TI’s Mid-Quarter Review: Revenues On Track And Restructuring Charges Could Weigh On Earnings

Texas Instruments (NASDAQ:TXN) announced its Q4 2012 mid-quarter financial update on December 10. The company updated its earnings forecast to 5-9 cents per share, which includes 21 cents (per share) of restructuring charges and 6 cents (per share) of other charges, compared to its initial forecast of 23-31 cents per share. Excluding the restructuring charges, the slight increase in the mid-point estimate is on account of TI’s growing efforts to reduce its overall expense base in light of the soft macro conditions. TI does not accept to realize any significant gains from restructuring its wireless business in the current quarter.

TI also narrowed down its Q4 2012 revenue estimate to $2.89 – $3.01 billion, compared to its initial forecast of $2.83 – $3.07 billion, as it claims that most segments are tracking consistent with its expectations at the start of the quarter. Nevertheless, as the majority of its customers continue to maintain a lean inventory on account of current macro headwinds, TI expects to witness a sequential decline in almost all of its business divisions.

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Restructuring The Wireless Business

Earlier in September, TI declared its intention to focus away from smartphones and tablets and instead expand the OMAP footprint in embedded applications such as automotive, industrial equipments, enterprise communications, etc. The company feels that the embedded markets offer greater potential for sustainable growth compared to mobile devices. As a result, it will now focus on leveraging its OMAP processors and wireless connectivity solutions in a broader set of embedded applications which require fewer resources and less investment.

In November’12, TI announced its intention to cutback 1,700 jobs (5% of its global workforce) to reduce its expenses in the wireless business. The company plans to provide a range of assistance w.r.t. compensation, benefits and job search for the affected employees, because of which it estimates additional expenses of $325 million this quarter. However, TI’s initiative to reduce its cost base would translate into annualized savings of about $450 million by the end of 2013, according to the company.

Gross Profit Will Not Be Impacted As Lower Revenue Will Be Compensated By Cost Savings

TI anticipates its restructuring plan to largely eliminate the loss incurred by the wireless segment over the last few quarters. With its exit from the baseband market in 20o8, TI has witnessed a continuous decline in  its market share in wireless products over the years. While the company expects its revenue from the division to decline further, with its exit from the smartphone and tablet application processor market, we feel that extending OMAPs’ use to alternate products such as automotive, robotics, industrial, health monitors, etc., will cushion the decline to some extent.

Going forward, TI does not forecast a significant change in gross margins for the wireless segment as it anticipates the decline in revenue to be largely offset by potential cost savings from its restructuring program.

Our price estimate of $35.2 for TI is at a premium of over 10% to the current market price.

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