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Texas Instruments 1Q Earnings Review
Texas Instruments reported results for their first quarter of 2023 last week. In this article, I’ll try to comprehensively go over what I think is relevant to know moving forward.
Overall financial analysis
TI generated 4.38bn in revenue, declining 11% YoY and 6% sequentially. This is the second quarter in a row in which the company’s topline reveals ‘trouble’. However, it should come as no surprise given the fact that the semiconductor industry operates in very pronounced cycles. Other businesses in the space (Nvidia, TSMC, Intel) have also experienced similar weakness.
Moving down the income statement, TI’s gross profit for the first quarter of 2023 was 2.8bn. The respective margin stood at 65.4%, down 480bps YoY and 70bps sequentially. Operating income was 1.93bn, implying the company operated at a 44.2% margin. As the GPM, the operating margin was down on a yearly and sequential basis, both 800bps and 240bps respectively. Finally, net income for the quarter was 1.7bn, meaning the net profit margin was at 39%, down 490bps YoY and 300bps QoQ.
Texas Instruments brought in 1.16bn in cash from operations, down severely from the comparable quarter and 45% from the previous one. On the other hand, capital expenditures continued trending upwards, being 982M during this last quarter. This leaves free cash flow at 178M.
The last table TI always provides investors with is one that shows the cash the company has returned to shareholders during the period. TXN distributed 1.12bn dollars in dividends, very in line with the previous periods, and spent 103M in stock repurchases. This latter piece of data is very interesting because TI’s management team is very well known for their great capital allocation skills. One way in which they show such ability is in deciding when to repurchase their own stock.
Texas Instruments operates under two major segments and a minor one. The first of them consists of producing and selling analog chips. This business unit generated 3.29bn in revenue, declining 14% on a yearly basis and around 8% sequentially. Operating income was 1.57bn, down from 2.15bn in the comparable quarter. This translates into a margin compression, from 56% last year to 47.7% in this quarter. On a quarterly basis, the operating margin dropped 280bps.
The second major segment is embedded processing. This one contributed 19% of TI’s total revenue, bringing in 832M. Furthermore, it operated at a 28.4% margin, down from 40.2% last year and 35% in the last quarter.
Management commentary and outlook
Management started by pointing out the continued weakness in all end markets, with the exception of automotive. The semiconductor industry has been in a down cycle for some quarters now and the TI team noticed some continuation in this trend during the beginning of the second quarter. However, they also mentioned the fact that, within the semiconductor industry, each end market operates in a cycle of their own. Personal electronics, for instance, has been in weak territory for 4 quarters now, so it could be reasonable to assume that it is closer to the bottom in comparison to others.
The second recurrent theme in the conference call was capital expenditures. Management gave notice to investors about this move a very long time ago and they continuously remember it, in response to analysts questions. Capital is being employed to build the fabs that will allow TI to keep growing in the coming decades.
“As we shared on the call a couple of months ago, we expect CapEx to average $5 billion per year for the next four years”
The last two items I think are relevant come as follows. Firstly, the company issued 1.4 billion of debt, making the total debt outstanding be 10.2bn, while the company has a 9.5bn cash position. The curious thing management mentions in these occasions is the weighted average coupon the debt has, now standing at 3.2%.
Finally, a concern shared by many investors is how the company has been very keen on building up their inventory. In this quarter, inventory was up 531M from the previous one, meaning inventory is at a total of 3.3bn. Consequently, days of inventory went up 38 days sequentially, to 195. Texas Instruments had stayed at the 1.8-2.2bn range in inventory for several years prior to 2022, so this recent rise alarmed analysts.
However, the reason behind this is that management is trying to prepare for the turn in cycle, whenever it comes. On this regard, TI did mention in their capital management day that inventories shall remain flexible and will depend on market conditions. Furthermore, they updated their target days of inventory to being at 200 days at the high end of the range.
Even though conditions are not the best, given the down cycle, Texas Instruments is doing what’s necessary to support their long-term growth. The strategy has served them well in the past and I don’t see a reason why it wouldn’t work this time.
TI is optimizing for the following:
Moreover, to offer some sort of relief to the current financial pain the company is going through, the CapEx the company is incurring in will prove vital for the business to perdure in time. And not only will it expand TI’s capacity, but it will also come with potential margin expansion due to the characteristics of how they are being built. The following extract, from a couple quarters ago, reveal how much sense these investments make:
Lastly, inventories are not a matter of concern to me for something management said some quarters ago as well:
“The product life cycles of the parts is decades in many times. The products themselves last 10 years in inventory, most of them. So the risk of obsolescence for the inventory is very, very low. The potential upside of having that inventory ready is very high. So that's why we prefer to have more, than less, inventory”
I hope you enjoyed today’s article. I’ll also be covering Visa, Mercado Libre and will see which other. Perhaps I go back in time and cover last Accenture earnings. You can subscribe below to receive all posts.
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Disclaimer: This is not financial advice.