Deteriorating Wireless Business Makes Texas Instruments a Good Sell
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Despite the fact that Texas Instrument’s (NASDAQ: TXN) analog and embedded processor business showed QoQ growth in Q2, we remain skeptical about the stock considering the decline in wireless solutions and the large investments going into them. As the guidance for Q3 remains flat with no considerable catalysts on the horizon in the near term, we rate this stock as a sell.
Order slowdown to continue in Q3
Total orders increased 5% QoQ to $3.41 billion while the book to bill ratio came in at 1.02, decreasing both QoQ and YoY from 1.04. TXN management indicated that the orders reduced from May to June as both OEM’s and distribution customers were unwilling to place new orders given the macro uncertainty and TXN’s short lead time of about six weeks. As a result, distributor inventory levels declined by a day to slightly less than 6.5 weeks while TXN’s Q2 inventory increased $32 million to $1.89 billion (2% QoQ growth). While the management suggested that the backlog coverage orders for July and August fall in line with the seasonality, the backlog was below normal for September as customers remain cautious given the macro uncertainties. Going forward, we believe that TXN’s “sell-in” business model could further add to the woes as TXN will have to estimate future sales in an unpredictable environment or it will need to bear any losses in the case of unforeseen circumstances.
Wireless revenues might decrease further
TXN’s total wireless revenue declined 8% QoQ and nearly 50% from 4Q11 levels as the segment has lost revenues for two consecutive quarters. The Q2 revenue weakening was driven by declines in OMAP and connectivity, while baseband revenue increased slightly. Although management suggested that the company has secured some design wins for OMAP, we do not see anything major in terms of near-term drivers and believe that the wireless segment will continue to lose money for some time with TXN’s customers (Research in Motion, Motorola and Nokia) losing share. Furthermore, TXN’s OMAP products face strong competition from competitors like Qualcomm (NASDAQ: QCOM), Nvidia (NASDAQ: NVDA) and Intel (NASDAQ: INTL), all of which are trying to acquire business from Samsung tablets and Amazon's (NASDAQ: AMZN) Kindle Fire (which remains the main hope for TXN’s OMAP business).
Weak Outlook going into Q3
Management guided revenues to be flat QoQ at the mid-point, well below normal seasonality of up 6% QoQ in Q3 (normally the company's seasonally strongest quarter) while the guided EPS of $0.38 was well below consensus estimates of $0.43. TXN’s negative outlook signals yet more market uncertainty in the semiconductor market and we believe that stock prices could go down in the wake of the market sentiments triggered by it.
Going forward, TXN will likely face increasing pressure among a weak macro environment and increasing competition. We believe that the CAPEX will continue to increase (CAPEX in Q2 increased $43 million QoQ) with additional expenses due to R&D in the OMAP segment. With its expected flat QoQ revenues, deteriorating wireless segment revenues and decreasing book to bill ratio, we believe that TXN has done little to impress investors, and therefore we rate it as a sell.
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