Consumers Keep Texas Instruments Ahead of Last Year

The chip company's earnings match estimates and a robust next quarter is expected.
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Updated from 6:10 p.m. EDT

At a time when most tech outfits are still strugglingbelow last year's sales levels,

Texas Instruments

(TXN) - Get Report

reported today that its revenues topped last year'slevels.

For its most recent quarter, the chipmaker slightlyovershot consensus estimates with sales of $2.1billion, up 18% sequentially and 6% over a year ago.Analysts were expecting sales of $2 billion, accordingto Thomson Financial/First Call.

The chipmaker posted a profit of 5 cents per sharecalculated according to generally accepted accountingprocedures. Its pro forma profit matched analystestimates of 6 cents per share.

Last quarter it posted a loss of 2 cents per share,while it lost 11 cents per share a year ago. In after-hours trading, the stock gained 61 cents,trading up 2.6% to $24.00. In Monday trading the stocklost $1.46, giving up 5.9% of its value to close at$23.39.

This quarter, TI's earnings took a four-cent hit froma non-cash charge of $96 million to write downholdings in the company's investment portfolio.Meanwhile, catch-up royalties from a new semiconductorcross-license agreement boosted earnings by a penny.

On the conference call, company executives painted apicture of steadily rising demand for TI's products inthe second quarter. The company's wafer fabutilization, a measure of factory productivity, jumpedfrom about 60% in the first quarter to 75% in thesecond quarter. Inventories rose 6.8% as the companystocked up in anticipation of higher third-quartershipments for its chip and education business.

"The fourth quarter of 2000 was the last time before the second quarter of '02 that we had year over year growth in our semiconductor business," CFO Bill Aylesworth told TSC, chalking up the gains to growth in both wireless demand and consumer electronics end markets. Wireless revenues were up 14% from the first quarter and 62% from a year ago, boosted both by unit growth and a higher averageselling prices as demand grew for next-generation 2.5Gproducts.

Overall, orders in the second quarter were up 20%sequentially and 34% from the year-ago period. Chiporders gained 22% sequentially and 42% from last year.

"It's a very difficult quarter to find any holes in,"says Cody Acree, a senior technology analyst at FrostSecurities, pointing to TI's 5 point sequential gainin gross margins, which reached 39.9% after bottomingat 24.5% last December. "The biggest question maysimply be, what's the industry going to grow at goingforward. Because

TI is so large, they'll need to seea continuation of improvement in the economy."

CEO Tom Engibous cautioned that in the second half ofthe year, the company's shipments will track enddemand, as an inventory restocking that lifted demandearlier in the year winds down. TI said it expects revenues to grow about 5% to 6% nextQuarter, excluding the catch-up royalties of thesecond quarter. Semiconductor sales should grow about4% to 6% without royalties.

GAAP earnings are expected to come in at around 9cents per share in the third quarter. That's more orless even with current earnings, adding back in theinvestment write-down. Operating margins should increase 1 to 2 percentagepoints.

In a slight shift in guidance, the company now expectsR&D for 2002 to be $1.6 billion, up from an earlierestimate of $1.5 billion. It attributes the increaseto recent acquisitions and investments in newtechnology.

TI's business has held up relatively better thanchipmakers like

Intel

(INTC) - Get Report

and

Advanced Micro Devices

(AMD) - Get Report

,both of which rely heavily on sales of microprocessorsto corporations. In contrast, TI depends more on consumer demand, whichhas remained fairly robust up to now. The companypulls in nearly two thirds of its revenues from analogchips and digital signal processors that go into awide range of consumer goods such as cell phones,DVDs, printers, and PC peripherals.

Since the beginning of the year, TI shares are offabout 14%, while Intel is down 44% and AMD off 48%. TI is "very much consumer sensitive. As the economy isgrowing, consumers are spending more, and TI doesbetter than most," says Acree. "If the consumer doesgo away, of course," he adds, "there's the negativeleverage as well as the positive leverage."

The company says it hasn't yet seen evidence of a dropoff in consumer demand. "There certainly will be some sensitivity to overall consumer sentiment, but so far in July we've seen nothing in order patterns or from our customers that would indicate anything other than we're on track for these expectations in the third quarter," says Aylesworth.