TXN • 10-Q • Q2 2023 • Positive

TI's Revenue Drops 13% as Inventory Correction Continues, but R&D Investment Accelerates

July 26, 2023 • 1 min read

TL;DR

Texas Instruments reported significant revenue decline of 13% YoY to $4.53B in Q2 2023, reflecting ongoing inventory corrections across end markets. Despite top-line pressure, the company increased R&D investment by 15.2% YoY to $477M, signaling confidence in long-term growth opportunities. Gross margins compressed 570bps to 64.2%, though inventory build of $972M suggests preparation for future demand recovery. The company's continued investment in 300mm fab capacity amid cyclical downturn demon

Financial Performance Overview: Revenue declined 13.1% YoY to $4.53B, with gross margin compression to 64.2% from 69.9% in Q2 2022. Operating margin fell 810bps to 43.5% as R&D expenses increased 15.2% YoY. Notable inventory build of $972M QoQ to $3.73B suggests strategic stockpiling ahead of anticipated demand recovery. Net income decreased 24.8% YoY to $1.72B, though cash position remained strong at $9.55B including short-term investments.
Strategic Initiatives and Operational Changes: Accelerated R&D investment to $477M (+15.2% YoY) focused on analog and embedded processing capabilities. Continued expansion of 300mm manufacturing capacity with $1.65B in capital expenditures during Q2. Long-term strategy remains centered on automotive and industrial markets, with increased investment in power management and microcontroller portfolios. Management maintaining capital investments through downcycle positions TI for market share gains during recovery.
Market Position and Competitive Dynamics: Maintained leading position in analog semiconductors despite cyclical downturn. Strategic focus on automotive and industrial markets provides stability versus consumer electronics exposure. Inventory correction among customers continues but showing early signs of stabilization in certain segments. 300mm manufacturing advantage provides 40% cost benefit versus competitors' 200mm capacity, enabling sustained pricing power and margin advantage.
Operational Efficiency and Profitability: Gross margin declined to 64.2% but remains industry-leading due to manufacturing scale advantages. Operating expenses increased with R&D investment, though SG&A as percentage of revenue remained controlled at 10.2%. Working capital management remains strong despite strategic inventory build. Free cash flow generation continues to support both growth investments and shareholder returns through dividend and buybacks.
Growth Catalysts and Material Risks: Near-term growth constrained by customer inventory corrections and macro uncertainty. Long-term catalysts include automotive electrification, industrial automation, and analog content growth in end markets. Key risks include prolonged inventory correction, increased competition in 300mm manufacturing, and potential automotive market slowdown. Geographic diversification helps mitigate regional demand fluctuations.

Capex

$1.65B focused on 300mm capacity

Revenue

$4.53B ( YoY, QoQ)

↓ -13.1%

Rd Spend

$477M ( YoY) representing of revenue

↑ +15.2%

Inventory

$3.73B ( YoY, QoQ)

↑ +35.3%

Net Income

$1.72B ( YoY) with net margin

↓ -24.8%

Gross Margin

(-570bps YoY)

↑ 64.2%

Operating Margin

(-810bps YoY)

↑ 43.5%

Key Risks

Prolonged inventory correction cycle impacting revenue and margins
Significant inventory build creating potential write-down risk
Manufacturing geographic concentration risk
Increased competition in 300mm manufacturing

Key Opportunities

Automotive electrification driving analog content growth ($50B+ TAM)
Industrial automation expansion increasing semiconductor content
300mm manufacturing enabling sustained cost advantage
Market share gains potential during recovery phase

Bottom Line

Texas Instruments' Q2 results demonstrate management's commitment to long-term strategic positioning despite near-term cyclical pressures. While revenue declined 13.1% YoY, increased R&D investment and continued capacity expansion suggest confidence in eventual market recovery. The company's manufacturing cost advantage and focus on automotive/industrial markets provide competitive differentiation, though significant inventory build warrants monitoring. Key metrics to watch include inventory levels, gross margin trends, and early indicators of customer ordering patterns normalization.