Texas Instruments (TXN) says it's seeing solid demand from several end-markets. But it isn't ready to say it's out of the woods just yet.
After the bell on Tuesday, TI reported Q2 revenue of $3.24 billion (down 12% annually) and -- after backing out a $0.33/share, one-time gain -- EPS of $1.15. Those numbers topped FactSet consensus estimates of $2.91 billion and $0.88, and were fully above the wide guidance ranges TI issued in its April 21 Q1 report.
For Q3, TI is forecasting revenue of $3.26 billion to $3.54 billion (down 6% to 14% annually) and GAAP EPS of $1.14 to $1.34, above consensus estimates of $3.1 billion and $1.00.
TI finished after-hours trading up 0.8% to $136.55. Shares had made new all-time highs in regular trading earlier on Tuesday, and went into the Q2 report 27% above where they traded going into TI's Q1 report.
Here are some notable takeaways from TI's earnings report and call.
1. Automotive Was Largely Responsible for Q2's Revenue Decline
On the call, IR chief Dave Pahl said that TI's automotive chip sales fell about 40% sequentially and more than 40% annually in Q2, as COVID-19 heavily impacted both car production and demand. He noted that excluding automotive, TI's revenue was up 8% sequentially and down just 3% annually.
Pahl added that automotive demand "appears to have bottomed in May," as North American and European plants resumed production. However, during the Q&A session, he said that TI "won't try to predict" how the automotive market will trend in the near-term, while adding that the maturity of the automotive supply chain means that it reacts relatively quickly to production changes.
2. Many Other End-Markets Did Better
With the help of strong PC and tablet demand, TI's sales to "personal electronics" markets rose more than 20% sequentially and about 10% annually in Q2. Sales to "enterprise systems" markets, which continue benefiting from strong cloud server demand, rose sequentially and annually by unspecified amounts.
And while TI's sales to the communications equipment market fell 15% annually thanks to its de-emphasizing of embedded processor sales for mobile infrastructure equipment, its analog sales to the market rose both sequentially and annually.
Sales to "industrial" markets (in practice, they include a wide variety of end-markets) were up 2% sequentially and annually. TI singled out medical devices as an "industrial" market that's seeing strong demand.
3. TI Struck a Cautious Tone About the Macro Environment
TI went into earnings up about 3%, but gave back a lot of its gains after Pahl said that the company remains "cautious on how the economy might behave over the next few years." CFO Rafael Lizardi later echoed those remarks, while adding that the current demand environment remains uncertain.
Of note: TI's management has often struck a cautious tone when faced with macro uncertainty. In April, the company said it was leaning on its experiences during the 2008 financial crisis to inform its decision-making during the current downturn.
4 TI's Mix Shift Towards Analog Chip Sales Continues
TI' sales of embedded processors such as microcontrollers (MCUs) and digital signal processors (DSPs) fell 31% annually to $546 million, and its embedded processing operating income fell 53% to $546 million. However, its analog chip sales fell just 4% to $2.43 billion, with their operating profit dropping 5% to $1.05 billion.
TI's de-prioritizing of its mobile infrastructure processor sales is partly responsible for this sales mix shift. However, the company's long-term strategy of focusing on sales of differentiated, high-margin, analog products -- often manufactured using 300-millimeter wafers that can help provide TI with a cost advantage -- also has a lot to do with it.
In a recent research note, Bernstein estimated TI's analog market share hit a new high of 19% in 2019, and that its market share was meaningfully higher for products such as voltage regulators, data converters and analog standard linear products. At the same time, it estimated that TI's embedded processing market share fell by a little over 1 percentage point to 16%.
5. Industrial Inventories Are Rising, But Order Lead Times Remain Low
In recent weeks, Micron (MU) , Xilinx (XLNX) and Taiwan Semiconductor (TSM) have each noted that some of their clients have been -- amid concerns about things such as supply chain risks and U.S./China tensions -- building up inventories.
In the wake of these comments, TI suggested that some "industrial" clients are stockpiling inventories, while strongly hinting that these clients are probably building up inventories via other suppliers as well. However -- while cautioning that its visibility into customer inventories is often limited -- TI didn't give any indication that it's seeing major inventory builds elsewhere.
Also, though rival Microchip Technology (MCHP) recently sent a letter to customers that suggested it has seen a jump in short-lead-time orders that it's struggling to fulfill, TI said its order lead times remain low.
6. TI Is Open to Making Acquisitions
Following top TI rival Analog Devices' (ADI) $20 billion deal to buy Maxim Integrated (MXIM) , TI is open to making a large strategic acquisition of its own, Lazardi suggested in response to an analyst question about M&A.
"Frankly, in an environment like we're going through today, that's a great time to make the most of opportunities, so we're not conservative," Lazardi said. He did note, however, that an acquisition target would need to fit with TI's strategic focus on growing sales of differentiated analog products to auto and industrial clients.
