Texas Instruments (TXN 0.79%) has been the beneficiary of strong semiconductor growth over the past two years, but its recent third-quarter earnings report hinted that that stretch may be coming to an end. Well, not necessarily an end, but perhaps a pause.
The company beat earnings-per-share expectations in the quarter due to robust margins and share repurchases, but the market was cool to TI's revenue growth, which clocked in at a mere 4%. Perhaps even more consequential, the company's forward revenue guidance was an underwhelming $3.6 billion to $3.9 billion, down sequentially, and roughly flat year over year.
The culprit? Industrywide "slowing," as management puts it.
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Slowing end markets
On the conference call with analysts, Texas Instruments management said its end markets were slowing; however, it's unclear whether the slowdown will be shallow, or potentially the start of a more prolonged downturn. The past quarter's numbers point to deceleration, rather than a downturn, at least for now.
Texas Instruments divides its products into analog and embedded categories. It showed a mixture of strong growth in analog chips, but slight declines in embedded processors:
|
Product Category |
Q3 Revenue |
Q3 Growth |
|---|---|---|
|
Analog |
$2.907 billion |
8% |
|
Embedded |
$894 million |
(4%) |
|
Other |
$460 million |
(6%) |
|
Total |
$4.261 billion |
4% |
Data source: Texas Instruments press release.
On the call, management also gave color on its third-quarter growth in end markets:
- Industrial: increased by upper single digits
- Automotive: increased by double digits
- Personal electronics: declined by mid-single digits
- Communications: increased by low single digits
While three out of four end markets grew, all marked a deceleration compared to the previous year.
There doesn't seem to be a specific cause to the downturn -- TI said the slowdown was somewhat broad-based. Management also noted that industry was slowing from a long period of particularly strong growth.
While management wouldn't point to the Trump tariffs or Federal Reserve interest rates as direct factors in the slowdown, it seems that companies are being more cautious about their investments. Whether that's due to the trade-war rhetoric or not is hard to say, but it could be related.
Positives show Texas Instruments' strengths
Despite the slowdown, Texas Instrument's bottom-line beat shows the company's particular strengths. The company grew its operating income by 8%, more than the 4% revenue growth due to operating leverage. Operating margin was a stunning 45.5%.
Over the past 12 months, the company has returned all of its free cash flow to shareholders, including $2.4 billion in dividends and $3.8 billion in share repurchases. Texas Instruments also raised its dividend 24% recently, while increasing its share repurchase authorization by $12 billion.
Texas Instruments owns a lot of its own manufacturing capacity, which is why it can have such high margins when times are good. Of course, if revenue begins to go negative, TI's margins could tick down more than revenue declines, due to the negatives of this strategy.
This is especially true due to the company's 300mm manufacturing capacity, which was purchased for a bargain in past downturns and is a competitive advantage. TI will continue to invest in expanding its 300mm fabrication plant to cement that cost advantage even if revenue declines.
Other ways to muddle through
Manufacturing companies face a dilemma when revenue goes down. If they produce more chips than necessary, they risk overloaded inventory and potential product obsolescence; if they don't produce chips, they still have to bear the costs of employees and plant maintenance.
To get around this problem, management says it will potentially slow wafer starts, but will continue producing low-volume but long-lived products that bear little risk of becoming obsolete during a downturn. The company has also shown a lot of cost discipline on overall operating expenses, which actually declined year over year despite revenue growth.
A safer haven
While semiconductors are notoriously cyclical, Texas Instruments has a stable and high-margin business relative to competitors, so long-term shareholders shouldn't sweat a downturn. If the downturn is shallow, the stock is a bargain.
But even if the downturn is deep, Texas Instruments should still generate cash and make it through to the other side, with the ability to repurchase low-priced shares.
