TI could struggle with semiconductor fab overcapacity til 2013

July 27, 2012 — Texas Instruments Incorporated (TI, NASDAQ:TXN) announced Q2 revenue of $3.34 billion, net income of $446 million and earnings per share of 38 cents. EPS includes 6 cents of charges associated with the company’s September 2011 acquisition of National Semiconductor and restructuring. See the company’s full Q2 report here, via PRNewswire.

Wireless sagged for TI, though analog and embedded processing segments grew. The company ended the quarter with revenues “about as…expected,” said Rich Templeton, TI’s chairman, president and CEO.

Also read: TI tops industrial electronics rankings, growing market share with NatSemi

Q2 was slightly better than Q1, where TI saw $3.12 billion revenue, and $265 million net income. Q1 was the quarter in which TI’s “business cycle bottomed,” said Templeton. TI expects Q3 revenues to be about even with Q2 and below its seasonal average growth rate.

For the full year of 2012, TI expects to spend slightly less on R&D: $1.9 billion, down from the prior expectation of $2.0 billion. The company also has earmarked $0.7 billion for capital expenditures throughout 2012.

Analysts’ takes:

TI’s orders in Q2 grew 5% sequentially, but order patterns weakened in June and stabilized in July at depressed levels, noted FBR Capital Markets, in its analysis of the quarter. FBR assesses TI’s lower-than-expected Q3 guidance as macro weakness driving a broad pause in customer production and purchasing behavior. In addition, “fab under-absorption charges should continue to weigh on TI in 3Q12 with sluggish revenues, and into 4Q12 as baseband and calculator revenue declines affect sales by 3-4% overall. TI could see some relief from under-absorption charges by 2H12 as $100M of annualized cost savings begin to flow in from the closure of two fabs (in 1H13 and mid 2013).”

Barclays Capital sees topline growth and filling its fabs as meaningful next cycle for IT, as opposed to the current one.

While TI is the clear leader in analog ICs, FBR notes that the chipmaker has challenges in its wireless business, gross margin impacts from its die bank inventory build-ahead in 1Q12, and potentially too much capacity following its National Semi acquisition. Baseband headwinds continue to weigh on TI’s potential for growth, Barclays pointed out.

Lowering its R&D expenses will help TI keep H2 2012 operating expenses under control, noted Barclays.

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