Texas Instruments forecasts indicate decline in chip demand is spreading

(Bloomberg) – Texas Instruments Inc., whose chips go into everything from home appliances to missiles, fell 6.1% in late trading after its quarterly forecast signaled that the semiconductor industry’s slump -drivers is spreading beyond computers and phones.

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The company said Tuesday it expects fourth-quarter revenue of $4.4 billion to $4.8 billion, below analysts’ average estimate of $4.93 billion. Earnings will be $1.83 to $2.11 per share, also missing projections.

While Texas Instruments has the largest list of customers in the semiconductor industry – making its projections an indicator of demand across the economy – producers of cars and industrial machinery contribute more than 60% of revenue. Some industrial customers are now slowing their orders, joining computer and phone makers in cutting spending. But demand from the auto market remains strong, the company said.

“During the quarter, we experienced expected weakness in personal electronics and growing weakness in the industry,” chief executive Rich Templeton said in the statement. Overall, orders worsened and cancellations increased as the current quarter progressed, Texas Instruments said.

Many of the biggest companies in the industry, including Samsung Electronics Co., Intel Corp. and Nvidia Corp., warned that demand is falling sharply. But investors were hoping the industry was nearing a bottom.

Although the Philadelphia Stock Exchange’s semiconductor index lost 40% of its value in 2022, it climbed seven straight days through Tuesday, suggesting investors believe the industry may have to hit rock bottom.

Shares of Texas Instruments have also fallen this year, although they have performed better than most of their peers. They are down 14% in 2022, making Texas Instruments the fourth-best stock in the index this year.

Chief Financial Officer Rafael Lizardi said it was impossible to say whether the current drop in demand is simply due to customers drawing down inventory or whether there is a deeper concern about the economy.

Even when the economy is stable, “you still have semiconductor cycles,” he said. “Over the past two years, I wouldn’t be surprised if customers had built up too much inventory. Now we are going the other way.

Net income for the third quarter reached $2.47 per share, Texas Instruments said. Revenue climbed 13% to $5.24 billion. The company had posted double-digit percentage increases for six straight quarters ahead of Tuesday’s results.

One of the chip industry’s pioneers, Texas Instruments is the largest maker of analog and embedded processing chips, which go into products as diverse as factory equipment and space hardware. These chips generally require less advanced production than Intel Corp. processors. or other digital products. This focus has allowed Texas Instruments to become one of the most profitable companies in the industry and to devote its cash to dividends and stock buybacks.

Texas Instruments management generally refuses to give forecasts of future electronics demand beyond its baseline forecasts. The executives argued that while there will always be fluctuations in the semiconductor industry, its chips have lasting value.

Unlike digital semiconductors such as microprocessors, Texas Instruments products take years to become obsolete, which means stockpiling during times of lower demand is not the danger sign it is. the case for other chipmakers.

The company ended the quarter with $2.4 billion in inventory, up from $1.86 billion at the same time a year earlier. Lizardi said that increase still leaves the company with a smaller inventory than expected. Texas Instruments could further increase its inventory to as much as $1 billion.

Texas Instruments makes about 80% of its chips in its own factories, and the company is expanding that footprint. He said this would result in higher levels of capital spending over the next two years, leading some analysts to express concern that the spending would squeeze his budget for buyouts.

Unlike its peers, Texas Instruments has no plans to cut capital expenditures or slow construction of new factories, Lizardi said.

(Updates with additional CFO comments beginning in the eighth paragraph.)

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