Expansion, Cooling Demand to Hit Texas Instruments' Fourth-Quarter Results

Texas Instruments (TXN), the semiconductor giant that traces its lineage back almost a century, will probably say next week that profit slid in the fourth quarter, reflecting expansion costs and lower demand for some kinds of its products.

Net income probably fell 15% to $1.8 billion, or $1.98 per share, as revenue fell 4% to $4.6 billion, according to estimates from Visible Alpha. The company earned $2.1 billion, or $2.28 per share, on revenue of $4.8 billion in the same period a year ago.

Source: Visible Alpha

The company warned in October that fourth-quarter profit and revenue would fall short of analysts' forecasts. Next week's results likely will reflect a broader dip in demand throughout the chip industry amid one of the company's most significant expansions.

Still, the company's stock only fell 2% in the past year, significantly better than the 20% drop suffered by the S&P 500 Information Technology Index.

Texas Instruments specializes in lower-end chips used primarily in automobiles and industrial applications and also sells to the personal electronics markets. The company stockpiled inventory during the pandemic, which helped it meet demand from automakers when global supply chains faced disruptions as the pandemic eased. The company's revenue surged 27% in 2021, its fastest growth in more than a decade.

Expanding Production Capacity

Nonetheless, the company's inventory remained tight. So in early 2022, the company said it would spend $3.5 billion annually to add production capacity through 2025 -- $1 billion more each year than analysts had projected. Among other projects, the company in May started constructing a $30 billion plant in Sherman, Texas, and recently refurbished a plant in Utah that it purchased last year from Micron Technology.

That spending likely crimped the company's gross profit margin in the fourth quarter. Meanwhile, chip demand has cooled amid the broader slowdown in the U.S. economy and what Goldman Sachs in a recent research report called a "cyclical correction" that impacted other segments of the semiconductor industry throughout 2022.

In its October third-quarter earnings report, Texas Instruments said it was already experiencing a slowdown in its personal electronics business and "expanding weakness" across its industrial businesses. As such, it lowered its reduced earnings forecast for the fourth quarter.

The company, Goldman notes, should continue benefiting from robust auto-industry demand and manufacturing expansion tax credits from the recent passage of the federal government's CHIPS and Science Act promoting domestic chip production.

However, the company's free cash flow, on a trailing 12-month basis, fell 17% in the third quarter, the largest quarterly decline since 2010. As it tries to boost inventory to meet auto industry demand in an otherwise sluggish chip market, Goldman said it expects the company's free cash flow growth will remain "under pressure for the next several quarters."