TXN Earnings Digest | A Glimmer of Hope!

After hours yesterday, chip giant $Texas Instruments(TXN)$ released its first-quarter report, and the results were better than expected, sending its stock price soaring over 7%.

Specifically, TI raked in $3.66 billion in revenue for the first quarter, down 16.4% year on year, the largest decline since 2014, but exceeded analysts' expectations of $3.6 billion, at the high end of the management's guidance of $3.45-3.75 billion:

The sales slide hit TI's profitability hard. Its gross margin for the quarter was 57.2%, and its net adjusted profit margin was 24.9%, both significantly lower than the same period last year.

Behind the numbers, it's all about lackluster demand. TI's products are mainly used in industrial and automotive markets, which combined contribute over 70% of its revenue.

Affected by the global economic downturn and high customer inventories, all of TI's end markets were sluggish. But on the earnings call, management said customers have made progress in reducing their inventories.

Management expects revenue for the second quarter to be between $3.65−3.95 billion, which is in line with analysts' predictions of $3.78 billion. The market thinks TI's fundamentals are showing signs of recovery.

But let's be honest, even if we take the high end of the guidance at $3.95 billion, that's still a 12.8% decline compared to last year, which is only slightly better than the first quarter but a small improvement quarter-over-quarter.

According to $JPMorgan Chase(JPM)$'s global PMI data, the PMI has already broken through the 50% mark this year, indicating a turnaround in business conditions.

So, it's only a matter of time before TI's end markets rebound. The only concern is that TI's historical growth rate hasn't been that impressive, hovering around the single digits.

However, they've done a great job of adjusting their product mix, boosting their gross margin from around 50% in 2010 to 69%, and their net profit margin from 18% to 44%.

Looking ahead, there's not much room for further improvement in TI's profitability. With such low growth rates, its price-to-book value ratio is still a whopping 7.8 times.

That might put a damper on future stock price gains.