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Texas Instruments (TXN) Q4 Earnings In Line, Revenues Beat

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Texas Instruments' (TXN - Free Report) fourth-quarter 2017 earnings of $1.09 per share came in line with the Zacks Consensus Estimate. Earnings increased 24% year over year but decreased 14% sequentially.

The above earnings per share figure do not include 75 cents in tax-related expenses primarily due to the recently passed tax reform act.

Revenues of $3.75 billion beat the Zacks Consensus Estimate by $11 million, up 9.8% on a year-over-year basis but down 9.8% sequentially. However, it came ahead of the guided range of $3.57-$3.87 billion, driven by strong demand in the auto and industrial markets.

Following fourth-quarter results, shares fell 7.01% in after-hours trading possibly on slower-than-expected revenue growth due to softer demand for its chips used in communications equipment. Also, the sluggish top-line outlook could be one of the reasons for the decline in the share price.

Also, Texas Instruments’ shares have rallied 47.9% in the last 12-month period, underperforming its industry’s growth of 53.2%.

Segment wise, growth of analog and embedded processing applications business was strong. These typically yield a more stable business as well as strong margins. The Other segment declined year over year.

Texas Instruments continues to prudently invest its R&D dollars into several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing its exposure to industrial and automotive markets and increasing dollar content at customers, while reducing exposure to volatile consumer/computing markets.

Internally, the company has always executed rather well. It, along with chipmaker Intel (INTC - Free Report) , is one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. Since the company usually builds out capacity well ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex at up to 4% of sales even while expanding its business.

The company remains focused on increasing free cash flow per share and strengthening competitive advantages. Notably, free cash flow in 2017 was $4.67 billion or 31.2% of revenues, reflecting an increase of 14% from the year-ago quarter.

Overall, we remain optimistic about TI’s compelling product line, the differentiation in its business and manufacturing efficiencies that include growing 300-millimeter Analog output. However, risks associated with a high debt level persist.

Let’s see what the numbers say.

Revenues in Detail

Analog, Embedded Processing and Other segments generated 68%, 24% and 8% of quarterly revenues, respectively.

Analog, which includes Power, Signal Chain and High Volume products, was up 11% from the year-ago quarter to $2.5 billion. The year-over-year growth was driven by strong performance in product lines — power and signal chain.

The Embedded Processing segment, which includes Connected Microcontrollers and Processors, was up 20% year over year to $896 million. The year-over-year growth was driven by stronger sales across both the product lines — processors and connected microcontrollers.

The Other segment, which includes DLPs, custom ASICs and calculators, was down 16% year over year to $319 million. The decline was primarily due to custom ASIC and royalties moving to other income and expenses beginning in the first quarter of 2017.

Margins

Texas Instruments’ gross margin of 65.1% was up 54 basis points (bps) sequentially and 259 bps from the year-ago quarter. The company’s gross margin has been improving consistently as more production shifts to its 300 mm line.

Operating expenses of $877 million were up 1.0% sequentially and 8.9% from last year. Operating margin was 41.7%, down 176 bps sequentially and 278 bps from the year-ago quarter.

Balance Sheet and Cash Flow

Cash and short-term investments balance was $4.5 billion compared with $3.4 billion in the prior quarter.

The company generated $1.9 billion in cash from operations, spending $231 million on capex, $706 million on share repurchases and $611 million on cash dividends.

Texas Instruments is one of the few technology companies that return a significant amount of cash to investors. In 2017, the company returned approximately 4.7 billion of cash through a combination of dividends and stock repurchases.

At quarter end, TI had $3.6 billion in long-term debt and $500 million in short-term debt.

Guidance

The company provided guidance for the first quarter.

It expects revenues between $3.49 billion and $3.79 billion (down 3% sequentially at the mid-point). The Zacks Consensus Estimate for revenues for the upcoming quarter is pegged at $3.64 billion.

Earnings for the quarter are expected to be in the range of $1.01 to $1.17 per share. The Zacks Consensus Estimate for earnings for the upcoming quarter is pegged at $1.07.

Texas Instruments Incorporated Price, Consensus and EPS Surprise

 

Texas Instruments Incorporated Price, Consensus and EPS Surprise | Texas Instruments Incorporated Quote

Zacks Rank & Stocks to Consider

Texas Instruments carries a Zacks Rank #2 (Buy). A few better-ranked stocks in the broader technology sector are ASML Holding N.V. (ASML - Free Report) and Lam Research Corporation (LRCX - Free Report) , each sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings per share growth rate for ASML Holding and Lam Research is projected to be 18.9% and 14.9%, respectively.

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