No Surprises In Texas Instruments's (NASDAQ:TXN) Q1 Sales Numbers But Quarterly Guidance Underwhelms

Analog chip manufacturer Texas Instruments (NASDAQ:TXN) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue down 10.7% year on year to $4.38 billion. However, guidance for the next quarter was less impressive, coming in at $4.35 billion at the midpoint, being 2.32% below analyst estimates. Texas Instruments made a GAAP profit of $1.71 billion, down on its profit of $2.2 billion, in the 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 12.4% annually. Last year the quarterly revenue declined from $4.91 billion to $4.38 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).

Despite Texas Instruments revenues beating analyst estimates, this was still a slow quarter with a 10.7% revenue decline.

Texas Instruments's revenue growth has decelerated for the last three quarters and the company expects growth to turn negative next quarter guiding to a 16.5% year on year decline, while analysts are estimating a NTM revenue decline of 4.66%.

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 197, 58 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 65.4% in Q1, down 4.8 percentage points year on year.

Gross margins have been trending down over the last year, averaging 67.5%. However, Texas Instruments's gross margins remain one of the highest in the semiconductor group, driven by strong pricing power from its differentiated chips.

Profitability

Texas Instruments reported an operating margin of 52.6% in Q1, down 6.5 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.

Operating margins have been trending down over the last year, averaging 54.7%. However, Texas Instruments's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.

Earnings, Cash & Competitive Moat

Wall St analysts are expecting earnings per share to decline 5.15% 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 $178 million in Q1, down 89.5% year on year.

Texas Instruments has generated $4.4 billion in free cash flow over the last twelve months, translating to 22.6% 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 60.8% 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 Q1 Results

Sporting a market capitalization of $159 billion, more than $9.55 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.

We struggled to find many strong positives in these results. Revenue growth was quite weak and both revenue and EPS guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Texas Instruments. The company is down 0.68% on the results and currently trades at $168.25 per share.

Is Now The Time?

Texas Instruments may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Texas Instruments is a great business. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from here. 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 is 21.5x. Looking at the semiconductors landscape today, Texas Instruments's qualities stand out, and we like the stock at this price.

The Wall St analysts covering the company had a one year price target of $183.6 per share right before these results, implying that they saw upside in buying Texas Instruments even in the short term.

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