Monday, July 25, 2011

Texas Instruments Inc. (NYSE: TXN): Q2 Earnings Preview 2011

Texas Instruments Inc. (NYSE: TXN), the world's second largest maker of mobile phone chips, is scheduled to release its second-quarter earnings after the closing bell on Monday, July 25, 2011. Analysts, on average, expect the company to report earnings of 53 cents per share on revenue of $3.44 billion. In the year ago quarter, the company reported earnings of 62 cents per share on revenue of $3.50 billion.

Texas Instruments Incorporated engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide. The company operates in four segments: Analog, Embedded Processing, Wireless and Other. The company has successfully realigned its business to reduce focus on the commoditized, low-margin market for wireless chips. Texas Instruments expects Analog and Embedded Processing to be its primary growth engines in the years ahead.

Texas Instruments makes chips for both low-end and high-end mobile phones. The low-end, used primarily in emerging markets like India and China, earns less margin, however, works out well due to the high volume involved. The high-end has higher profitability and is used in phones having better features, used primarily in the developed countries. The company also makes chips for digital cameras and televisions as well.

The company was riding a post-recession demand rebound before March’s historic earthquake and tsunami in Japan disrupted tech-sector supply chains and damaged two of TI’s factories. Before the earthquake struck, TI was experiencing weaker consumer demand for personal computers and televisions and slower-than-usual industrial demand growth, but it predicted the corrections would be short-lived.

In the preceding first quarter, the Dallas, Texas-based company's net income was $666 million or 55 cents per share, compared to $658 million, or 52 cents a share, in the year-ago quarter. The chipmaker said the earnings were impacted by about 2 cents a share due to the Japan earthquake.Revenue climbed to $3.39 billion from $3.20 billion. Analysts, on average, expected the company to report earnings of 58 cents per share on revenue of $3.40 billion. 

Last month, the chipmaker slashed its outlook for both revenue and earnings in the second quarter — citing weak demand from a single customer, which is widely known to be cell phone giant Nokia Corp. (NYSE: NOK). Nokia is the company's largest customer. The company said that it now expects second-quarter revenue to be between $3.36 billion and $3.5 billion, down from the previous range of $3.41 billion to $3.69 billion. TI also said that it now expects earnings to be between 51 cents and 55 cents a share, down from the prior range of 52 cents to 60 cents a share.

The company is generally viewed as strong long-term player in the chip market, especially given its robust position in the analog and embedded processing markets. The company continued to invest during this recession, making smart acquisitions, expanding the sales force, and expanding manufacturing capability. 

The company is focusing on tried-and-true profitable tech segments that have long product lifecycles and reasonable economic moats, while also keeping itself as a key player in the growing smartphone market. Texas Instruments is prudently investing its R&D dollars into several high-margin, high-growth areas of the analog, embedded processing and wireless markets, which has led to solid order growth in the recent past. The phasing out of the low-margin baseband business also remains on track and should generate some margin expansion every quarter. This, along with a stronger mix and cost control is resulting in great earnings momentum and solid cash flow.  Texas Instruments' compelling product line, the increased differentiation in its business, lower-cost 300mm capacity and possibly aggressive pricing strategy (in the next few quarters) should continue to drive earnings momentum.

Full Disclosure: None. 
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