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Texas Instruments Inc. (TXN - Analyst Report) is scheduled to announce its third-quarter fiscal 2012 results on October 22, 2012, and we notice upward as well as downward movements in analyst estimates.

Prior-Quarter Synopsis

Texas Instrumentsdelivered a decent second quarter with pro forma earnings per share of 46 cents, exceeding the Zacks Consensus Estimate by 7 cents.

The company reported revenue of $3.34 billion, up 6.9% sequentially and toward the middle of the revised guidance range of $3.22–$3.48 billion. The strength in the quarter came from growth in core analog, led by power management and HVAL.

Gross margin was 49.5%, down 22 basis points (bps) sequentially, impacted by lower insurance proceeds. It also declined 199 bps from the year-ago quarter, mainly on account of low utilization rates as well as lower revenue.

Third-Quarter Guidance

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

The chipmaker now expects sales of $3.27–$3.41 billion versus its previous guidance of $3.21–$3.47 billion. The earnings outlook range has also been raised to 38–42 cents per share from the previous guidance of 34–42 cents.

(Detailed earnings results can be viewed in the blog titled:  Guidance Pulls Down TI Shares

Agreement of Analysts

Over the last 30 days, only 1 out of the 30 analysts providing estimates made an upward revision, while none made downward revisions for the third quarter. For fiscal 2012, 8 out of 21 analysts made downward revisions, with none of the estimates moving in the opposite direction.

Recently, management revised its revenue and earnings guidance for the third quarter but did not reduce the midpoint of the guidance, allaying investor concerns. Analysts, by and large, expect results to come in line with the revised guidance.

The company stated that insurance receipts of $60 million related to the 2011 earthquake in Japan and various restructuring activities will likely help earnings in the upcoming quarter.

However, a few analysts expect revenue and earnings to come in below the guidance range. They continue to believe that the ongoing macro weakness and strong competition from tablets and smartphones will likely hit TI’s computing market. The analysts also contend that a slowdown in Europeand mature markets could be an added concern.

Recent reports from Israeli newspaper Calcalist stated that Amazon (AMZN) was in advanced talks to buy TI’s OMAP business. The majority of analysts see this as a clear positive for TI as it would remove a major investor overhang. They believe that the sale would bring in a lot of cash, which will allow management to reduce its huge debt balance, currently estimated to be $4.2 billion.

Longer term, majority of the analysts contend that TI's analog and embedded businesses will continue to drive growth. They 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 RFABand cost synergies from the NSMacquisition will likely lead to margins and earnings upside going forward.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate remained unchanged at 45 cents for the third quarter, but was down  2 cents to $1.66 for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate was down by 3 cents for the third quarter and by 8 cents for fiscal 2012.

Recommendation

Though we remain optimistic about Texas Instruments’ compelling product line, the increased differentiation in its business and its lower-cost 300mm capacity, we expect the company to report in-line third quarter results due to a weak PC market worldwide and a challenging global economy.

Though the wireless segment has been struggling for a while, TI recently announced that it was seeing some improvement owing to new tablet launches that use the company’s ARM-based OMAP processors. Also, its new analog and embedded processing designs getting into volume production should help the gross margin to move up toward its long-term target of 55%.

On the cost front, we believe the company has taken a number of steps in 2011 by closing a couple of 6-inch facilities in Hiji, Japanand Houston, Texasand transitioning the remaining products to more advanced facilities. The restructuring is expected to generate annual savings of $100 million a year.

However, we remain concerned about the macro weakness, Texas Instruments’ larger exposure to wireless communications infrastructure, and National’s huge debt balance, which has negatively impacted the balance sheet.

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

We, therefore, have a short-term Hold rating (Zacks #3 Rank) on Texas Instruments shares.

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