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Texas Instruments (TXN - Free Report) or TI’s fourth-quarter 2016 earnings and revenues were up sequentially and year over year.
Over the last one year, the stock has outperformed the Zacks Semiconductor - General industry. It gained 42.38% compared with the industry’s gain of 12.78%.
There are indications of strengthening auto and industrial markets, which are helping the company. The communications and enterprise systems market is stable. The personal electronics markets remains weak but TI has done well to tackle the challenge.
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.
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.
Texas Instruments also 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 its exposure to the volatile consumer/computing markets.
Let’s see what the numbers say
Revenue
Texas Instruments reported revenues of $3.41 billion, which were down 7.1% sequentially but up 7.1% year over year (within the guidance range of $3.17 billion and $3.43 billion) and ahead of the Zacks Consensus Estimate by 3.2%.
The automotive market was again strong in the last quarter with growth spread across all five sectors inside this market. The company has also seen broad-based improvement in the industrial market. Communications equipment and enterprise systems stayed even but personal electronics was slightly down. Other segment saw a decline.
Analog and embedded processing applications business continues to see strong growth. It typically yields a more stable longer-lived business as well as stronger margins. 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 67%, 22% and 11% of quarterly revenues, respectively.
The Analog business was down 1.4% sequentially but up 10.5% from the year-ago quarter. The year-over-year growth was driven by strong high-performance Analog (HPA), Silicon Valley Analog (SVA) and power management sales offsetting stable sales in High-volume Analog (HVAL).
The Embedded Processing segment, which includes the processor, microcontroller and connectivity product lines, was down 6.9% sequentially but up 6.3% from last year. The year-over-year growth was driven by stronger sales across all product lines.
The Other segment, which includes DLPs, custom ASICs, calculators, royalties and some legacy wireless products was down 46.6% sequentially and 9.5% year over year. Weakness in royalties and custom ASICs persisted with Calculators and DLPs staying even.
Net product orders were $3.44 billion in the quarter, up 11% year over year.
Margins
Texas Instruments’ gross margin of 62.5% was up 44 basis points (bps) sequentially and 396 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 $814 million were down 8.9% sequentially but up 12.4% from the last year. Operating margin was 38.6%, up 92 bps sequentially and 282 bps from the year-ago quarter. All expenses decreased sequentially as a percentage of sales.
The Analog, Embedded Processing and Other segments generated operating margins of 42.8%, 28.2% and 33.7%, respectively. Analog margin expanded 190 bps sequentially, Embedded Processing expanded 50 bps with Other contracting 690 bps. Both Analog and Embedded segment margins expanded year over year by 480 bps with other contracting 1220 bps.
Net Income
Pro forma net income was $1.05 billion, or a 30.7% net income margin compared with $959 million, or 26.1% in the previous quarter and $836 million, or 26.2% in the year-ago quarter.
On a GAAP basis, the company reported net profit of $1.02 a share compared with a net profit of 94 cents in the previous quarter and a net profit of 80 cents in the comparable prior-year quarter.
Balance Sheet and Cash Flow
Cash and short-term investments balance was $3.49 billion, up $353 million during the quarter.
The company generated $1.39 billion in cash from operations, spending $110 million on capex, $475 million on share repurchases and $499 million on cash dividends.
Texas Instruments is one of the few technology companies that return a significant amount of cash to investors. Its management policy is to return cash in the form of both share repurchases and dividends. It has increased dividends 14% over the trailing 12 months, although the amount spent on share repurchases dropped 22%.
At quarter-end, TI had $3 billion in long-term debt and $631 million in short-term debt. As of Dec 31, 2016 the company’s net debt position was $119 million.
Guidance
The company provided guidance for the first quarter.
It expects revenues between $3.17 billion and $3.43 billion (down 10.8% sequentially at the mid-point). However the company’s revenue guidance at the mid-point is higher than the Zacks Consensus Estimate of $3.22 billion.
The annual effective tax rate and the rate to be applied for the first quarter is unchanged at around 30%.
Earnings for the quarter are expected to be 78 to 88 cents. The Zacks Consensus Estimate is pegged at 75 cents.
For the current year, the estimates for NVIDIA stayed unchanged while the same for Intersil have gone up 1.75% in the past 60 days.
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Texas Instruments (TXN) Q4 Earnings & Revenues Grow Y/Y
Texas Instruments (TXN - Free Report) or TI’s fourth-quarter 2016 earnings and revenues were up sequentially and year over year.
Over the last one year, the stock has outperformed the Zacks Semiconductor - General industry. It gained 42.38% compared with the industry’s gain of 12.78%.
There are indications of strengthening auto and industrial markets, which are helping the company. The communications and enterprise systems market is stable. The personal electronics markets remains weak but TI has done well to tackle the challenge.
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.
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.
Texas Instruments also 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 its exposure to the volatile consumer/computing markets.
Let’s see what the numbers say
Revenue
Texas Instruments reported revenues of $3.41 billion, which were down 7.1% sequentially but up 7.1% year over year (within the guidance range of $3.17 billion and $3.43 billion) and ahead of the Zacks Consensus Estimate by 3.2%.
Texas Instruments Incorporated Revenue (TTM)
Texas Instruments Incorporated Revenue (TTM) | Texas Instruments Incorporated Quote
The automotive market was again strong in the last quarter with growth spread across all five sectors inside this market. The company has also seen broad-based improvement in the industrial market. Communications equipment and enterprise systems stayed even but personal electronics was slightly down. Other segment saw a decline.
Analog and embedded processing applications business continues to see strong growth. It typically yields a more stable longer-lived business as well as stronger margins. 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 67%, 22% and 11% of quarterly revenues, respectively.
The Analog business was down 1.4% sequentially but up 10.5% from the year-ago quarter. The year-over-year growth was driven by strong high-performance Analog (HPA), Silicon Valley Analog (SVA) and power management sales offsetting stable sales in High-volume Analog (HVAL).
The Embedded Processing segment, which includes the processor, microcontroller and connectivity product lines, was down 6.9% sequentially but up 6.3% from last year. The year-over-year growth was driven by stronger sales across all product lines.
The Other segment, which includes DLPs, custom ASICs, calculators, royalties and some legacy wireless products was down 46.6% sequentially and 9.5% year over year. Weakness in royalties and custom ASICs persisted with Calculators and DLPs staying even.
Net product orders were $3.44 billion in the quarter, up 11% year over year.
Margins
Texas Instruments’ gross margin of 62.5% was up 44 basis points (bps) sequentially and 396 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 $814 million were down 8.9% sequentially but up 12.4% from the last year. Operating margin was 38.6%, up 92 bps sequentially and 282 bps from the year-ago quarter. All expenses decreased sequentially as a percentage of sales.
The Analog, Embedded Processing and Other segments generated operating margins of 42.8%, 28.2% and 33.7%, respectively. Analog margin expanded 190 bps sequentially, Embedded Processing expanded 50 bps with Other contracting 690 bps. Both Analog and Embedded segment margins expanded year over year by 480 bps with other contracting 1220 bps.
Net Income
Pro forma net income was $1.05 billion, or a 30.7% net income margin compared with $959 million, or 26.1% in the previous quarter and $836 million, or 26.2% in the year-ago quarter.
On a GAAP basis, the company reported net profit of $1.02 a share compared with a net profit of 94 cents in the previous quarter and a net profit of 80 cents in the comparable prior-year quarter.
Balance Sheet and Cash Flow
Cash and short-term investments balance was $3.49 billion, up $353 million during the quarter.
The company generated $1.39 billion in cash from operations, spending $110 million on capex, $475 million on share repurchases and $499 million on cash dividends.
Texas Instruments is one of the few technology companies that return a significant amount of cash to investors. Its management policy is to return cash in the form of both share repurchases and dividends. It has increased dividends 14% over the trailing 12 months, although the amount spent on share repurchases dropped 22%.
At quarter-end, TI had $3 billion in long-term debt and $631 million in short-term debt. As of Dec 31, 2016 the company’s net debt position was $119 million.
Guidance
The company provided guidance for the first quarter.
It expects revenues between $3.17 billion and $3.43 billion (down 10.8% sequentially at the mid-point). However the company’s revenue guidance at the mid-point is higher than the Zacks Consensus Estimate of $3.22 billion.
The annual effective tax rate and the rate to be applied for the first quarter is unchanged at around 30%.
Earnings for the quarter are expected to be 78 to 88 cents. The Zacks Consensus Estimate is pegged at 75 cents.
Capex target remains at 4% of revenues.
Zacks Rank & Stocks to Consider
Texas Instruments carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader technology sector include NVIDIA Corporation (NVDA - Free Report) and Intersil Corporation , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
For the current year, the estimates for NVIDIA stayed unchanged while the same for Intersil have gone up 1.75% in the past 60 days.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>