Texas Instruments (NASDAQ:TXN) Exceeds Q3 Expectations But Quarterly Guidance Underwhelms

Full Report / October 25, 2022
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Analog chip manufacturer Texas Instruments (NASDAQ:TXN) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 12.8% year on year to $5.24 billion. However, guidance for the next quarter was less impressive, coming in at $4.6 billion at the midpoint, being 6.93% below analyst estimates. Texas Instruments made a GAAP profit of $2.29 billion, improving on its profit of $1.94 billion, in the same quarter last year.

Texas Instruments (TXN) Q3 FY2022 Highlights:

  • Revenue: $5.24 billion vs analyst estimates of $5.14 billion (1.9% beat)
  • EPS: $2.47 vs analyst estimates of $2.39 (3.18% beat)
  • Revenue guidance for Q4 2022 is $4.6 billion at the midpoint, below analyst estimates of $4.94 billion
  • Free cash flow of $1.97 billion, up 68.7% from previous quarter
  • Inventory Days Outstanding: 135, up from 126 previous quarter
  • Gross Margin (GAAP): 69%, up from 67.8% 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.

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 decent, averaging 12.1% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $4.64 billion to $5.24 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

While Texas Instruments beat analysts' revenue estimates, this was a modest quarter with just 12.8% revenue growth. This marks 9 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's revenue growth was positive this quarter, but the company is guiding to decline of 4.8% YoY next quarter, while analysts expect to see declines of 2.27% 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.

Texas Instruments Inventory Days Outstanding

This quarter, Texas Instruments’s inventory days came in at 135, which is exactly around the five year average, showing that despite the recent increase there is no indication of an unusual inventory buildup at the moment.

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 69% in Q3, up 1.1 percentage points year on year.

Texas Instruments Gross Margin (GAAP)

Gross margins have been trending up over the last year, averaging 69.5%. 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 57.1% in Q3, up 2.5 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 58%. 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 $1.97 billion in Q3, 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 29.3% 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 62% 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 Q3 Results

Sporting a market capitalization of $147 billion, more than $9.09 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.

It was good to see Texas Instruments outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, this quarter's results were not the best we've seen from Texas Instruments. The company is down 4.74% on the results and currently trades at $154.47 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. 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 is 18.3x. 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.

The Wall St analysts covering the company had a one year price target of $177.4 per share right before these results, implying that they saw upside in buying Texas Instruments even in the short term.

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