TI sees recession "likely upon us" and will build up chip inventory

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Texas Instruments laid out plans to continue chip production for two quarters to build up inventory even as a significant recession is likely. (Texas Instruments)

Semiconductor maker Texas Instruments announced first quarter revenues of $3.3 billion on Tuesday while laying out expectations for a coming significant recession due to COVID-19 fallout.

The company will continue running factories at about the current level for two quarters to be able to build up inventory that will support customers who have a limited ability to forecast, officials said.

In an earnings call, CEO Rich Templeton flatly declared, “a COVID-19 recession [is] likely upon us.” He also described reduced visibility into customer demand for semiconductors, leading the company to expand the range of its revenue guidance for the second quarter, from $2.6 billion to $3.19 billion.

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First quarter revenues ended down 7% from the first quarter of 2019, with net income of $117 billion. Analog revenue was down 2% and embedded processors were down 18%, he said.

Templeton described cash flow of $6.4 billion, which “underscored the strength of our business model.”  TI has also returned $6.6 billion over the past year in stock repurchases and dividends.

In an unusual format for an earnings call, Templeton  reviewed three ambitions that he said have driven all decisions inside TI for decades and will matter in a significant recession: “We will act like owners who will own the company for decades; We will adapt and succeed in a world that is ever changing; We will be a company that you are proud to be a part of and would be proud to have as a neighbor.”

Templeton and Chief Financial Officer Rafael Lizardi also said that TI has handled production disruptions despite the COVID-19 crisis. “We were prepared for disruptions,” Lizardi said, describing a “diverse manufacturing footprint” that has led to a short lead time to provide products to customers.

Templeton said it ships 50% of its chips into China where factories are coming back online for production of electronics products, including smartphones, although he added it is not clear “how much demand actually there is.”  He said cell phones are often built in China that were designed in California and end up being sold in Europe.  That is what happens to iPhones designed by Apple in California, then assembled with various parts by Foxconn in China that are then sold into many countries.

Compared to first quarter 2019, TI’s semiconductor revenues followed trends expressed by other semiconductor makers who have seen revenues increase from PCs and servers used in data centers with more employees working from home amid virus quarantines and guidance.

For the quarter, TI industrial revenues increased by mid-single digits, while automotive revenues declined mid-single digits as automaker factory shutdowns impacted demand. Mobile phones declined in the low double digits, while PCs increased by low-double digits. Communications equipment revenues were down about 50% when compared to a very strong first quarter 2019. Enterprise systems increased by double digits on strong data center demand.

Templeton said the 2008 financial crisis will be used to inform TI decisions on operating plans, revenue forecasts and investment and spending plans. He noted that new orders turned off overnight in September of that year, which led to a 26% sequential decline in revenue for the fourth quarter of 2008, an additional 16% decline in first quarter of 2009 and then a “rapid snapback for the next six quarters.” 

He added, “we can deal successfully with any outcome,” and said TI will run its factories at about the level they ran in the first quarter for the next six months. “This will likely result in an increase in inventory during second quarter, but this will be important to support our customers during a time when they have limited ability to forecast,” he said.

TI stock was down more than 4% at $106.84 at the close of the Nasdaq index on Tuesday. The company has about 30,000 employees and brought in $14.3 billion in revenues in 2019.

RELATED: TI sales and earnings fell from year-ago levels

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