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Texas Instruments (NASDAQ:TXN) Posts Better-Than-Expected Sales In Q4 But Quarterly Guidance Underwhelms


Full Report / January 24, 2023
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Analog chip manufacturer Texas Instruments (NASDAQ:TXN) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue down 3.35% year on year to $4.67 billion. However, guidance for the next quarter was less impressive, coming in at $4.35 billion at the midpoint, being 1.66% below analyst estimates. Texas Instruments made a GAAP profit of $1.96 billion, down on its profit of $2.13 billion, in the same quarter last year.

Texas Instruments (TXN) Q4 FY2022 Highlights:

  • Revenue: $4.67 billion vs analyst estimates of $4.62 billion (0.92% beat)
  • EPS: $2.13 vs analyst estimates of $1.98 (7.69% beat)
  • Revenue guidance for Q1 2023 is $4.35 billion at the midpoint, below analyst estimates of $4.42 billion
  • Free cash flow of $1.07 billion, down 45.5% from previous quarter
  • Inventory Days Outstanding: 158, up from 135 previous quarter
  • Gross Margin (GAAP): 66.1%, down from 69.3% same quarter last year

Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ: TXN) is the world’s largest producer of analog semiconductors.

One of the oldest US-based technology companies, Texas Instruments created the first commercial silicon transistor and the transistor radio in 1954, the first handheld calculator in 1967, and the first microcontroller in 1970. Texas Instruments has long been the largest manufacturer and seller of analog chips, and serves one of the widest customer bases of

Its breadth of products is matched by its breadth of manufacturing, it runs 14 manufacturing sites around the world, from Germany to China to Japan and throughout Southeast Asia.

While personal electronics and industrial (manufacturing) end markets have long been TXN’s largest end markets, it also serves customers in automotive, communications, and enterprise computing.

Texas Instruments’ peers and competitors include Analog Devices (NASDAQ:ADI), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), and Microchip (NASDAQ:MCHP).

Analog Semiconductors

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

Texas Instruments's revenue growth over the last three years has been unremarkable, averaging 12.6% annually. Last year the quarterly revenue declined from $4.83 billion to $4.67 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Texas Instruments Total Revenue

Despite Texas Instruments revenues beating analyst estimates, this was still a slow quarter with a 3.35% revenue decline. Texas Instruments's revenue is continuing to decline, signal that the current downcycle is deepening.

Revenue growth went from positive to negative this quarter, and Texas Instruments expects it to stay negative next quarter with an estimated decline of 11.3% YoY and analysts think the declines will continue, with next twelve months estimated at 8.66% declines.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Texas Instruments Inventory Days Outstanding

This quarter, Texas Instruments’s inventory days came in at 158, 23 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Texas Instruments's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 66.1% in Q4, down 3.2 percentage points year on year.

Texas Instruments Gross Margin (GAAP)

Gross margins have been trending up over the last year, averaging 68.7%. Texas Instruments's gross margins remain one of the highest in the semiconductor sector, driven strong pricing power from its differentiated chips.

Profitability

Texas Instruments reported an operating margin of 53.2% in Q4, down 3.5 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Texas Instruments Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 57.4%. Texas Instruments's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Wall St analysts are expecting earnings per share to decline 10.3% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Texas Instruments's free cash flow came in at $1.07 billion in Q4, roughly the same as last year.

Texas Instruments Free Cash Flow

Texas Instruments has generated $5.92 billion in free cash flow over the last twelve months, translating to 29.5% of revenues. This is a great result; Texas Instruments's free cash flow conversion was very high compared to most semiconductor companies, in the last year. This high cash conversion, if maintained, puts it in a great position to invest in new products, while also remaining resilient during industry down cycles.

Texas Instruments’s average return on invested capital (ROIC) over the last 5 years of 63.6% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Texas Instruments's Q4 Results

Sporting a market capitalization of $161 billion, more than $9.06 billion in cash and with positive free cash flow over the last twelve months, we're confident that Texas Instruments has the resources it needs to pursue a high growth business strategy.

Texas Instruments topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is up 0.62% on the results and currently trades at $178.21 per share.

Is Now The Time?

When considering Texas Instruments, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Texas Instruments is a solid business. However, its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its impressive operating margins are indicative of an highly efficient business model, and its high return on invested capital suggests it is well run and in a strong position for profit growth.

Texas Instruments's price to earnings ratio based on the next twelve months of 22.5x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about Texas Instruments and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the semiconductors stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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