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Texan Walks Tall

Shares jump 9% the day after a big earnings beat.

Updated from April 23

Texas Instruments

(TXN) - Get Free Report

surged 9% after the chipmaker boosted second-quarter guidance, saying it's shaking off an inventory glut.

Shares rose $2.79 to $35.20 early Tuesday after the solid forecast prompted an upgrade by Piper Jaffray. The firm boosted the stock to outperform from market perform, citing margin gains.

"We believe the inventory correction that began in the second half of last year largely ended in the first quarter," said CEO Rich Templeton. "Orders are beginning to rebound, and we expect sequential growth to resume in the second quarter."

Like almost all chipmakers, TI saw its sales slow midway through 2006, as rising stockpiles of chips caused customers to cut back on new orders.

In the three months ended March 31, TI had sales of $3.19 billion, down 4% year over year, due to what TI characterized as a broad-based decline in demand.

Analog chips and digital signal processors, two of the main types of semiconductors that TI sells, each experienced 5% sequential sales decline. Sales of TI's DLP chips, which are used in big-screen televisions and video projectors, tumbled 30% sequentially.

But the Dallas-based company beat Wall Street expectations on the bottom line.

TI said it earned $516 million, or 35 cents a share, in the first quarter, vs. $585 million, or 36 cents at this time a year ago. The results were ahead of TI's own guided range as well as analyst expectations, which called for TI to earn 31 cents a share on sales of $3.15 billion.

TI credited its plan of outsourcing part of its manufacturing to third-party foundries, as well as its increasing mix of higher-margin analog chips, for its ability to maintain strong profitability in a weak market.

Gross margin in the first quarter was 51.3%, vs. 50.1% at this time a year ago.

According to TI, the first quarter marked the first time the company has maintained its gross margin above 50% and its operating margin above 20% in the midst of a downturn.

CFO Kevin March told investors in a postearnings conference call that gross margins should continue to benefit as TI strives to make analog chips a greater portion of the company's total revenue, although he declined to set a specific target for margins.

The company also pointed to a recent deal to provide chips for



most advanced cell phones as representing a significant new opportunity for TI.

Although TI is the world's No.1 maker of cell phone chips, the company's relationship with Motorola has previously been limited to supplying components for low-end handsets. By designing more expensive chips for Motorola's advanced 3G phones, TI has an opportunity to increase the amount of revenue it derives from each phone.

TI executives said that the first Motorola handsets featuring its 3G chips should go into production sometime in 2008.

The chipmaker also added its voice to the chorus of companies pronouncing the semiconductor industry's latest downturn a thing of the past.

TI said its book-to-bill ratio in the first quarter was .99, up from .89 in the first quarter. A book-to-bill ratio of 1 or higher is considered a positive sign of demand.

Perhaps more importantly, TI said that monthly sales in March showed the first sequential increase in several months. Average daily sales in March were up 20% compared to February, TI said, and the trend has continued into April.

The upshot is that TI said its second quarter could prove much stronger normal for this time of year.

CFO March said that TI's semiconductor revenue in the second quarter typically increases between 3% and 4% sequentially. But the company guided semiconductor revenue to grow between 1% and 9% in the second quarter.

Companywide, sales in the current quarter will range between $3.32 billion and $3.60 billion, with EPS between 39 cents and 45 cents, TI said. Analysts polled by Thomson Financial were looking for $3.35 billion in sales with EPS of 37 cents.

"Given the guidance we gave, clearly we have an opportunity to do better than that seasonal average," said investor relations manager Ron Slaymaker.