Analog chip manufacturer Texas Instruments (NASDAQ:TXN) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 13.7% year on year to $5.21 billion. Guidance for next quarter's revenue was $5.1 billion at the midpoint, 2.67% above the average of analyst estimates. Texas Instruments made a GAAP profit of $2.29 billion, improving on its profit of $1.93 billion, in the same quarter last year.
Texas Instruments (TXN) Q2 FY2022 Highlights:
- Revenue: $5.21 billion vs analyst estimates of $4.64 billion (12.1% beat)
- EPS (GAAP): $2.45
- Revenue guidance for Q3 2022 is $5.1 billion at the midpoint, above analyst estimates of $4.96 billion
- Free cash flow of $1.17 billion, down 31.1% from previous quarter
- Inventory Days Outstanding: 126, down from 128 previous quarter
- Gross Margin (GAAP): 69.5%, up from 67.1% 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.
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.
Texas Instruments's revenue growth over the last three years has been unremarkable, averaging 10% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $4.58 billion to $5.21 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).
While Texas Instruments beat analysts' revenue estimates, this was a slow quarter with 13.7% revenue growth. This marks 8 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
Texas Instruments' appears to be headed for a downturn. While the company is guiding to growth of 9.84% YoY next quarter, analyst consensus sees 0.64% revenue decline over the next twelve months.
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.
This quarter, Texas Instruments’s inventory days came in at 126, 8 days below the five year average, showing no indication of an excessive inventory buildup at the moment.
Texas Instruments's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 69.5% in Q2, up 2.4 percentage points year on year.
Gross margins have been trending up over the last year, averaging 69.2%. Texas Instruments's gross margins remain one of the highest in the semiconductor sector, driven strong pricing power from its differentiated chips.
Texas Instruments reported an operating margin of 58.2% in Q2, up 4.6 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.
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
Analysts covering the company are expecting earnings per share to be fairly flat 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 $1.17 billion in Q2, down 32.5% year on year.
Texas Instruments has generated $5.88 billion in free cash flow over the last twelve months, translating to 30% 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 59.1% 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 Q2 Results
With a market capitalization of $150 billion, more than $8.38 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were impressed by how strongly Texas Instruments outperformed analysts’ revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 1.34% on the results and currently trades at $163 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. Although we have other favorites, we understand the arguments that Texas Instruments is not a bad business. However, its revenue growth has been slower, and analysts expect growth rates to deteriorate from there. But on a positive note, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion.
Texas Instruments's price to earnings ratio based on the next twelve months is 18.4x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Texas Instruments doesn't trade at a completely unreasonable price point.
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