Texas Instruments Earnings: Most End Markets Struggling, but Auto Appears Resilient

Wide-moat Texas Instruments TXN reported first-quarter results and provided investors with a second-quarter forecast that was slightly lighter than our prior expectations. We maintain our $168 fair value estimate for TI and continue to view shares as fairly valued. The company is still seeing soft demand across many of its end markets, but its two most important ones, automotive and industrial, are still holding up well. Inventory levels are high, but still appear to be within a manageable range. Ultimately, we view these issues as mostly cyclical, rather than structural, and our long-term thesis that TI is a best-in-breed analog firm remains intact.

Revenue in the March quarter was $4.38 billion, down 6% sequentially and down 11% year over year, but just above the midpoint of guidance of $4.17 billion-$4.53 billion. Industrial chip revenue was flattish sequentially, while auto revenue still held up well and grew a mid-single-digit percentage about 5% sequentially. However, TI saw significant weakness in its smaller end markets, such as personal electronics, communications equipment, and enterprise systems. Lower sales levels caused gross margin to fall 70 basis points sequentially to 65.4%. Operating expenses ticked up a bit in the March quarter due to bonus payouts, per usual, and operating margin declined 240 basis points sequentially to 44.2%.

TI expects June-quarter revenue to be flattish sequentially at $4.35 billion at the midpoint of guidance, which would represent a 16% year-over-year decline. TI believes that customers will continue to draw down their chip inventory on hand, especially in markets like personal electronics, which should weigh on revenue growth. EPS is forecast to be $1.75 at the midpoint of guidance, down from $1.85 earned in the March quarter, as we estimate that gross margins will tick down a bit in the June quarter.