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Texas Instruments’ Q4 Earnings Might Hint at Cyclical Slowdown

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Texas Instruments’ broad customer base

Previously, we saw that TSMC is set to report strong revenue in the fourth quarter of 2018, but its first-quarter 2019 earnings will likely be hit by weak sales of Apple’s (AAPL) iPhones. Another chip company with exposure to Apple is Texas Instruments (TXN), and it is set to report its fourth-quarter 2018 earnings on January 23.

Texas Instruments supplies analog chips and microcontrollers to a broad customer base spread across five end markets of industrial, automotive, personal electronics, communication equipment, and enterprise systems. The company earned 54% of its revenue from the fast-growing segments of industrial and automotive in 2017. Within these two markets, it caters to 19 sectors. Such diverse sectors bring stable growth for TXN, as declines in some sectors can be offset by growth in others.

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Texas Instruments to report weak fourth-quarter earnings

In the third quarter of 2018, TXN’s revenue growth slowed to 3.5% YoY and 3.9% sequentially due to slower growth in its industrial, automotive, and communications markets. The company expects a slowdown in most of its end markets and has therefore guided fourth-quarter revenue to fall 12% sequentially to $3.75 billion, which would mark its biggest sequential decline since 2012. If the slow growth in end markets continues for a longer period, it could lead to a potential cyclical downturn.

On its third-quarter earnings call, Rafael Lizardi, TXN’s CFO, said it’s not clear whether the weak demand is due to a cyclical downturn or is being influenced by macro trends such as the US-China (FXI) trade war. The uncertainty created by the trade war is discouraging businesses from stocking up on electronic components since they’re not sure if they will be able to use them. This slowdown in demand has increased the inventory of TXN.

Texas Instruments’ strategy to deal with a potential downturn

As TXN manufactures its own chips, it has to bear the factory overhead cost whether or not it produces chips. Producing more chips could increase its inventory and make its products obsolete if not sold. Thus, the company is looking to slow down its production volume and only produce long-lifecycle products that have minimal risk of becoming obsolete. This would negatively impact TXN’s fourth-quarter profit margins after they reached their record high in the third quarter of 2018.

Xilinx is set to report its earnings on the same day as TXN. Next, we’ll look at Xilinx’s earnings.

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