Texas Instruments reported third-quarter results above expectations Monday. Net income rose 31% from a year earlier to $826 million, and revenue rose 8% to $3.5 billion.
The solid results came 10 days after Microchip’s CEO warned of “another industry correction” in the offing.
Financial analysts probed TI executives during the earnings call — in every which way — by asking if it might have detected a market slowdown in the quarter or ominous signs for the near future.
However, the onion peelers in the news and analyst communities got little comfort from TI. Executives saw little evidence to support any such cautions. TI stressed that the company has not seen inventory buildup or any significant retreat in the Chinese and European markets.
In a report published Tuesday, Morgan Stanley analyst Joseph Moore wrote, “TI posted solid upside and sees no correction in sight.” Though Morgan Stanley “continues to budget for deceleration in analog the next couple of quarters in line with what peers are seeing,” TI's much lower opex and slightly better gross margins “drive our estimates higher.” The firm reiterated an Equal-Weight rating on TI and raised the price target from $42 to $45.
Brian Matas, vice president of market research at IC Insights, told us, “Frankly, this situation is rather puzzling.” After Microchip's warning of an industry market correction, “I fully expected there would be one or a few other companies that joined them in a similar lugubrious outlook, but that really hasn't panned out. More and more, it seems Microchip is alone on this island of despair.”
During the earnings call, TI refrained from speaking for the industry as a whole.
“Our inventory on our books is at 108 days, which is within our target model,” said David Pahl, its vice president and head of investor relations. The company's channel inventories are “essentially unchanged” from a quarter earlier. The lead time of just over 4.5 weeks “has been consistent,” and “cancellations and reschedules remain very low.”
In sum, in Pahl's words, “nothing is changing.”
Business was up in all regions, “with Asia and Europe up the most.” Pahl said his company looked specifically inside China for resale performance. “I'd just say that resales really just continued to be solid as we closed out the quarter.”
It remains to be seen if Microchip is still “a canary in the coal mine,” as the company describes itself.
Every company has a different strategy in dealing with distribution and inventory management. TI has structurally changed how inventory is managed in the distribution channel with the company's consignment program. It has been converting more of its distribution sales, with 55% of its distribution revenue on consignment. Under the program, Pahl said, TI records revenue only when distributors “pull products from our consignment inventory… stored at the distributors' locations.”
This program “minimizes changes in demand due to distribution inventory/channel inventory and, most importantly, allows us a greater flexibility to meet customer demand.”
The question, then, is whether its consignment program keeps TI from seeing changes in the overall demand environment quickly.
“Our distributors provide us with point-of-sale reporting, and we get that information on a very regular basis,” Pahl said. “So regardless of how the revenue is recognized, we see what's going on from a distributor resale standpoint.”
What happened in July 2011
This isn't the first time Microchip has warned of “weak overall market conditions.” In July 2011, CEO Steve Sanghi talked of a lingering dip in the market. Many in the industry clearly didn't want to listen, and they downplayed the warning as an isolated incident specific to Microchip.
Within a few months, reality caught up. Other chip companies ranging from Analog Devices to Altera and Freescale began cutting third-quarter sales targets.
At that time, Microchip gave three reasons for its prescience on market changes. First, it recognizes its sales only when distributors have sold products to customers, allowing the company to see “true consumption.”
Second, the company cited its shorter lead time (3-4 weeks) compared to competitors.
Third, it has a broad customer base, and many of its customers keep minimal inventory. Their ordering habits allow Microchip a quicker read when slight economic changes are about to hit the broader market, the company told us back in 2011.
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