Good things come in small packages. But when you have a surfeit of product just sitting around and waiting to be packaged, you have a problem. That's what's going on with Texas Instruments (NYSE:TXN) today.
Last night, the Texan maker of microchips narrowed its fourth-quarter guidance down to the upper half of the original estimate. TI now expects to make a profit of $0.47 to $0.51 per share on sales near $3 billion. That's fine and dandy, but could have been much better.
See, TI can't keep up with current demand for its chips. Its largest customer, Nokia (NYSE:NOK), is in the process of switching from TI's telephony chips to a multi-supplier strategy, but other customers are picking up the slack. TI has no trouble churning out enough silicon wafers to keep everyone happy through a combination of in-house production and outsourcing to chip foundries like United Microelectronics (NYSE:UMC). The bottleneck lies at the next step of the chip-making process: testing and packaging the silicon to get 'em ready for use in end-user products like cell phones and radio towers.
"Demand does continue to lead our supply of components," said TI spokesman Ron Slaymaker, later explaining that the supply constraint comes from the testing and packaging department. Many of TI's competitors, like Marvell Semiconductor (NASDAQ:MRVL) and Atheros Communications (NASDAQ:ATHR), send their wafers to third-party outfits such as Siliconware Precision Industries (NASDAQ:SPIL) for this crucial step, but TI prefers to handle most of the testing itself.
In fact, TI thinks of the internal testing and packaging capacity as a competitive advantage, and invested $1 billion in a new facility in the Philippines this year. It looks like that strategy backfired a bit -- and the market caught on to this fact. Texas Instruments stock is down 2.5% today, despite the upbeat guidance update. That hit brought TI down to levels not seen since -- well, about a week ago. The stock is up a market-crushing 64% this year anyway.
In other words, don't panic. TI is doing all right -- it’s just not perfect.
