Texas Instruments Tops Forecasts

Shares of the semiconductor giant gained Tuesday after it announced a better than expected quarterly profit

The computer chip maker Texas Instruments (TXN) managed to keep profits up during recent months -- even as its wireless handset customers pulled back on purchases. The news relieved investors, who bought the Dallas company's stock on Apr. 24 and hoped for better times ahead.

To be sure, Texas Instruments' net income during the three months ended March 31 amounted to $516 million, down nearly 12% compared to the same period last year. Revenue sank 4% year over year to $3.19 billion during the first quarter, according to a press release late Apr. 23.

The U.S. cell phone industry has been maturing in recent years and growing more slowly. Meanwhile wireless handset providers have been bogged down with excess inventory for many months, diminishing the need to buy computer chips for making even more products.

But Texas Instruments has been taking steps to deal with such problems. The company has managed its own inventory in recent months by shipping less than customers expect to consume, for example. Thanks to such efforts Texas Instruments posted earnings per share of 35 cents during the first quarter, including 5 cents of benefit related to a federal research tax credit and another penny related to new patent license agreements. In contrast, analysts surveyed by Thomson Financial had expected only 31 cents EPS.

Texas Instruments is also signaling improvements in the future. The company says it will have 39 cents to 45 cents EPS on $3.32 billion to $3.60 billion revenue during the second quarter, compared to the consensus forecast for 37 cents EPS on $3.35 billion.

"We believe the inventory correction that began in the second half of last year largely ended in the first quarter," CEO Rich Templeton said in the press release. "Orders are beginning to rebound, and we expect sequential growth to resume in the second quarter."

After the news investors bid up the stock 8.1% to $35.03 per share in midsession trading on the New York Stock Exchange Apr. 24.

"Even though revenue dropped 8% from the fourth quarter, we were impressed by the cost control that allowed the firm to generate wider-than-expected margins at the gross and operating profit levels," Morningstar analyst Larry Cao said in a research note.

Texas Instruments' gross profit margin amounted to 51.3% of revenue during the first quarter, compared to 50.1% in the same period last year. Operating profit only slipped to 21.3% from 21.5%.

"We think longer-term catalysts for high-performance analog and high-end handsets remain intact, especially now that excess inventory is easing, and we see continued margin expansion as a result," Standard & Poor's equity analyst Clyde Montevirgen said in an Apr. 24 research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Montevirgen reiterated a strong buy opinion on the stock.

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