Source: Texas Instruments
Texas Instruments is not a stock for the thrill seekers of Wall Street. The semiconductor veteran often provides more guidance than investors might expect, and significant earnings surprises from TI are rare.
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But that does not mean investors should turn down the volume on TI earnings calls. CFO Kevin March and investor relations chief Dave Pahl like to shine new light on burning topics, both financial and technical. Investors and analysts always walk away from the quarterly calls with some fresh insights into how the company works.
Consignment-style inventory management
This is a radical change from the hub-and-spokes distribution model that TI and other semiconductor makers have been depending on in the past. The new consignment model gives TI a closer view of channel demand and a more direct route to the final customer.
On the downside, Texas Instruments is allowing its balance sheet to look untidy with seemingly bloated inventory levels. Not the worst crime against sensible management I have ever seen, but there is always a stickler investor ready to protest every detail.
The Chinese opportunity
That is a worthy goal indeed -- 42% of the total revenues already come from buyers in China and Hong Kong. Putting your chip-building and distribution centers close to the massive device manufacturing hubs in China can build the TI order book very quickly. So the next time Apple or Samsungneed an analog chip or embedded processor for their newest gadgets, Texas Instruments might stand out as not only a proven product innovator but also a convenient supplier to Chinese manufacturing centers.
The book-to-bill ratio ain't what it used to be
Book-to-bill ratios help investors understand the money flow through manufacturing businesses. A figure above 1.0 means that order bookings are coming in faster than the company can manufacture, ship, and send invoices to its customers. That is a good thing, and it gives investors a sense of strong revenue visibility for upcoming quarters.
Here, Kevin March noted that the TI book-to-bill ratio sits very close to the important 1.0 level on an upward trend but then asks investors to forget about this good news.
The consignment model is undermining the importance of this metric, since TI tends to fill orders on shorter notice this way. An ideal, 100% consignment sales model would set this figure at exactly 1.0 for all eternity, since incoming orders would get filled and billed right away.
TI will never reach this model of absolute perfection, but the consignment idea can take the air out of this venerable metric anyhow. I will continue to keep an eye on book-to-bill figures as long as TI keeps reporting them, but it is no longer a top priority.
Strategic investments are paying off
If you are playing keyword bingo at home, "embedded processing" is often a code name for the Internet of Things. Several years back, TI stepped up its investment in products for this market, and it has started reaping the benefits of that decision.
In the fourth quarter, embedded revenues rose 11% year-over-year. Operating margins more than doubled over the same period as the growth investments from years past result in economies of scale today. March expects margins to continue improving right alongside growing embedded sales volumes. Its R&D investments should drive top-line growth while overhead expenses stay flat.
So,Texas Instruments is heavily involved in the Internet of Things, which is perhaps the most exciting end market for semiconductors today. And it is moving the needle in a big way.
Bonus: Capital management and free cash flows
So, the company sees three ways to improve its free cash flows, and two of those have been working in its favor over the last decade. Here is what it looks like in chart form, and it is actually kind of beautiful:
With these two metrics pulling cash flows in the right direction, TI would love to accelerate the whole trend with growing revenues as well. As a reminder, the growth in analog and embedded components has been neutralized by TI moving out of legacy markets such as wireless signal processors.
The wind-down of legacy products has nearly run its course, removing a lead weight from TI revenue growth. Now it is up to the company to execute on its core operations in embedded and analog components. The legacy headwinds will not be there to hold back sales growth much longer -- or to give management an easy excuse if top-line sales do not meet expectations.
The article Texas Instruments Incorporated: 5 Things Management Wants You to Know originally appeared on Fool.com.
Anders Bylund has no position in any stocks mentioned. He has no intention of messing with Texas.The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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