Texas Instruments Pulls Out the 2008 Playbook for 2020

Texas Instruments (TXN 5.64%) is one of the true blue chips in the technology space. Founded all the way back in 1930, it's one of the oldest technology companies in America. The key to TI's longevity? Chalk it up to superior technology, capital allocation, and product diversity across a wide range of end markets. Texas Instruments makes analog chips and embedded processors found in devices used in the defense, healthcare, data center, automotive, and industrial markets. 

Yesterday's first-quarter earnings release and conference call gave great insights into what different sectors of tech are doing at the moment. Management also spelled out what it expected from the tech industry going forward should the current crisis mirror that of 2008–2009.

Image source: Texas Instruments.

What's happening now

Although Texas Instruments' Q1 earnings revenue and earnings unsurprisingly declined year over year due to the rolling global pandemic, results were better than analyst expectations. Revenue was down 7.2%, but beat analyst expectations. EPS of $1.24 also beat analysts' expectations by $0.25.

Management observed a spike in sales in early March as the virus hit, as customers chose to stock up in fear of future supply disruptions. That spending surge continued all the way into April, helping earnings beat expectations. In April, however, sales steadily slowed to the pace first seen in early march, which management expects to continue.

In terms of segments, management spelled out individual growth rates for several end markets:

Data source: Texas Instruments first-quarter conference call. YOY = year over year.

Results declined due to TI's heavy concentration in the auto market, which is troubled right now, as well as an expected decline in the lumpy communications segment due to a strong quarter a year ago. Auto production and mobile phone production were also curtailed on the supply side as factories shuttered due to quarantines in China and then the U.S. In contrast, results for PCs and data centers spiked as people increasingly worked from home and used cloud communications. 

Of course, this data looks backwards, and many of the trends mentioned above are already known. Investors might be more interested in what TI's management expects going forward into what will most certainly be a recession of some kind.

Assuming 2008-like trends

Management admitted that it didn't know exactly how the year would unfold, and said no two downturns are exactly alike. Still, management decided to provide color on what investors should expect if 2020 replicates the 2008–2009 downturn:

[I]f you look back to 2008, specifically to September 2008, our new orders turned off overnight. This led to a 26% sequential drop of revenue in fourth quarter of 2008, an additional 16% sequential decline in first quarter of 2009, and then a rapid snapback for the next six quarters. By second quarter of 2010, or within two years of the start of the sharp decline, revenue moved back above the level of third quarter of 2008. With the benefit of hindsight, our customers overcorrected to the downside, and we then spent 1.5 years chasing back up to support demand.

Given that knowledge, Texas Instruments is maintaining its current level of production and factory utilization for now. Management knows it will build inventory over that time, but since Texas Instruments makes products with relatively low obsolescence risk, it believes it's the right thing to do for customers. TI also plans to keep up research and development spending and investment in digital capabilities.

In the second quarter, the company expects a modest sales and earnings decline, but also gave a very wide range of possible outcomes:

 Data source: Texas Instruments first-quarter conference call. YOY = year over year.

Given that Texas Instruments is so heavily concentrated in the problematic automotive category, this guidance actually impressed analysts, sending shares up 2.5% in after-hours trading.

Going forward

Based on experience, TI expects customers to overcorrect on the conservative side in the next two quarters, before beginning a recovery in Q4. However, that timeline could be extended or shortened, depending on developments with the coronavirus and treatment, as well as the pace of economic reopening.

Still, tech investors should keep an eye on the long term. Even as current guidance and headlines seem scary, and likely will for the coming months, Texas Instruments' management is confident that TI and other high-quality tech names will eventually recover in time. That means investors should stay in these best-in-class blue chip names like TI, or even pick up discounted shares in this sell-off. Though these stocks can go in any direction in the near term, Texas Instruments' long-term returns are second to none in the semiconductor space, opening an opportunity today for the long-term investor.