Aggressive Guidance Isn't Always Evil

 

Worldwide Invest Better Day 9/25/2012

"One of the most destructive things many companies do is to provide guidance to Wall Street about how the current quarter and the near-term future will turn out."

Fellow Fool Chuck Saletta dropped this pearl of wisdom on us the other day, and I totally agree. Yet, here I sit with a guidance update from Texas Instruments (NYSE: TXN  ) as if it were real news. What's going on?

Two things about TI's mid-quarter updates make them stand out from the crowd. For one, management is committed to providing these updates in the middle of each quarter while most companies only hand out financial forecasts alongside quarterly reports. You can call this habit obsessive-compulsive, or micromanaging expectations, or even keeping investors abreast of management's latest business insights. Depending on your chosen point of view, this can be good or bad.

But then, TI takes the next logical step. The company doesn't just drop a few numbers on you with minimal explanation, in the tradition of impromptu guidance updates. That's what fellow chip giant Intel (Nasdaq: INTC  ) did last week, for example, leaving investors guessing what's really wrong with Intel's operations.

No, Texas Instruments goes the whole nine yards and pairs the guidance with a conference call, where analysts get to poke and prod the new data. This adds some real insight and value to an otherwise empty exercise in numerology.

What's new?
This time, TI tightened its revenue guidance around the original midpoint while nudging the earnings target toward the high end. By themselves, these numbers mean nearly nothing.

But spokesman Ron Slaymaker also explained why the numbers came out this way. Demand for TI's chips is a bit weak, which reduces both revenue and profits. On the other hand, the company is cutting costs around its recent acquisitions, and insurance payouts for last year's earthquake disaster in Japan are boosting the top and bottom lines back up. It's a rather small payout, just $60 million, but it's almost 100% profit. Hence, margins look good and the bottom line swells.

When prodded by various analysts, Slaymaker expanded on that theme. A number of new tablet computers are hitting the market, featuring TI's OMAP processors. The brand-new Amazon.com (Nasdaq: AMZN  ) Kindle Fire HD is perhaps the biggest win there. On the other hand, TI is backing out of the market for mobile radio chips, so the mobile division is a wash in the end.

And that was the good news. "Outside of wireless ... almost all of [product lines] are running a little weaker than what we had expected back in July," he said. Orders are weak in every corner, from PC systems to automotive and consumer electronics.

Gee, thanks for the info!
This is helpful information that shines a light on the overall health of the semiconductor and electronics industries. TI fills in the blanks in Intel's gloomy guidance update.

So there you have it -- not every guidance update is inherently evil. I still prefer Google's (Nasdaq: GOOG  ) long-standing policy of never, ever issuing financial guidance over TI's hectic forecasting schedule, but I do appreciate TI's business updates in plain English. This company leaves me with the impression that management is running the show for the long term, which makes the interim updates a helpful bit of extra transparency.

Intel plays the guidance game in a more traditional way and sends out interim updates only when something very unusual is happening. If you want the inside scoop on what's really going on at the world's largest chipmaker, you can get it from The Fool's premium report service on this important ticker. For one low price, you get a deep dive into Intel's insides alongside a full year's worth of updated analyses. Get started right here.

Better yet, if you'd like to continue using the Fool as a source to improve your knowledge of the financial world, jump over to our special page: InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Head on over to the site now to continue your own personal investing voyage.

Fool contributor Anders Bylund owns shares of Google but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Intel and Amazon.com. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, and Intel. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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