Updated from 6:49 p.m. EDT Shares of Texas Instruments (TXN:NYSE - commentary - research - Cramer's Take) slipped after the chipmaker's third-quarter report delivered merely an expected top-line performance, while projections for the fourth quarter promised nothing better.
The stock was recently off more than 4% to $29.65 in after-hours trading.
The company said late Monday that earnings for the quarter ended Sept. 30 were $638 million, or 38 cents a share, from $563 million, or 32 cents a share, a year earlier.
The latest quarter included expenses of 3 cents a share for additional stock compensation, while higher-than-expected taxes hurt the bottom line by a penny a share.
Excluding these items, the company earned 42 cents a share, but it was unclear whether the Thomson First Call estimate of 40 cents a share also excluded the one-penny tax hit.
Revenue rose to $3.59 billion, up 11% sequentially and up 10% from a year earlier. The results just edged the $3.55 billion which marked both the midpoint of the company's own guidance and the consensus expected by analysts.
According to the company, the results owed to strong demand for its digital signal processor and analog chips used in cell phones and other communications devices. With $3.13 billion in revenue, the company's semiconductor division provided the strongest growth engine, increasing 13% from the previous quarter. The growth was the semiconductor division's highest in 15 years, the company said. The strong showing in semiconductors, said Chief Financial Officer Kevin March, was broad-based, reflecting solid growth in various markets. Wireless chip revenue was up 16% from the prior quarter, thanks to increasing demand for chips designed for both feature-rich 3G cell phones and low-priced handsets sold in emerging markets like China, India and Africa. The company's digital light processors, used in displays and projectors, had revenue growth of 40%. Much of this growth however, reflected a shortage of DLP chips in previous quarters. "We have had multiple years now of working hard on improving our total product portfolio and improving our overall manufacturing strategies, and that work is paying off," said March.
In September, the company raised its guidance for the third quarter, upping its expected EPS range to 39 cents to 41 cents a share from 34 cents to 38 cents a share, excluding the stock option charge. The company also lifted its revenue range to between $3.48 billion and $3.62 billion, compared to its earlier range of $3.29 billion to $3.56 billion.
The company continued to make strides in its margins, turning out 49.3% gross margins, up from the previous quarter's 47%, and within striking distance of its 50% target. Likewise, the 22.7% operating margin, up from the second quarter's 20.6%, represented an all-time high. Texas Instruments has set a long-term 25% operating margin target. March noted that the company had actually attained its margin targets, if one excluded the stock option expenses, since the targets were set before the company began expensing stock options. He also said there was room to grow margins further, as revenue from the company's high-performance analog chips pick up, capacity utilization increases at its manufacturing facilities and the facilities are further depreciated.
For the fourth quarter, TI expects to earn 36 cents to 40 cents a share, which, like the third quarter included 3 cents a share in stock-based compensation expense.
The current First Call estimate is 41 cents a share, excluding the expense.
TI anticipates fourth-quarter revenue of $3.43 billion to $3.72 billion, bracketing analysts' consensus of $3.63 billion.
TI also revealed that its inventory heading into the fourth quarter was somewhat leaner than it would like. The company is currently carrying 57 days of inventory, compared with the 69 days of inventory it had at this time last year. While the inventory shortfall won't affect the company's ability to meet existing orders, March acknowledged that TI could have difficulties responding to a fourth-quarter surge in demand.
In a conference call with analysts, March sought to dispel any notion that the inventory shortfall was related to TI's strategy of outsourcing some manufacturing to third-party foundries. According to March, the drop in inventory levels was the result of stronger-than-expected third-quarter demand, rather than any capacity constraint. "We've got the capacity," said March, "it's just that if we had to go back three months we probably would have started more wafers than we started."
Educational and Productivity Solutions, the division of the company which makes calculators, reported $177 million in revenue, down $13 million from the year ago period due to lower sales of graphing calculators. Revenue at the company's Sensors and Controls division dropped $15 million sequentially, to $280 million.
Texas Instruments forged ahead with its share buyback program in the third quarter, reporting that it spent $496 million to repurchase 15 million shares. The company has spent approximately $3.7 billion on share buybacks since starting the program a year ago. The company's stock has climbed 28% since the beginning of the year.
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