Texas Instruments Changes the Game

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.

Further Foolishness:


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 561580, ~/Articles/ArticleHandler.aspx, 10/22/2014 10:03:18 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement