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After Solid Q3, TI Expects Sales Decline

22 October 2013

Texas Instruments Inc. Monday (Oct. 21) reported solid third quarter results but delivered sharply lower-than-expected guidance for the fourth quarter, blaming seasonal sequential declines endemic of the global semiconductor industry over the last three years, as well as in its calculator business.

The company expects revenue in the range of $2.86 billion to $3.10 billion in the fourth quarter, and earnings per share of between $0.42 and $0.50.

"At the middle of this range, revenue would decline 8 percent sequentially, with about half of that decline coming from the seasonal drop in calculators," said Kevin March, TI's chief financial officer, in a conference call with analysts. "The remainder of the decline is consistent with the semiconductor industry's pattern over the past three years: 2010, 2011 and 2012, as well as our own history over that same period when legacy wireless revenue is excluded."

Analysts believe that TI’s fourth-quarter guidance is more conservative than the overall semiconductor market. According to Ross Seymore, a research analyst at Deutsche Bank in San Francisco, the company’s overall guidance implies that its core analog and embedded businesses is expected to decline roughly 5 percent, which is well below his prior estimate of flat to slightly down seasonality.

In the third quarter, analog and embedded processing products accounted for 80 percent of revenue, which grew sequentially in each segment 11 percent and 8 percent, respectively. Analog revenue increased to $1.93 billion from $1.75 billion, while embedded processing revenue grew to $668 million from $618 million, according to Tore Svanberg research analyst at Stifel Nicolaus in San Francisco.

Higher analog sales were buoyed mostly by its power management chip business, followed by high volume analog and logic products. And stronger embedded processing revenue was driven by processors, followed by growth in microcontrollers and connectivity, according to the TI (Dallas).

Excluding TI's legacy wireless business, third-quarter revenue grew 10 percent to $3.24 billion on continued strength in the industrial and automotive segments, as well as a recovery in the computing, gaming console and handset sectors. However, continued weakness in its legacy wireless business contributed to year-over-year declines in revenue, which fell 4 percent compared with $3.39 billion a year ago. Net income dropped 20 percent to $629 million compared with $784 million in the year-ago quarter.

In the fourth quarter, legacy wireless products should decline to about $50 million from $57 million in the third quarter, TI said. The company expects that revenue from these products will essentially be gone as it enters next year.

"This was a good quarter for TI," said Rich Templeton, TI's president and CEO. "Revenue came in just above the midpoint of our guidance range, growing 6 percent sequentially and growing 10 percent if you exclude legacy wireless revenue, which declined to less than 2 percent of TI revenue in the quarter."

TI said that the improved quality of its revenue is reflected in record gross margin in the quarter of 54.8 percent, even though both revenue and factory utilization were lower. TI also reported strong cash flow from operations of $1.15 billion in the quarter and free cash flow of $1.03 billion, which was 24 percent of revenue and consistent with its target of 20 to 25 percent.

TI also increased its inventory by $6 million compared with the prior quarter, and Inventory days increased by one day to 106 days, which is consistent with its model of 105 to 115 days, according to March.

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