Texas Instruments Set to Beat

And an inventory drawdown bodes well for the next quarter.
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Texas Instruments

(TXN) - Get Report

is scheduled to report its fourth-quarter 2005 results after the close on Monday with a conference call at 5:30 p.m. EST.

Current consensus estimates are for revenue of $3.64 billion (+15% year over year; +1% sequentially) and EPS of $0.42.

In the prior quarter, TXN reported total revenue of $3.59 billion (+11% year over year; +12% sequentially). EPS were $0.38 on a GAAP basis and $0.41 pro forma. Semiconductor revenue (87% of total) was $3.14 billion (+13% year over year; +13% sequentially). Analog revenue increased 13% sequentially due to strong demand for high-performance analog parts as well as wireless. Digital signal processor revenue increased 16% sequentially on strong wireless demand. Overall, wireless revenue increased 16% sequentially. Other semis were up 11% sequentially largely due to increased demand for digital light processing products (+41% sequentially). Orders increased 10% sequentially to $3.74 billion, and semiconductor orders increased 12% sequentially to $3.32 billion.

Gross margins increased 230 basis points sequentially to 49.3% with higher fab utilization rates. Operating margins increased by 200 basis points to 22.7% driven by semiconductors, +510 basis points sequentially. Excluding stock-based compensation expenses, the company's operating margins increased 430 basis points to 25.0%. The company also incurred a higher tax rate than had been forecast, which reduced EPS by an additional $0.01/share. TXN's balance sheet strengthened as well. Cash increased about $770 million after cash from operations of $1.51 billion and stock repurchases of $496 million (15 million shares). Accounts receivable increased only $13 million, sending days sales outstanding down 5 days to 48 days. Inventory declined $44 million, with days of inventory down 6 days to 57 days.

On Dec. 7, TXN provided its midquarter update. At the corporate level, the midpoint of revenue guidance increased to $3.63 billion from $3.57 billion. Virtually all of the increase was from the strength in its semiconductor business, where the company raised the low-end of guidance range by $125 million and parameters now stand at $3.200 billion to $3.325 billion. The low-end of EPS guidance was raised as well, with current projections at $0.38 to $0.40 vs. the prior range of $0.36 to $0.40. TXN's EPS guidance is for GAAP, and it includes approximately $0.03 of FAS 123 expense. The Street consensus of $0.41 is pro forma.

To view Robert Martorana's video take of Texas Instruments, click here

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It's no secret that anyone with a handset-related business had a good December. TXN will be no exception. However, they have the added benefit of a very strong high-performance analog/digital service processing business for consumer electronics in general, and I believe that their digital light processing business was well above expectations. But all of this is in the stock, and most investors are only concerned with guidance.

The Street consensus for first quarter 2006 is for revenue of $3.47 billion, or down 5% sequentially. I think TXN will exceed these expectations and guide revenue to be down only a couple of percentage points. The company, its original equipment manufacturers and its distributors have been draining inventory well below targeted levels. That inventory will be replaced and, as a result, should generate better-than-expected results for the March quarter.

At the time of publication, Faulkner had no position in stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. He started as a sell-side analyst with Wood Gundy and Alex. Brown & Sons. In 1990, he moved to the asset management side with portfolio management/analytical positions at 1838 Investment Advisors and Merrill Lynch. Bob has an M.B.A. from Seton Hall and a B.S. from Waynesburg College.