Texas Instruments Inc. (TXN) is scheduled to announce its third quarter fiscal 2011 results on October 24, 2011, and we notice downward movements in analyst estimates.
Second Quarter Overview
TexasInstrumentsdelivered a decent second quarter, with pro forma earnings per share of 58 cents exceeding the Zacks Consensus Estimate by 5 cents, or 9.4%.
The company reported revenue of $3.46 billion, which was up 1.9% sequentially and at the lower end of the originally guided range of $3.41 billion and $3.69 billion. The sequential increase was driven by strength in Analog and Embedded Processing segments, partially offset by the expected weakness in the company's Wireless segment. As expected, revenue from Japan was weak.
Texas Instruments’gross margin was 50.7%, down 25 basis points (bps) sequentially and 348 bps from the year-ago quarter. The sharp decline from both the previous and year-ago quarters were due to lower utilization rates and higher earthquake-related costs.
Management Guidance
On September 8, 2011, the company narrowed and lowered its expected ranges for revenue and earnings per share (EPS) for the third quarter of 2011.
Currently, the company expects revenue in the range of $3.23–$3.37 billion compared to the prior range of $3.40–$3.70 billion and EPS in the range of 56–60 cents compared to the prior range of 55–65 cents.
Management stated that the lowered guidance was due to weak demand across a wide range of products, markets and customers.
For 2011, Texas Instrumentsexpects research and development expenses of $1.7 billion (unchanged), capex of 0.9 billion (unchanged), depreciation of $0.9 billion (unchanged) and an annual effective tax rate of 27% (down from previous estimate of 28%).
Agreement of Analysts
Estimate revisions indicate declining sentiments for the next quarter, with 5 out of 11 analysts making downward revisions in the last 30 days. However, the fiscal 2011 looks to be more positive, with three upward revisions, versus a single downward revision in the last 30 days.
The analysts lowering their estimates attributed their negative view to weaker-than-expected analog and embedded processing shipments and continued weakness in the industrial end market. They expect revenue to decline on.
Though the NSM acquisition is strategically a good move in that it consolidates the analog industry, the analysts believe that TI might face multiple challenges such as high channel inventories, which coupled with the recently added capacity, could result in prolonged under-utilization, thereby impacting cost absorption. Added to that is the additional indebtedness. Currently, Texas Instruments has approximately $2 billion in net debt. So if TI decides to pay off debt first, it could potentially limit the amount of annual share repurchases.
However, the analysts stated that Texas Instruments would see a tax benefit in the third quarter as the firm reduced its estimated 2011 tax rate from 27% previously to 25% (current). This will help the company to meet its earnings guidance relative to its revenue guidance.
However, longer term, the analysts believe that the 300mm RFAB and China fab purchases will increase the company’s market share and reduce the cost structure, thereby improving gross and operating margins in the near future.
Magnitude of Estimate Revisions
For the third quarter, there was no change to the Zacks Consensus Estimate in the past 30 days. But the estimate fell 7 cents to 57 cents in the last 90 days.
For fiscal 2011, the Zacks Consensus Estimate increased 2 cents to $2.25 in the last 30 days, but witnessed a drastic decrease of 13 cents since the second quarter results.
Recommendation
We remain optimistic about Texas Instruments’ compelling product line, the increased differentiation in its business and its lower-cost 300mm capacity.
Texas Instruments is one of the largest players in the analog market with a share of around 17%. Following the National Semiconductor (NSM) acquisition on September 23, analog now accounts for around 50% of Texas Instruments’ business. However, the acquisition has increased the debt burden of the company and increased under-utilization of fabs, as TXN has extensive Fabs and NSM also has 90% in-house manufacturing.
Increasing competition from Maxim Integrated Products (MXIM), Analog Devices (ADI), Broadcom (BRCM), and Intel (INTC) are concerns.
Hence, we expect the company to report in line with the lowered guidance provided in its mid-quarter update.
However, we see downside risk due to macro demand weakness, elevated inventory levels and the Thailand flood (HDD components are 6% of total revenues). We therefore have a short-term Sell recommendation (Zacks Rank #4) on Texas Instruments shares.
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