Analog chip manufacturer Texas Instruments (NASDAQ:TXN) missed analysts' expectations in Q4 FY2023, with revenue down 12.7% year on year to $4.08 billion. Next quarter's revenue guidance of $3.6 billion also underwhelmed, coming in 11.2% below analysts' estimates. It made a GAAP profit of $1.49 per share, down from its profit of $2.19 per share in the same quarter last year.
Texas Instruments (TXN) Q4 FY2023 Highlights:
- Market Capitalization: $158.8 billion
- Revenue: $4.08 billion vs analyst estimates of $4.13 billion (1.4% miss)
- EPS: $1.49 vs analyst estimates of $1.47 (1.7% beat)
- Revenue Guidance for Q1 2024 is $3.6 billion at the midpoint, below analyst estimates of $4.05 billion
- Free Cash Flow of $776 million, up 75.6% from the previous quarter
- Inventory Days Outstanding: 221, up from 207 in the previous quarter
- Gross Margin (GAAP): 59.6%, down from 66.1% 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).
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 8.2% annually. This quarter, its revenue declined from $4.67 billion in the same quarter last year to $4.08 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 had a difficult quarter as revenue dropped 12.7% year on year, missing analysts' estimates by 1.4%. This could mean that the current downcycle is deepening.
Texas Instruments looks like it's on the cusp of a rebound, as it's guiding to 21.6% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 0.5% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 221, which is 71 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Texas Instruments's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 59.6% in Q4, down 6.5 percentage points year on year.
Despite declining over the past year, Texas Instruments still retains robust gross margins, averaging 62.8%. These attractive unit economics point to its potent and competitive product offering, pricing power, and efficient inventory management.
Texas Instruments reported an operating margin of 47.2% in Q4, down 0.5 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Texas Instruments's operating margins have been trending down over the last year, averaging 44.2%. However, the company's profitability remains 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 Street expects earnings per share to decline 5.7% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Texas Instruments's free cash flow came in at $776 million in Q4, down 27.8% year on year.
As you can see above, Texas Instruments produced free cash flow of just $1.35 billion in the last year, resulting in a measly 8% free cash flow margin. Texas Instruments will need to improve its free cash flow conversion if it wants to stay competitive.
Return on Invested Capital (ROIC)
EPS growth informs us whether a company's revenue growth was profitable. But was it capital-efficient? For example, if two companies had the same EPS growth, we’d prefer the one putting up those numbers with lower capital requirements (usually in the form of balance sheet debt and equity).
Understanding a company’s long-term ROIC (return on invested capital) gives another level of insight because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also its management team's decision-making prowess (because they're the individuals dictating what the company invests in).
Texas Instruments's five-year average ROIC was 59.5%, placing it among the best semiconductor companies. Just as you’d like your investment dollars to generate returns, Texas Instruments's invested capital has produced excellent profits. The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Texas Instruments's ROIC has averaged 11 percentage point decreases each year. We still think Texas Instruments is a good business, but if its returns keep falling, it could suggest its competitive advantage or profitable investment opportunities are shrinking. We'll keep a close eye on the company.
Key Takeaways from Texas Instruments's Q4 Results
We struggled to find many strong positives in these results. Its revenue and free cash flow missed analysts' estimates, driven by weakness in its industrial and automotive end markets. On top of that, its guidance for next quarter missed Wall Street's expectations. Overall, this was a mediocre quarter for Texas Instruments. The company is down 3.7% on the results and currently trades at $168 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.
We think Texas Instruments is a solid business. Although its revenue growth has been weak over the last three years with analysts expecting growth to slow from here, its stellar ROIC suggests it has been a well-run company historically. On top of that, its impressive operating margins show it has a highly efficient business model.
Texas Instruments's price-to-earnings ratio based on the next 12 months is 26.4x. There are definitely things to like about Texas Instruments and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price point.
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