well in the upcoming quarter due to further declines in the baseband business, which the company expects to phase out completely by the end of the year.

However, longer term, the analysts believe that TXN's analog and embedded businesses will continue to drive growth for the company. They also see potential margin expansion opportunities from the company’s cost cutting initiatives along with growth in higher-margin businesses. Additionally, the analysts contend that 300mm RFAB and cost synergies from the NSM acquisition will likely lead to margins and earnings upside going forward.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate increased by a penny to 39 cents for the second quarter, but was down 3 cents to $1.74 for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate remains unchanged for the second quarter and was up 1 cent for fiscal 2012.

Recommendation

We remain optimistic about Texas Instruments’ compelling product line, the increased differentiation in its business and its lower-cost 300mm capacity. Also, the addition of National Semiconductor strengthens its product lineup and brings on board additional capacity.

We also believe that some of the new designs (analog and embedded processing products) getting into volume production should help the gross margin to move up toward its long-term target of 55%.

However, we remain concerned about the macro weakness, TI’s larger exposure to wireless communications infrastructure, and elevated inventory levels.

Increasing competition from Maxim Integrated Products (MXIM - Analyst Report), Analog Devices (ADI - Analyst Report), Broadcom Corp. (BRCM - Analyst Report) and Intel Corp. (INTC - Analyst Report) is also a matter of concern.

Hence, we expect the company to report in line with the lowered guidance provided in its mid-quarter update.

We, therefore, have a short-term Sell recommendation (Zacks Rank #4) on Texas Instruments shares.



 

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