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Texas Instruments: Waiting For An Order Uptick

 December 11, 2012 02:04 PM

(By Mani) Texas Instruments, Inc. (NASDAQ: TXN) is experiencing weak end market demand across industrial, wireless infrastructure, and computing, making it a tough road for the company at least till the first half of 2013.

The chip maker narrowed its fourth quarter revenue outlook around the midpoint—in line with consensus at $2.95 billion while narrowing EPS guidance to 7 cents versus the prior 27 cents to account for previously disclosed charges associated with the restructuring of the Wireless business. The street sees fourth quarter earnings of 33 cents a share, according to analysts polled by Thomson Reuters.

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Texas Instruments, or TI, appears to be seeing continued broad-based weakness across most of its business. The computing, communications and industrial end markets were characterized as generally weak, with consumer and automotive described as mixed.

For consumer, game consoles and e-books are doing well, offset by weakness in TVs. In automotive, strength in the US is offset by weakness in Europe and China.

TI expects OMAP/connectivity to exit the model entering 2014, creating a sustained top-line headwind in 2013.

"With orders tracking revenue and ongoing sluggish demand, we anticipate a sub-seasonal 1Q13," Oppenheimer analyst Rick Schafer said in a client note.

Wireless infrastructure spending remains constrained, and the movement of the legacy NSM business to consignment creates a further headwind. Wireless, which accounts for about 10 percent of sales, is tracking as expected with base-band seasonally flat and OMAP/connectivity down.

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At a $200 million a quarter run rate in the fourth quarter, TI now expects OMAP/connectivity to exit the model entering 2014. The restructuring is expected to wield $450 million in annualized savings exiting calendar 2013.

"We now expect OMAP and connectivity revenues from smartphones and tablets to decline from ~$800 million in 2012 to ~$0 exiting 2013," Schafer said.

Inventory at distributors is expected to be down slightly at the fourth quarter, and remain below 6.5 weeks. TI also expects inventory on its balance sheet to decline in dollars but be up slightly in days sequentially.

"Customer orders are roughly tracking revenue, and we infer backlog is down vs. 3Q," the analyst said.

Meanwhile, distributor inventory remains lean at 6.5 weeks and visibility impaired. Lead times continue to hover at/below 6 weeks. TI will likely maintain low lead times for the foreseeable future given capacity additions over the past two years.

TI is the No. 1 or 2 player in each major segment of high-performance analog and, with the recent purchase of Qimonda's 12" fab assets, appears poised to gain share in the high-volume (commodity) analog market.

The company's higher margin analog businesses are driving growth. However, its decision to end investment in the wireless smartphone/tablet business is likely to present a material headwind to sales over the next 18-24 months.

TI is likely too broad/diverse to overcome near-term macro sluggishness despite the company is positioned for long-term success in core analog/ embedded.

"With $7B of incremental capacity acquired since the most recent downturn, TXN has ample capacity to take advantage of an improvement in the global economy. However, this excess capacity is also likely to weigh on GM in the near term," Schafer said.

Shares of TI were up 2 percent year-to-date versus SOX's 5 percent uptick, They trade at 22x CY13E EPS vs. peers' 20x.

"TXN's unique product breadth/scale have the company positioned for longterm success, but near-term GDP sluggishness and company-specific wireless headwinds keep us sidelined here," Schafer added.



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