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Texas Instruments Crushed Modest Expectations in Q1

Anders Bylund, The Motley Fool

Semiconductor veteran Texas Instruments (NASDAQ: TXN) reported results after the closing bell on Tuesday, covering the first quarter of TI's 2019 fiscal year. Sales and profit fell dramatically compared to the year-ago period, but both management and analysts had been expecting an even steeper drop.

TI's fourth-quarter results: The raw numbers

Metric

Q1 2019

Q1 2018

Change (YOY)

Revenue

$3.59 billion

$3.79 billion

(5.2%)

Net income

$1.22 billion

$1.37 billion

(11%)

GAAP earnings per share (diluted)

$1.26

$1.35

(6.7%)

Data source: Texas Instruments. YOY = year over year.

What happened with TI this quarter?

  • Management noted that demand for TI's products continued to slow down across many different markets. As a result, analog revenue fell 2% year over year while embedded processing collected 14% lower sales.
  • Three months ago, TI's management set its first-quarter revenue guidance at roughly $3.48 billion while targeting approximately $1.12 of GAAP earnings per share. The actual results were down from the year-ago period, but they blew right past these modest milestones. Analysts had been modeling their estimates broadly in line with the official forecast, so TI smashed Wall Street's projections as well.
  • Most of the company's order flows were in line with management's expectations, but communications equipment builders helped TI exceed its revenue targets with a 30% year-over-year increase in that sector's revenues. The company is seeing the early benefits of the imminent installation of 5G wireless networks in America and other advanced markets.
  • The company collected $856 million of free cash flow in the fourth quarter while paying out $724 million in the form of dividends and repurchasing $1.15 billion of its own stock. Over the last four quarters, TI has returned $8.1 billion of cash to shareholders, fueled by $6 billion of free cash flow and $2.1 billion of cash reserves. In turn, TI raised $1.6 billion of additional long-term debt over the same period.
  • TI's flexible production model is paying dividends in slow periods like the current stretch. Despite soft demand for TI's chip, inventories increased by a mere 5% over the last 12 months. The company's hybrid model combines a healthy base of in-house manufacturing facilities plus a variable amount of orders managed by third-party chip foundries. In lean years, TI can slow down its outside chip orders while making the most of its internal manufacturing lines.
TI's corporate logo, red on a white background

Image source: Texas Instruments.

What management had to say

In his prepared remarks for the earnings call, CFO Rafael Lizardi explained how this quarter's slow sales fit into TI's cyclical business patterns.

We believe that after 10 quarters of year-on-year growth, the weakness we're seeing is primarily due to the semiconductor cycle. We have just completed our second quarter of year-on-year declines for TI. If you look at history, cycles are always different, but typically the industry would have four to five quarters of year-on-year declines before year-on-year growth resumes.

In other words, there should be some life left in this market downturn. Lizardi made it clear that he isn't trying to predict exactly how the market cycle will work out since it's mostly out of the company's own control. The pattern he highlighted here is more of a historical backdrop.

Looking ahead

TI expects second-quarter sales in the neighborhood of $3.60 billion and GAAP earnings near $1.22 per share. The revenue target stands 10% below the sales from Q2 of 2018, and earnings should fall roughly 13%. Again, these guidance targets reflect Lizardi's view of a broad downward turn in the overall semiconductor business cycle that started in mid-2018 and might run into early 2020.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of Texas Instruments. The Motley Fool has a disclosure policy.