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Trade War Fallout: Texas Instruments Earnings, Sales, and Guidance Plunge in Q3

By Anders Bylund - Updated Oct 23, 2019 at 8:45AM

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The chip titan will be fine in the long run, but the next few quarters are full of Chinese potholes.

Semiconductor giant Texas Instruments (TXN -0.81%) reported third-quarter results after the closing bell on Tuesday. Earnings looked good at first glance, but revenues came in below Wall Street's expectations. TI's stock took a beating in after-hours trading, falling as much as 10.1% on the revenue miss and soft fourth-quarter guidance.

Texas Instruments' third-quarter results by the numbers

Metric

Q3 2019

Q3 2018

Change

Revenue

$3.77 billion

$4.26 billion

(12%)

Net income

$1.43 billion

$1.57 billion

(9.2%)

GAAP earnings per share (diluted)

$1.49

$1.58

(5.7%)

Data source: Texas Instruments. GAAP = generally accepted accounting principles.

What's going on with Texas Instruments?

Your average analyst had been expecting earnings near $1.42 per share on top-line sales in the neighborhood of $3.82 billion. That solid-looking earnings figure includes an unexpected upside of $0.09 per share due to one-time tax benefits, which neither TI's management nor Wall Street analyst were able to include in their financial modeling. If you back that item out, TI missed analyst expectations across the board.

The revenue shortfall was triggered by sluggish demand across every target market. Analog processor sales fell 8% year over year, while embedded processing products took a 19% hit. The embedded sales plunge rested chiefly on soft orders in automotive computing and communications.

The silver lining on TI's dark clouds consists of strong cash flows. Free cash flows rose 6.2% year over year, landing at $1.84 billion. That's 49% of the quarter's revenues and 129% the reported net income. In other words, the cash machines are humming on every cylinder in Texas, even if revenues and bottom-line earnings look weak.

Two shipping containers, one painted with the American flag, the other with the Chinese flag, hanging from unseen cranes and colliding violently.

Image source: Getty Images.

Color commentary from the executive suite

Management didn't mince words about the lousy market conditions it sees today.

In a prepared statement, CEO Rich Templeton said that revenues are falling because "most markets weakened further." That's a painful place to start.

Investor relations VP Dave Pahl stoked the market worries further on the earnings call. "There is an increasing number of reports of macroeconomic weakness, with trade tensions as the primary contributor," Pahl said. "Consistent with this, the weakness we've seen in the third quarter was broad-based across all markets and most sectors."

Then CFO Rafael Lizardi chimed in with more details on the situation. TI is tapping the brakes on its chip production, reducing the number of wafer starts until the market weakness subsides. He states:

Our sense is that customers are just far more cautious than they were certainly a year ago, but even 90 days ago, and many of them, when they talk about the caution, they mentioned the trade tensions that we know have been happening and have been kind of accumulating over the last three or four quarters. And the consistency of that breadth of weakness supports that this is a macro situation that is driving the further weakness that we're seeing.

On that note, the fourth quarter is shaping up to a terrible performance. TI's guidance points to fourth-quarter earnings of approximately $1.00 per share on revenues near $3.20 billion. The current analyst view calls for earnings of roughly $1.28 per share and sales near $3.59 billion, so management's projections fell far short of Wall Street's pre-guidance estimates.

What's an investor to do?

When Texas Instruments starts off the earnings season on this dark note, I get the sense that there will be more turbulence ahead. Keep an eye on other semiconductor giants as they report their own results over the next couple of weeks, starting with Intel on Thursday afternoon. What these companies say will either confirm or debunk TI's negative market forecast.

Let me leave you with one last management comment of a rosier flavor.

"We've learned over the years that same focus on building the company stronger, especially in the face of a weak market, provides great long-term rewards. We continue to invest in and leverage our competitive advantages," Pahl said.

You know that adage about buying when there's blood in the streets? The next few weeks (or months, maybe even quarters -- depending on how long the international trade wars stick around) look like an excellent opportunity to do exactly that. Intelligent investors should buy rock-solid cash machines like Texas Instruments when they're available at a shortsighted discount -- like this one.

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