Texas Instruments Reports 2Q Earnings, Gives Decent 3Q Outlook
Although TI's outlook isn't exceptional, we're pleased to see that the firm thinks it can overcome many of issues that led to rival Microchip's soft outlook.
Market Update
Texas Instruments (TXN) reported second-quarter earnings and gave a third-quarter outlook that was in line with our tempered expectations, and we are maintaining our fair value estimate.
Revenue was $3.46 billion, slightly ahead of the midpoint of the firm's revised forecast range of $3.36 billion-$3.50 billion discussed in early June. Sales at these levels represent a 2% sequential increase but were down 1% from the year-ago quarter. The company's embedded chip segment performed well this quarter, as revenue from these products were up 12% sequentially, driven by robust demand from wireless infrastructure customers in the buildouts of 3G wireless networks, primarily in North America and Europe. The firm's broad-based analog chip business was also up 3% sequentially.
Offsetting these healthy results was about $60 million in lost revenue stemming from damages to TI's manufacturing facilities in Japan due to the tragic earthquake and tsunami that hit the region in March. Also, as TI disclosed in early June, wireless baseband chip sales were dismal, down 32% sequentially as the firm's lone customer, Nokia (NOK), continues to struggle and lose share in the handset market. Gross margins dipped 20 basis points, mainly because of production losses in Japan, but the firm still managed to generate a healthy operating margin of 26%.
For the September quarter, TI expects revenue of $3.40 billion-$3.70 billion, which at the midpoint would represent a 3% sequential sales increase. Another broad-based chipmaker, Microchip Technology (MCHP), recently issued an earnings warning, expecting a low- to mid-single-digit revenue decline in the September quarter. Microchip cited a soft macroeconomic environment and pockets of weakness in certain tech sectors, like PCs and autos, as reasons for its warning. Although TI's outlook isn't exceptional, given that the September quarter is usually seasonally strong for the firm, we're pleased to see that TI thinks it can overcome many of these issues and exceed Microchip's soft outlook.
Admittedly, TI's revenue forecast has some noise, as the firm usually sees higher calculator sales during the back-to-school season, while the wind-down of its Nokia-centric wireless baseband business will continue to be a top-line headwind over the next 18 months. Yet, we are encouraged by the firm's comments surrounding the industrial and automotive sectors in particular, as TI saw growth from these customers in the second quarter and its forecast implies sales at roughly similar levels in the third quarter. Meanwhile, its exposure to the healthy wireless market, both in terms of mobile processors used in smartphones and tablets as well as wireless infrastructure chips used in network buildouts, should serve TI well in the months ahead.
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