Texas Instruments

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 5/5

Texas Instruments (TXN) is a semiconductor company known for its analog and embedded processing products. While primarily known for its hardware, a growing software presence is a key component of its business.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Texas Instruments’ business is technology-driven and manufacturing intensive.

Business Overview:

Texas Instruments (TI) operates in two main reportable segments:

  • Analog: This segment focuses on analog and mixed signal integrated circuits, which are used to condition, amplify, and convert real-world signals into digital ones. These products are foundational to a variety of electronic systems, including power management, signal conditioning, and data acquisition.
  • Embedded Processing: This segment produces embedded processors, microcontrollers, and digital signal processors. These chips are designed to handle specific tasks and are found in devices like automobiles, factory automation systems, and industrial equipment.

While TI is primarily a hardware company, their ability to create custom software integrated with their chips gives them an edge.

Revenue Distribution:

Most of TI’s revenue comes from the Industrial segment, which includes the automotive, communications equipment, and factory automation sectors. They have high reliance on manufacturing, and their supply chain is an important factor. Geographically, a large chunk of their revenue comes from the United States, but they have a global presence across Americas, Asia, Europe, and Middle East.

  • Geopolitical uncertainty is driving reshoring and regionalization, with a greater focus on on-shore capacity in America and Europe.
  • Technological innovation and advancements in semiconductor process continue to drive growth and demand.
  • Supply chain disruptions are still common after COVID-19.
  • AI is increasing chip use cases and is quickly changing the semiconductor industry landscape.

Profitability and Margins:

Texas Instruments has had good profits and free cash flow consistently, but their margins can vary because of their business model being capital intensive and prone to business cycles. Their operating margins have been variable, but recently improving: 42.4% for the first half of 2024, 34.1% for full-year 2023, 46.6% for full-year 2022, and 51.6% for full-year 2021. The gross profit margins are good at 67.2% in the latest quarter. For the latest earnings call, they did see weakness in their industrial and automotive segments. They are still very focused on maintaining high profit margins and disciplined operating expenses.

Competitive Landscape:

  • The analog market is competitive, but TI has a strong presence and wide selection of products.
  • The embedded processing market is more competitive, and commoditization and pricing pressures exist.
  • They face competition from other big players like AMD, Nvidia, and Intel in various segments.

What Makes Texas Instruments Different?

  • They have a vast portfolio of products covering multiple applications, which insulates them from competition in a specific segment.
  • They are moving more and more into software and solutions, rather than focusing only on hardware, which makes them more valuable.
  • Their emphasis on their own manufacturing capacity allows them to control their supply chain effectively.
  • Their distribution network is widespread and they can make their production lines more versatile through the technology they have created.

Moat Assessment:

Texas Instruments possesses a narrow economic moat due to:

  • Intangible assets: their diverse portfolio of products, and their brand recognition provides some protection.
  • Switching Costs: Many customers use their software and hardware together, increasing switching costs for existing clients.

The rating is not higher, because of

  • Rivalry among firms: Other competitors are improving their processes and technology to compete more effectively with Texas Instruments.
  • Threat of substitutes: The risk of substitutions in tech industries is always there.

Moat Rating: 3 / 5.

Risks to the Moat and Business:

  • Dependence on technological advancements: if they fail to keep up with technology advancements, they may struggle. This may come from either the product side or the manufacturing process side. The semiconductor industry is fast-moving, and what is great today may be mediocre tomorrow.
  • Cyclicality of the semiconductor market: Their earnings and demand for their products are highly dependent on the industrial and overall economy. Any sudden downturn can be harmful to sales.
  • Competitive pressures: Their competitive pressures may intensify if they don’t keep their technology and supply chain advantages.
  • Dependence on government incentives: Their growth strategy relies heavily on various governments giving them incentives or tax exemptions.
  • Geopolitical risks: China, which is where their manufacturing facilities are based, is becoming a high risk market and they may need to diversify their supply chain.

Business Resilience:

TXN does seem to be very resilient, and they have weathered many challenges in the past. They have large amounts of cash on hand and good free cash flow, meaning they have more flexibility. Also, their management has a sound understanding of the business cycle, giving them an ability to pivot. Their investments in R&D means that they are well-positioned for future developments.

Financials:

  • Income statement: In the latest quarter, revenues were $4.53B, net income was $1.72B and earnings per share (EPS) was $1.85. Their revenue declined from $5.07B in 2022, primarily due to an economic slowdown. Operating expenses increased from $1.27B to $1.34B. Other financial numbers, which include interest income and loss, decreased to -$0.2B from 0.1B. Overall, net income is down from $2.42B last year. Their income from various segments has been very fluctuating, with the segments responsible for revenue change varying greatly. For the latest quarter, embedded processing was stable and even grew a little, while analog took the most of the hit. They have been focusing on improving their operating margins and gross margins to improve their financials.
    Their recent revenues have been impacted by reduced inventory levels at their major customers in the Industrial segment. These customers, like car manufacturers and equipment suppliers, have been reducing the amount of parts that they keep on hand because demand is slightly low. This is affecting Texas Instruments’ profits and revenues.
  • Balance sheet: The company has a very strong balance sheet. They have over $6.9B in cash and short-term investments. Long-term debt is only at $14.9B. Their current liabilities are $3.6B, making them well-capitalized. Their net working capital was at $17.1B. They have made various changes in the investment section of their balance sheet because they moved money into short term marketable funds, which are safe and readily accessible. Their goodwill has also decreased to almost zero as they reduced acquisitions and amortized the remaining intangible assets.
  • Cash flow statement: Cash flow from operations have been positive and quite large. In 2023, they had cash flow from operations of $6.5B. They repurchased a massive $3.6B worth of shares in the last 12 months. As we had mentioned, they keep a large cash position, and the increase from short-term investments gives them an added advantage when looking at cash flow. They continue to invest heavily in their core businesses by increasing capital expenditures. Their free cash flow yield is over 4 percent at the moment, which also shows good fundamentals in cash flow.

Balance Sheet Health: 5 / 5

Texas Instruments has a very strong balance sheet with a lot of liquidity and low debt. They also have a positive cash position, making them well suited to withstand any future downturns or economic issues.

Understandability: 2 / 5

The company’s business, while fundamentally rooted in semiconductor manufacturing, is intricate due to its focus on both analog and embedded processing technologies. These areas require a deep understanding of electrical engineering and material sciences. Their client and revenue base is very broad, further obfuscating its business as an end user’s product or an intermediate manufacturer’s. The sheer number of different products and technologies makes it hard for even financial experts to ascertain their position in the market and see their competitive advantages.

To make it easier, they are essentially a company that makes parts for other companies to use in making a final product, ranging from a car to a medical device. These parts usually are integrated circuits and other semiconductors that convert or process data or energy in some way. Their profitability is highly tied to the number of different customers they have. Since the number of end applications of their products is so diverse, their business can be affected by a variety of factors from geopolitical situations to advancements in technology. This makes it difficult to get a clear picture of the business, its competitive position, and future performance.

Also, financial reports are complex because of high capital expenditures that are not easily distinguishable from operating expenses and there is also a lot of accounting gymnastics involved in order to ascertain their real profits.

Recent Controversies and Management Perspectives:

  • Impact of the pandemic caused a supply chain disruption and the business has taken efforts to shore up their supply lines by doing their own manufacturing.
  • Uncertainty in global economy has also prompted management to adjust their guidance down.
  • Trade tensions with other countries are also a factor as they source a lot of their materials from other countries. Management is trying to diversify their supply chain to reduce dependency.
  • Increased competition from other players in the industry has also made it difficult for them to grow profits significantly. This is more acute in the Embedded segment.
  • Stock-based compensation has come under heavy scrutiny in the recent earnings calls by analysts, particularly related to the company’s increasing stock compensation for employees and management.
  • They were questioned on inventory build-ups. Management cited that it was to prepare for a strong second half in the year but conceded that this could impact margins.
  • Management reiterated focus on long-term growth, and emphasized on investing to increase their competitive advantages in analog and embedded processing segments. Management also made note that their strong capital allocation framework enables them to return value to shareholders.

Overall, the company has seen a rough year due to global economic instability, but they are confident in their long-term business prospects and ability to make returns for shareholders.