Analog chip manufacturer Texas Instruments (NASDAQ:TXN) missed analysts' expectations in Q3 FY2023, with revenue down 13.5% year on year to $4.53 billion. Turning to EPS, Texas Instruments made a GAAP profit of $1.85 per share, down from its profit of $2.47 per share in the same quarter last year.
Texas Instruments (TXN) Q3 FY2023 Highlights:
- Revenue: $4.53 billion vs analyst estimates of $4.59 billion (1.22% miss)
- EPS: $1.85 vs analyst estimates of $1.82 (1.88% beat)
- Revenue Guidance for Q4 2023 is $4.1 billion at the midpoint, below analyst estimates of $4.5 billion
- Free Cash Flow of $442 million is up from -$47 million in the previous quarter
- Inventory Days Outstanding: 207, down from 209 in the previous quarter
- Gross Margin (GAAP): 62.1%, down from 69% 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.
Sales Growth
Texas Instruments's revenue growth over the last three years has been unremarkable, averaging 11% annually. This quarter, its revenue declined from $5.24 billion in the same quarter last year to $4.53 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 13.5% year on year, missing analysts' estimates by 1.22%. This could mean that the current downcycle is deepening.
Texas Instruments's revenue growth has slowed over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 12.2% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 3.46% 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 207, which is 61 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Pricing Power
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 62.1% in Q3, down 6.9 percentage points year on year.
Despite declining over the past year, Texas Instruments still retains robust gross margins, averaging 64.5%. These attractive unit economics point to its potent and competitive product offering, pricing power, and efficient inventory management.
Profitability
Texas Instruments reported an operating margin of 50.2% in Q3, down 8.1 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 50.9%. 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
Analysts covering Texas Instruments expect earnings per share to be relatively flat 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 $442 million in Q3, down 77.6% year on year.
As you can see above, Texas Instruments produced free cash flow of just $1.65 billion in the last year, resulting in a measly 8.95% free cash flow margin. Texas Instruments will need to improve its free cash flow conversion if it wants to stay competitive.
Texas Instruments's average return on invested capital (ROIC) of 60.1% over the last five years implies that it has a strong competitive position and was able to invest in profitable growth over time.
Key Takeaways from Texas Instruments's Q3 Results
Sporting a market capitalization of $133 billion, more than $8.95 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Texas Instruments is attractively positioned to invest in growth.
We struggled to find many strong positives in these results. Its revenue guidance for next quarter underwhelmed and its revenue missed Wall Street's estimates. Overall, this was a mediocre quarter for Texas Instruments. The company is down 4.27% on the results and currently trades at $140.64 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 good business. However, its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. On top of that, its growth is coming at a cost of significant cash burn. The good news is its impressive operating margins indicate a highly efficient business model and its high ROIC suggests it is well run and in a strong position for profitable growth.
Texas Instruments's price-to-earnings ratio based on the next 12 months is 19.0x. There's definitely a lot of 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.
Wall Street analysts covering the company had a one-year price target of $181.1 per share right before these results, implying that they saw upside in buying Texas Instruments even in the short term.
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