Texas Instruments Sees Stronger-Than-Feared Sales Ahead

July 26, 2019
A recent forecast by Texas Instruments signals that the worst may finally be behind the world's seventh largest supplier of chips.

Texas Instruments sees stronger-than-feared sales and profits in the current quarter, a signal that the semiconductor industry may be slowly regaining its strength. The company expects profits in the range of $1.31 to $1.53 per share in the third quarter on sales ranging from $3.65 billion to $3.95 billion. The assessment topped analyst estimates of $1.38 per share of profit and $3.83 billion in sales.

The forecast by Texas Instruments signals that the worst may finally be behind the world's seventh largest supplier of chips. The global chip business has been buffeted over the last year by falling smartphone sales and inventory oversupply, among other factors. The company's earnings also eased concerns that trade tensions with China will cause lasting damage to American suppliers. Shares of the Texas Instruments have jumped 5% since Tuesday.

The company has weathered weak demand since the second half of last year. Net income in the second quarter dropped to $1.31 billion, or $1.36 per share, from $1.41 billion, or $1.40 a share, a year ago. Sales slumped 9% to $3.67 billion because of "broad-based weakness" in its core analog and embedded businesses, according to chief executive Rich Templeton. On average, analysts expected earnings of $1.22 per share on sales of $3.6 billion.

That makes three straight quarters of year-on-year declines for Texas Instruments. The company may be able to escape the doldrums by the first quarter of 2020.  "When you look at the last 30 years of history in our industry, cycles are always different," the company's chief financial officer, Rafael Lizardi, said on an analyst conference call. "But typically you see four or five quarters of year-on-year declines before year-on-year growth resumes."

"We're ready for any scenario," he said. "If the economy strengthens, we're ready. If it runs sideways or weakens, we're ready."

Texas Instruments is the world's largest supplier of analog semiconductors, which are among the building blocks of nearly every electronic device. The company, which offers tens of thousands of products and sells them to tens of thousands of customers, acts as a bellwether for the broader chip business and a barometer for global electronics demand. Chips used in cars and factories accounted for more than half its overall sales in 2018.

While the trade war with China—coupled with new restrictions on supplying chips to Huawei—is putting pressure on the semiconductor space, Texas Instruments has largely been left unscathed. The company said trade tensions had not affected its ability to conduct business in China at all. "If you look from a regional standpoint, there was nothing unusual" in the second quarter, said Dave Pahl, the company's vice president of investor relations.

The company canceled shipments in May when Huawei was banned by the Trump administration from buying advanced American chips. Huawei, the world's No.1 vendor of telecommunications equipment and No.2 player in the smartphone market, accounts for 3% to 4% of its overall sales. Texas Instruments restarted shipments of "most" of its parts to Huawei after determining what is and what is not subject to the new rules, Pahl said.

Other clouds hanging over the company have started to dissipate. Unsold inventory, which has been piling up over the last year as the company's sales declined, dropped to $2.08 billion in the second quarter. In contrast, the company's inventory was worth $2.09 billion in the same quarter last year. Texas Instruments is also holding inventory no longer that it was in the first quarter of 2019. The company's investors have sent shares up 35% in 2019.

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