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.”
Alan, I can't disagree too much with your reasoning and, on a lighter note, I love numbers (as long as they are accurate) and can't but admire someone who spices comments with data. Thank you for the brief but quite reasonable analysis.
Whether TI's revenue drop in the 2nd quarter was caused by higher fab capacity and shorter component lead times, leading to lower ASPs - is debatable. Time-to-market is a competitive differentiator, so ASPs can actually be higher for shorter lead times. If TI's lead times are too long, customers may move on to competitors(assuming they are not proprietary parts). So price needs to be kept down.
It's more likely, like TI says, that the revenue shortfall in 2Q had to do with a "customer specific issue" at a Wireless customer, rather than a drop in ASPs.
TI's Wireless segment only grew from $717M in 1Q10 to $727M in 2Q10, which is just a 1% increase. While the business units of Analog, Embedded Processing, and Other (DLP, custom ASIC) grew by 11, 17 and 9% respectively.
And in Wireless, higher revenue from connectivity products was offset by lower revenues from baseband and OMAP. TI's wireless business is still vulnerable to specific products at specific customers, and this will continue to cause business turbulence.
It is now a norm that investors push firms to do good and also move into very difficult spots. Despite this good result to me, TI could not get it with many of the shorters. TI must focus on its long-term and never be overly worried by most of these investors. It is the same thing that happens when people complain that US is not creating jobs when actually investor demands are pushing firms to outsource jobs in order to beat estimates. Owing your strategy over short-term investors must be a priory for TI.
TI is in very tough market when optimization of inventory and demand is very critical. Getting it right in most cases is tough. Nonetheless, they have a good Q.
Concerns about a possible overcapacity situation down the road may have some legitimacy, but the hit to TI's stock seems to me to be due to a reactionary strategy by short-term investors. It seems like some people were ready to dump TI at the first hint of supply loosening up, even though its a better situation for the company's long-term prospects.
Jay-K, TI sells a lot of proprietary parts. Second sources are not easily available so often a manufacturer must wait on TI. The company knows this hence the decision to add capacity. These are cyclical trends and one day, TI may be glad it responded so quickly to its customers' needs.
As to your question on design sockets, it depends again on whether or not there are good second sources for the components. If these are not available, you sit, wait and hope your customers won't move on to rivals' products.
I wonder what the future impact will be of losing sockets due to frustration with lead times. It's tough for everyone right now, but availability seems to be significantly worse with TI than with some of their competitors.
What the analysts may be concerned about is the overcapacity and the aggressive expansion of fabs (like the recent 'TI buys two fabs from Spansion Japan' story posted July 14, which should impact costs at least initially. The impressive part is that 300mm fabs with small to medium complexity analog translates into a lot of chips...It is an analog world for sure with no slowing down in sight is what I sense.
Join our online Radio Show on Friday 11th July starting at 2:00pm Eastern, when EETimes editor of all things fun and interesting, Max Maxfield, and embedded systems expert, Jack Ganssle, will debate as to just what is, and is not, and embedded system.