Texas Instruments is adding capacity to whittle down analog lead times and boost market share. Are investors buying it?
Texas Instruments Inc. only a few months ago was fending off verbal blows for difficulties it faced satisfying roaring demand for its analog semiconductors, a situation that resulted in extended lead time for the company’s products and some double-ordering by customers.
This week, one day after the analog IC and embedded processor vendor announced “the best operating profit TI has ever produced,” according to CFO Kevin March, the company is getting clobbered again, this time by investors spooked by its slightly lower-than-expected second quarter revenue and contracting book-to-bill ratio amid improvements in lead times.
TI in the second quarter reported revenue increased 42 percent from the year-ago quarter, to $3.5 billion versus analysts’ average estimate of $3.52 billion, a miss of just under $20 million. The miss, despite overall better metrics, including operating profit and gross profit margin, sent the company’s stock price sharply lower at the opening of trading on Tuesday, July 20.
What exactly did TI do wrong? Company executives hinted the revenue shortfall was primarily due to a “customer specific issue” related to the wireless sector and most analysts believe the company had a great quarter and even guided third quarter sales above current expectations.
Investors fault TI for the problem that might potentially emerge from what is looking like a successful capacity building and market-share gaining strategy.
Overall, TI appears to be in great shape and it’s profit engines seem to be in overdrive. However, recent actions by the company to improve product delivery times and the addition of new manufacturing capacity gave the impression it was facing some headwind as book-to-bill ratio fell from the prior quarter.
The company, it seems, is on a winning stretch but it might also be opening itself up to a new problem: the possibility of overcapacity in the event of a market slowdown. The fears may be real—and possible, considering the history of the semiconductor industry—but they appear misplaced in the case of TI.
There is some perverse logic to this situation even if it only makes sense in a system where it’s possible to make money whether a company’s performance trends upward or downward. In TI’s case, any improvements in its lead times constitute both good and bad news.
By finally getting a better handle on its lead times—though they are still far from normal or acceptable levels—TI is better able to determine actual demand for its products and plan future production accordingly, rather than operate on forecasts that may be error prone due to the strong likelihood of double- or triple-ordering by manufacturers trying to ensure they get supplies, company executives said.
“We actually think the orders are coming in probably more consistently with underlying demand,” said March, TI’s CFO, during a conference call to discuss the company’s second quarter results Monday, July 19.
“Last quarter our book-to-bill was 1.14 and this [second] quarter it was at 1.07,” March added. “We believe what we are seeing here is the effect of us in orderly fashion beginning to pull our lead times in [and] we’ve given our customers more confidence that they don’t have to place orders as far out in the future as they have for the last three quarters.”