Texas Instruments (NASDAQ:TXN) Exceeds Q2 Expectations But Quarterly Guidance Underwhelms

Radek Strnad /
2023/07/25 4:04 pm EDT

Analog chip manufacturer Texas Instruments (NASDAQ:TXN) reported results ahead of analysts' expectations in Q2 FY2023, with revenue down 13.1% year on year to $4.53 billion. The company also expects next quarter's revenue to be around $4.55 billion, roughly in line with Consensus. Texas Instruments made a GAAP profit of $1.72 billion, down from its profit of $2.29 billion in the same quarter last year.

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Texas Instruments (TXN) Q2 FY2023 Highlights:

  • Revenue: $4.53 billion vs analyst estimates of $4.37 billion (3.67% beat)
  • EPS: $1.87 vs analyst estimates of $1.77 (5.84% beat)
  • Revenue guidance for Q3 2023 is $4.55 billion at the midpoint, below analyst estimates of $4.59 billion
  • Free cash flow was -$47 million, down from $178 million in the previous quarter
  • Inventory Days Outstanding: 209, up from 197 in the previous quarter
  • Gross Margin (GAAP): 64.2%, down from 69.6% in the same quarter last year

"Revenue increased 3% sequentially and decreased 13% from the same quarter a year ago. Similar to last quarter, we experienced weakness across our end markets with the exception of automotive" said Haviv Ilan, TI's president and CEO.

Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ:TXN) is the world’s largest producer of analog semiconductors.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Texas Instruments's revenue growth over the last three years has been unremarkable, averaging 12.3% annually. This quarter, its revenue declined from $5.21 billion in the same quarter last year to $4.53 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Texas Instruments Total Revenue

Even though Texas Instruments surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 13.1% year on year. This could mean that the current downcycle is deepening.

Texas Instruments's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 13.2% year-on-year revenue decline while analysts are expecting a 1.44% drop over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Texas Instruments Inventory Days Outstanding

This quarter, Texas Instruments's DIO came in at 209, which is 67 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Texas Instruments's Q2 Results

With a market capitalization of $167 billion, a $9.55 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Texas Instruments has the resources needed to pursue a high-growth business strategy.

It was good to see Texas Instruments beat analysts' revenue and EPS expectations this quarter. That really stood out as a positive in these results. On the other hand, its underwhelming revenue guidance for next quarter was disappointing and its gross margin declined. Management remarked that Texas Instruments "experienced weakness across our end markets with the exception of automotive." Overall, this was a mixed quarter for Texas Instruments. The company is down 1.63% on the results and currently trades at $182.9 per share.

Texas Instruments may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, and what's happened in the latest quarter. We cover this and more in our full company report, and it's free.

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The author has no position in any of the stocks mentioned in this report.