Texas Instruments (TXN) reported messy fourth-quarter results after the close Monday that were littered with one-time charges, making year-over-year comparisons difficult. We’ll be taking a close look at our forecasts for Texas Instruments, but we do not expect to make a change to our fair value estimate at this time.
At face value, the performance was subpar. Texas Instruments’ revenue fell 3%, operating profit dropped 70%, while earnings per share tumbled 68%. Analog revenue, which includes high volume analog & logic, power management, etc., advanced 12% in the quarter, while the remaining segments (Embedded Processing, Wireless—OMAP application processors) experienced sharp revenue declines. Operating profit fell across all major revenue categories, with the steepest fall coming from its Embedded Processesing unit, which includes digital signal processors and microcontroller catalog products.
Management blamed the operating profit shortfall on acquisition-related charges, lower gross profit and restructuring charges, but we remain skeptical that something more fundamentally-concerning may be at hand. Other underlying financial metrics also performed poorly in the quarter. Orders fell 9% from the year ago period and 7% sequentially, while inventory swelled $268 million on a year-over-year basis, to $1.79 billion at the end of the quarter. Management indicated that the increase in inventory was caused by initiatives to support higher customer service levels and excess associated with the acquisition of National Semiconductor.
Looking ahead to the first quarter of 2012, Texas Instruments expects revenue to come in between $3.02 billion and $3.28 billion (versus consensus of $3.47 billion), and earnings per share to come in the range of $0.16 to $0.24. The outlook is also muddied by restructuring charges. We were less than impressed with Texas Instruments first-quarter outlook and point to Intel (INTC) as a better valuation play within the space. We’d grow more constructive on Texas Instruments’ shares as the cyclical bottoming process in analog ensues and upon the firm’s share price breaching the lower end of our fair value range.
<< Our 16-page Report on Texas Instruments (TXN)
Key excerpt from management on the conference call regarding the bottoming of demand in the chip space:
“As you can see, the fourth quarter revenue of $3.42 billion was significantly stronger than the reduced outlook we had provided during the mid-quarter update. Higher than expected revenue came in all our major product lines. We believe this strength well to our outlook is consistent with the historical bottoming pattern in the industry. The slowdown that began in the third quarter continued in the fourth during which customers and distributors were significantly reducing inventory.”
“In December, with low levels of customer inventory and short TI product lead time, we experienced significant strength compared to what our backlog indicated at the start of the month. Our belief based on historical trends is that the semiconductor market bottomed in fourth quarter ’11 or else will bottom in first quarter ’12. Our important market indicators were consistent with this belief. New orders declined 7% sequentially, book-to-bill was 0.84 and distribution inventory dropped to historically low levels. So despite low levels of backlog and visibility, we are forecasting that our first quarter revenue will decline only about 2% compared with the seasonal average decline of about 4% excluding baseband.”