Texas Instruments stock rises on fourth-quarter earnings
The fourth-quarter 2018 semiconductor earnings season began with foundry TSMC’s (TSM) earnings showing signs of a slowdown in the semiconductor industry. Texas Instruments’ (TXN) latest fourth-quarter 2018 earnings also pointed to a slowdown, especially in China (MCHI), as its revenue missed the analysts’ estimate. However, better-than-expected profits reassured investors that the company can withstand the slowdown, which sent the stock up more than 7% after earnings were reported on January 23.
Texas Instruments’ earnings highlights
In the fourth quarter of 2018, TXN’s revenue fell almost 1% YoY and 12.7% sequentially to $3.72 billion, missing analysts’ estimate of $3.74 billion. The YoY decline came due to demand weakness in China, especially for Apple’s (AAPL) iPhone, for which TXN supplies touch screen controllers, power management chips, and a control device. This weakness was partially offset by strong demand from 5G (fifth generation) deployment, which boosted communications equipment revenue by 20% YoY.
The 12% sequential decline was greater than the normal seasonal decline of high single digits because of weakness in automotive, industrial, and personal electronics, specifically smartphones. The slowdown in semiconductor demand decelerated TXN’s YoY growth rate from 11% in the first quarter of 2018 to -1% in the fourth quarter of 2018. For the first quarter of 2018, TXN expects its revenue to fall 8.2% YoY to $3.48 billion at the midpoint, missing analysts’ estimate of $3.59 billion.
Weakness in China
On the fourth-quarter 2018 earnings call, TXN’s head of investor relations, Dave Pahl, stated that demand slowdown comes as its customers are cautious amid the uncertainty created by the US-China trade tensions. CNN, referring to FactSet data, stated that TXN earns more than 40% of its revenue from China and is therefore impacted by the nation’s demand weakness, which is a combination of lower domestic demand and reduced exports.
TXN’s CFO Rafael Lizardi stated that the semiconductor industry is going through a cyclical downturn. The “depth and duration” of this cycle could be impacted by the uncertainty created by the US-China trade war. The weakness in revenue impacted TXN’s profit margins, but the impact was lower than expected. We will look into this next.
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