On the Call: Texas Instruments CFO Kevin March on chip maker’s profit margins

Monday, April 26, 2010

On the Call: CFO Kevin March

SAN FRANCISCO — While Texas Instruments Inc.’s first-quarter revenue and profit both beat Wall Street’s forecasts, some analysts noted that a key measure of profitability for the chip maker has slipped.

From the fourth quarter to the first quarter, TI’s gross profit margin declined slightly to 52.7 percent from 52.9 percent. On a conference call with analysts, TI’s chief financial officer, Kevin March, explained that figure fell because of pay increases the company is giving employees as revenue rose.

QUESTION: Why were the gross margins down despite the increase in revenue, and can you give us a sense of where gross margins will go for the rest of the year?

ANSWER: “You may recall that in January when we had our fourth-quarter earnings release and our first-quarter call, I mentioned that we were reinstating compensation changes, compensation increases for everybody in 2010, and that we also, based upon our outlook, would see related compensation such as profit, say, going up, and so really what you’re seeing is the effect of that going through the gross margin line.

In fact, you adjust for that, the fall-through would be very close to where you probably would have expected it. … We’ve established the gross margins target of 55 percent gross margin and 30 percent operating margin and we remain very confident being able to achieve those. The main driver of that, of course, is going to be just the revenue mix as we go forward. … We expect that mix to continue to richen up as we go through the years and the years to follow and the gross margins will move on accordingly. Beyond that I won’t give a specific time period as to when we think we’ll be achieving that 55 percent gross.

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