After-hours trading yesterday, $Texas Instruments(TXN)$ released its third-quarter results. While the earnings weren't stellar, management’s optimistic outlook propelled the stock up by 4%.
Earnings Overview
In Q3, Texas Instruments reported revenues of $4.15 billion, representing an 8.4% year-over-year decline.
This marks the eighth consecutive quarter of revenue drops. However, the figure exceeded analyst expectations of $4.12 billion and was slightly above the midpoint of management's guidance, which was $4 billion.
Additionally, the gross margin reached 59.6%, surpassing the anticipated 58.4%.
Guidance for Q4
Looking ahead to Q4, management projects revenues between $3.7 billion and $4 billion, which indicates a year-over-year decline of 5.6% and is below analysts’ expectations of $4.08 billion. The anticipated earnings per share will be in the range of $1.07 to $1.29, also falling short of the $1.35 forecast.
Although the guidance appears less than ideal, the trend shows a narrowing decline in revenues alongside a recovering gross margin. Management hinted at an expected rebound in orders, which helped to counteract the pessimistic guidance and push the stock price higher.
Market Segments
Texas Instruments’ product range includes analog integrated circuits, digital signal processors (DSP), microcontrollers, embedded processors, sensors, and power management solutions. These are widely used across various industries, including consumer electronics, industrial automation, automotive electronics, and medical devices.
Industrial Market: It is TI's largest segment, contributing around 35% of revenues.
Automotive Market: The segment follows closely behind at roughly 33%.
Consumer Electronics, Enterprise Systems, and Communication Devices: Together account for about 25% of revenue.
In Q3, inventory destocking by customers led to a low single-digit decline in the industrial market. However, the automotive sector experienced growth of about 7.5%. Consumer electronics saw a seasonal uptick of 30%, Enterprise systems grew around 20%, and Communication devices increased by about 25%.
The growth in the automotive market was significantly driven by rising sales of electric vehicles (EVs) in China. Compared to traditional combustion vehicles, EVs have a much higher demand for semiconductor products.
However, outside of China, the adoption rate of EVs in other countries has slowed down, which has dragged down overall growth.
The growth in consumer electronics during Q3 was anticipated due to seasonal factors, with a quarter-over-quarter increase of 30%. Other markets also showed signs of recovery, albeit contributing less to total revenue.
Looking ahead, the automotive market appears strong. China’s growing EV penetration and the expansion of Chinese automotive brands overseas are likely to enhance global EV adoption. The shift toward electrification in the automotive industry is essential and ensures long-term growth prospects despite short-term fluctuations.
The industrial sector remains crucial for Texas Instruments. Management believes that inventory adjustments are ongoing but expects a recovery soon. To prepare, Texas Instruments increased its inventory to $4.3 billion, up by $190 million from the previous quarter.
However, a specific timeline for the industrial market’s recovery has not been provided; management only indicated that recovery is anticipated.
Economic Indicators
According to the JPMorgan Global Manufacturing PMI, the index for September was 48.8, indicating contraction and marking a one-year low. The manufacturing sector requires more signals for recovery. Yet, trends in revenue and gross margins suggest that Texas Instruments has navigated past its lowest point.
The toughest days seem to be behind Texas Instruments. With its valuation at some of the lowest levels seen in recent years, there’s renewed confidence in the market to push forward.
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