Yesterday, semiconductor stocks fell after-hours as Texas Instruments’ (TXN) third-quarter earnings and guidance missed estimates by a large margin. Texas Instruments’ guidance was lower than the industry demand. Investors tend to use the company as a barometer for the semiconductor industry’s health because of its broad product portfolio and most diversified customer base. Texas Instruments is the world’s largest maker of analog chips, which are used in all devices with an on-and-off switch.
TXN management reported a pessimistic demand outlook for the industry amid the United States–China trade war. Demand was particularly weak in the communications and automotive markets. It didn’t say that the industry has hit the bottom of the downturn or that demand will rise going forward. Instead, it reported an even steeper revenue decline for the fourth quarter.
On the third-quarter earnings call, Texas Instruments’ head of investor relations, Dave Pahl, said, “The current trade tensions could impact the depth and duration of a cycle.” This statement shattered investors’ hopes for a second-half recovery and sent semiconductor stocks down.
The weak earnings results sent TXN stock down 10% after-hours. Also, the VanEck Vectors Semiconductor ETF (SMH) fell 3%.
TXN’s weak demand outlook hurt stocks of fellow analog chipmakers Analog Devices, Maxim Integrated, and ON Semiconductor, which fell over 4%. Chipmakers with big exposure to the communications market—Xilinx, Skyworks, Broadcom, and Qualcomm—fell over 2%. Automotive chip maker NXP Semiconductors also fell 3.5%.
Texas Instruments guides for a fifth straight quarter of year-over-year revenue decline
In the third quarter, Texas Instruments’ revenue fell 11.5% year-over-year to $3.77 billion. This revenue missed consensus estimates of $3.82 billion by 1.3%. It was the fourth consecutive quarter of year-over-year revenue declines for TXN. Dave Pahl had reiterated that the 30-year historical data of semiconductor cycles show that year-over-year declines generally last four to five quarters.
Now, Texas Instruments is guiding for a fifth straight quarter of year-over-year revenue decline at 14% for Q4 2019. The company expects its fourth-quarter revenue to fall to a three-year low of $3.2 billion, missing consensus estimate of $3.59 billion by ~11%.
If you look at the rate of revenue decline, you’ll see that it accelerated with every quarter. The lack of clarity around demand makes it difficult to predict the end of this downturn.
Texas Instruments’ profits remain strong
Despite weak revenue, Texas Instruments continued to invest in research and development. It reduced its production to match demand, which reduced its gross profit by 12.8% year-over-year in the third quarter. The company’s operating profit fell 18% year-over-year. And its EPS fell 5.7% year-over-year to $1.49. This number was above the consensus estimate of $1.42. EPS fell lower than revenue as the company repurchased $4.4 billion worth of stock in the trailing 12 months. Moreover, discrete tax benefits added $0.09 to the EPS. Texas Instruments excluded this amount from its guidance.
For the fourth quarter, Texas Instruments expects EPS to fall 21.3% year-over-year to $1.0 at the midpoint. Its EPS guidance missed the consensus estimate of $1.28 by ~22%.
Cash flows and shareholder returns remain strong
Despite weak revenue, Texas Instruments managed to report stable cash flows. Its operating cash flow fell 5.4% year-over-year to $2.0 billion, of which it spent $149 million on capital expenditure. Its FCF (free cash flow) rose 6.3% year-over-year to $1.85 billion in the third quarter of 2019. During tough times, investors should look at a company’s capital allocation and financial position. This approach helps us understand if the company has the financial flexibility to withstand headwinds and invest in the business while remaining profitable.
Texas Instruments continued to deliver strong returns to shareholders—even during the downturn. The company increased its quarterly dividend per share by 17% last month. It spent $721 million in dividend payments and $456 million in stock buybacks during the third quarter. Texas Instruments also maintained its capital allocation strategy of returning all free cash flow to shareholders, returning 122% in the trailing 12 months.
Texas Instruments has a total debt of $5.8 billion and total cash reserve of $5.07 billion. Its strong cash reserves show that it has the financial flexibility to withstand near-term headwinds. The company’s stable quarterly free cash flow of over $1 billion shows that it has the ability to pay dividends after investing a sufficient amount in the business.
Texas Instruments highlights that these are tough times for revenue and earnings. No growth is in sight—at least for this year.
So Texas Instruments stock is underperforming the semiconductor industry. TXN stock rose 27% year-to-date, whereas SMH rose 38.3%. However, the company’s strong profits and cash flows ensure that your dividend is safe.
For more semiconductor earnings analysis, see Intel Earnings: Q3 Expectations Both High and Low.