With the broadest range of products and longest list of customers in the semiconductor industry, Texas Instruments acts as a thermometer for the overall health of the sector. So when the company reported dwindling demand in its industrial, consumer and automotive markets in October, Wall Street sounded an alarm bell. The only question was how severe the slowdown would be.
On Wednesday, the largest manufacturer of analog semiconductors returned with a response: things could be worse. Texas Instruments forecast first quarter revenue in the range of $3.34 billion to $3.62 billion, slightly off analyst estimates of $3.43 billion to $3.68 billion. Profits in the first quarter are projected to be around $1.11 per share. In the first quarter of 2018, the company reported $3.79 billion in sales, while profits were $1.35 per share.
"After 10 quarters of year-on-year growth, the weakness we are seeing is primarily due to the semiconductor cycle," the company's chief financial officer, Rafael Lizardi, said in a conference call on Wednesday with analysts. "That is just the sort of thing that happens in the semiconductor industry." He added that "the macro-environment, including uncertainty caused by trade tensions, could impact the depth and duration of this cycle."
Texas Instruments also reported fourth quarter results on Wednesday, which showed slowing growth in revenue. Chip sales targeting smartphones and other personal electronics—which accounted for 23 percent of the company’s revenue last year—declined in demand, particularly in China. The company blamed trade tensions between the United States and China over the last year for dampening demand in China, which was weaker than other regions.
The company's chips are among the basic building blocks of electronic devices, and it has been taking advantage of the increasing amount of analog electronics used in cars and industrial control systems. Chips targeting these applications accounted for 56 percent of the company's sales last year. But sales started slipping in the third quarter last year. The slowdown continued in the fourth quarter, Texas Instruments said.
The slowdown was softened by strong sales of semiconductors used in communications equipment, which helped the company's core analog business grow 4 percent annually. Texas Instruments said that communications revenue rose 20 percent in the quarter ahead of early deployments of 5G networks. The company's embedded processing unit fell around 12 percent over the last year as demand for microcontrollers declined.
Texas Instruments reported revenue of $3.72 billion in the fourth quarter. Profits rose to $1.24 billion. Earnings were $1.27 per share. "Revenue decreased one percent from the same quarter a year ago as demand for our products continued to slow across most markets," chief executive officer Richard Templeton said. Templeton took the job for the second time last year after his replacement was forced out amid an investigation into misconduct.
Texas Instruments is stashing unsold inventory longer and longer, which generally means that the company is manufacturing chips faster than it can convert them into sales. The company's inventory days increased from 134 to 152 days over the last year. Dallas, Texas-based Texas Instruments was holding onto $2.22 billion of inventory at the end of the fourth quarter last year, up from $1.96 billion in the fourth quarter of 2017.
But it can afford to hold onto inventory longer than other players in the semiconductor industry. The company's chips typically have long life spans, often remaining in use with customers for more than a decade before becoming obsolete. They can be sold years after they have been manufactured. But since the third quarter, Texas Instruments has been reigning in production to avoid building up its inventory, which is currently above normal levels, Lizardi said.
"If we can run sideways for a while, we are prepared to support a potential snap back," he said on Wednesday's conference call. "Or if it is deeper and longer, then we have to make further adjustments." He added: "During this period of weaker demand, we will stay focused on what will make us stronger long term and diligent in the short term."