Texas Instruments (NYSE: TXN) is navigating uncharted waters -- and finding its way just fine.
When the Dallas-based semiconductor giant decided to lighten its operational model a couple of years ago, it was a novel approach to manufacturing. Not quite fabless like Qualcomm (Nasdaq: QCOM) and NVIDIA (Nasdaq: NVDA), but moving away from building and using internal production lines in the mold of Intel (Nasdaq: INTC), the asset-light hybrid approach has proven both flexible and profitable.
When order flow is brisk, TI calls up foundries like Taiwan Semiconductor (NYSE: TSM) or United Microelectronics (NYSE: UMC) to boost production; in leaner times, the company can cover the needed production on its own. This strategy has led to the fattest gross margins in TI's storied history and much less of a need to invest the fattened operating cash flow into factory upgrades. That explains the massive dividend increases in the past couple of years.
In this week's earnings call, management talked about how this model is changing the way it looks at some traditional metrics. A book-to-bill ratio below 1, meaning that the incoming order volume is less than the amount of orders filled in the same period, is supposed to be horrible news and lead to lower sales in upcoming quarters. But it hasn't worked out that way for TI lately.
CFO Kevin March noted that the company's book-to-bill has floated below the magic 1-to-1 ratio for five quarters in a row -- four times followed by sequential sales growth. "We do believe that the metric has become a much less reliable indicator on what our revenue direction might be," he said. "So we tend not to read as much into the book-to-bill as we did in the past."
That said, the company still looks at the incoming orders for insight on market trends. "Our guidance is really a function of the inputs we get from our customers, and that's what really drives it," March said. "We are not trying to predict what the impact of some of the more global type of changes, such as the Fed move, would have today."
So if you want to use Texas Instruments as a barometer of the global economy, you'd better look at the results. For an idea of where the technology sector is going, the company's guidance can help. Right now, these guys are aiming at 55% gross margins, which is two points better than what they got last year. Ergo, there's enough growth opportunity to go around, so no need for price wars here. Spread the word.
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