Texas Instruments reported solid second-quarter earnings and gave investors a bright third-quarter outlook that was in line with expectations. TI’s June-quarter revenue was $3.05 billion, at the midpoint of the firm’s revised forecasted revenue range of $2.99 billion to 3.11 billion put forth in mid-June.

Revenue was up 6% sequentially, but down 9% from the year-ago quarter. Sales from TI’s core analog and embedded chip segments were up 6% and 10% sequentially, respectively, thanks to strong demand from industrial and automotive customers. Chip sales to these customers continued to rebound from a cyclical downturn in the second half of 2012, and TI’s forecast points toward strong ongoing near-term demand, and a relatively brighter macroeconomic picture.

Yet, TI also thinks it is gaining share from these customers as well. A more favorable product mix and higher factory capacity utilization allowed TI’s gross margins to rise 390 basis points, to 51.5%. Combined with a $315 million onetime gain from selling wireless connectivity technology to a customer, TI earned a 30% operating margin in the June quarter, as compared to 14% in the March quarter. For the September quarter, TI expects revenue in the range of $3.09 billion to $3.35 billion, which would represent 1%-10% sequential sales growth. TI expects healthy demand from industrial and auto customers, while analysts suspect that analog demand from smartphone customers should rise as well.

Meanwhile, a seasonal uptick in calculator sales during back-to-school season should offset an expected $90 million decline in legacy wireless product sales. All in all, TI’s forecast is consistent with our thesis of a nice rebound in chip sales in the middle of 2013. However, we believe that TI’s recent stock price doesn’t offer investors a terrific margin of safety today, as we believe that a near-term cyclical upswing has already been baked into the company’s share price. That said, analysts remain encouraged by TI’s transformation into a higher-margin chipmaker, and we remain pleased with the company’s recent emphasis on distributing excess free cash flow to shareholders.


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