This industrial spectroscopy module packs a handful of TI technologies into a single compact system. Strawberry included for scale. Image source: Texas Instruments.

Texas Instruments (NASDAQ:TXN) released third-quarter results on Wednesday night. The company crushed analyst expectations across the board, sending TI shares up 12% on Thursday.

The report was largely seen as a good omen for the microprocessor market at large. Major rival STMicroelectronics (NASDAQ:TXN) rose 2.8% on Thursday, while QUALCOMM (NASDAQ:TXN) gained about 2.5%. It's always a tricky business, reading industry trends into one company's results, because TI's strength might very well come from stealing business opportunities from its rivals. STMicroelectronics will clear the air when it reports on Oct.  29, and Qualcomm completes the picture in early November. For now, their investors settled for a modestly positive market reading.

Texas Instruments results: The raw numbers

 

Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)

Revenue

$3,429 million

$3,501

-2%

Free Cash Flow

$1,270 million

$1,280 million

-1%

GAAP EPS

$0.76

$0.76

0%

Source: Yahoo! Finance.

What happened with Texas Instruments this quarter?
This wasn't a great quarter by any means, but sales still came in stronger than management was expecting. In other words, it could have been worse.

  • Operating profits rose 53% year over year in the embedded processing division, led by strong sales of microcontrollers and connectivity products. TI is getting in early on the whole Internet of Things megatrend.
  • The company's stated goal is to return 100% of its free cash flows to shareholders as dividends and buybacks, adjusting the cash flows for debt retirement expenses. Thanks to a $750 million early debt repayment in the third quarter, TI actually dipped into cash reserves to pay out 204% of the remaining free cash flows.

The company also issued some fourth-quarter guidance for the top and bottom lines, assuming the effective tax rate holds steady at 30%.

  • In the fourth quarter, Texas Instruments expects to report revenue of approximately $3.2 billion and earnings near $0.69 per share.
  • Hitting these targets would amount to flat sales year over year, while earnings would decline by 9%.
  • Both of these guidance figures are significantly higher than the current analyst consensus.

What management had to say
TI CEO Rich Templeton didn't mince words; the quarter clearly could have been even better.

"While our overall demand remained weak, most areas were stronger than we had expected, especially wireless infrastructure and industrial," Templeton said in a conference call with analysts.

Elaborating on that paradox -- strong revenues on weak demand? -- CFO Dave Pahl explained that 2% sales shrinkage certainly counts as weak demand. It's just that management was bracing for even worse. Sales did indeed come in above the top end of management's guidance range for this quarter, yielding an even larger gap between earnings guidance and reported EPS.

"So that's really what we're trying to say," Pahl said. "We continue to operate in what we would consider to be just a weaker macroeconomic environment, and that's where we came in."

Looking ahead
Demonstrating confidence in the business model, even in a weak economic environment, TI recently added $7.5 billion to its share repurchase policy to keep that train rolling for another couple of years.

Business is booming in TI's automotive portfolio, and personal electronics is growing largely due to one very large but anonymous customer. Gross margins should continue to improve as Texas Instruments reaps the benefits of improvements to the chip manufacturing process, with cascading effects further down the income statement.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm. Try any of our Foolish newsletter services free for 30 days.

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