Texas Instruments’ Forecast Signals Chip Demand Drop Spreads

(Bloomberg) — Texas Instruments Inc., whose chips are into everything from household appliances to missiles, fell as much as 6.1% in late trading after the collapse in the semiconductor industry signaled that it was spreading beyond computers and phones.

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The company said Tuesday it expects revenue of $4.4 billion to $4.8 billion in the fourth quarter, below analysts’ average estimate of $4.93 billion. Profit will be between $1.83 and $2.11 per share, and estimates are lacking.

While Texas Instruments has the largest client list in the semiconductor industry – making its projections an economy-wide demand indicator – auto and industrial machinery manufacturers contribute more than 60% of revenue. Some industrial customers are now slowing down their orders and joining computer and phone manufacturers in the outage. However, the company said that demand from the automotive market remains strong.

“During the quarter, we experienced expected weakness in personal electronics and growing weakness across the industry,” Chief Executive Officer Rich Templeton said in a statement. Said. Texas Instruments said that overall, orders worsened and cancellations increased as the current quarter progressed.

Many of the largest companies in the industry — Samsung Electronics Co., Intel Corp. and Nvidia Corp. among them — they warned that demand is falling rapidly. But investors are hoping the industry is approaching a low point.

Although the Philadelphia Stock Exchange Semiconductor Index lost 40% of its value in 2022, it has climbed seven days in a row through Tuesday, showing that investors think the industry may have bottomed out.

Texas Instruments shares are also down this year, despite outperforming most of their peers. Texas Instruments was the fourth best stock in the index this year, down 14% in 2022.

Chief Financial Officer Rafael Lizardi said it’s impossible to say whether the current drop in demand is simply customers’ cutbacks to reduce inventories or if there are deeper concerns about the economy.

Even when the economy is stable, “you still have semiconductor loops,” he said. “I wouldn’t be surprised if customers have built up a lot of inventory in the last two years. Now we’re going the other way.”

Texas Instruments said its third-quarter net income increased to $2.47 per share. Revenue increased 13% to $5.24 billion. The company had reported double-digit percentage gains for the six quarters in a row, coming in Tuesday’s results.

One of the pioneers of the chip industry, Texas Instruments is the largest manufacturer of analog and embedded processing chips that go into products as diverse as factory equipment and aerospace hardware. Such chips often require less advanced manufacturing from Intel Corp. processors or other digital products. This focus has allowed Texas Instruments to become one of the most profitable companies in the industry, dedicating its cash to dividends and share repurchases.

Texas Instruments management typically refuses to make predictions about future demand for electronics outside of its fundamental estimates. Executives argued that while there will always be volatility in the semiconductor industry, its chips have enduring value.

Unlike digital semiconductors such as microprocessors, Texas Instruments’ products take years to become obsolete, meaning that stockpiling when demand is weak is not a danger sign for other chipmakers.

The company closed the quarter with $2.4 billion in inventory, up from $1.86 billion at the same point a year earlier. Lizardi said the increase left the company with smaller stock than it had targeted. Texas Instruments could increase inventory by up to a billion dollars.

Texas Instruments manufactures about 80% of its chips in-house, and the company is expanding that footprint. He said this will lead to higher capital expenditures over the next few years, causing some analysts to express concern that spending will shrink his budget for buybacks.

Lizardi said that unlike his colleagues, Texas Instruments has no plans to cut capital expenditures or slow the construction of new facilities.

(Updates with additional CFO comments starting at paragraph eight.)

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