Last night's earnings report from Texas Instruments (NYSE: TXN ) met every reasonable expectation. However, many investors focused on management comments about lower order backlogs, and the stock is trading 3% lower today. It's the usual day-trader shortsightedness, and it doesn't take the whole picture into account.
The 12% drop in orders put TI's book-to-bill ratio (orders backlog divided by this quarter's revenues) at 0.93. Anything below 1.0 is unusual for this company, and could be taken as a sign of weakness. But consider where the lower order volume is coming from.
The lion's share of that drop in order volume comes from TI's largest customers -- cell-phone manufacturers like Nokia (NYSE: NOK ) , Sony Ericsson, and Motorola (NYSE: MOT ) . All of these companies just reported surprising growth -- in all the wrong places. They were taken by surprise by massive demand for low-end models at the expense of the mid-range and top-of-the-line product lines. They had to scramble to fill this need, ending up with huge unit sales and record dollar revenues, but low gross margins and extra operational expenses.
The normal seasonal pattern from TI's perspective is to ship lots of chips in the third quarter so that its customers can prepare for the holiday rush well in advance, with a strong fourth-quarter follow-through to fill any gaps. But given last quarter's events, I can't blame Nokia, et al, for getting a bit cautious. Unsure of where the consumer is going next, TI's customers are leaving some room for last-minute component orders so they won't get stuck with warehouses full of unsellable products if they happen to guess wrong.
It's true that some of the projected decline stems from the aforementioned shift toward cheaper phones. But I strongly believe that cell-phone makers wanting to keep their options open play a larger part. "We don't hear our customers talk about any broad turndown in consumption; it's just the mix in wireless," says company spokesman Ron Slaymaker, and TI isn't going into panic mode under these conditions.
TI outsources some of its manufacturing to United Microelectronics (NYSE: UMC ) and Semiconductor Manufacturing International (NYSE: SMI ) , making temporary slowdowns a simple matter of reducing outside orders rather than stopping inside foundry work. While that's also true of competitors like Marvell (Nasdaq: MRVL ) and Atheros (Nasdaq: ATHR ) , Texas Instruments uses more outside help than the others, which makes it less susceptible to short-term market downturns.
Slaymaker said that his company is "competing from a position of strength with leading products and with customers who are gaining share." TI is increasing R&D, tightening other expenses, and watching the market for signs of where to go next. Given all this, I find it hard to be negative on this company today.
- Read up on Nokia's mixed quarter.
- Semiconductor growth is slowing.
- Digging in Texas Instruments' Vaults
- The Optimistic Prediction of Warren Buffett