TXN • 10-Q • Q2 2024 • Positive

Texas Instruments' Revenue Declines 16% as Semiconductor Demand Softens Significantly

July 24, 2024 • 1 min read

TL;DR

TI reported Q2 2024 revenue of $3.82B, down 16% YoY, reflecting broader semiconductor industry weakness. Operating profit declined 37% to $1.25B as margins compressed due to lower factory utilization. The company maintained significant R&D investment at $498M (+4.4% YoY) despite headwinds, signaling commitment to long-term growth. Balance sheet remains strong with $9.7B in cash and investments, though inventory levels rose 2.7% sequentially to $4.1B.

Financial Performance Overview: Revenue declined 16% YoY to $3.82B, with gross margin compressing 570bps to 57.8%. Operating profit fell 37% to $1.25B as lower factory utilization and continued R&D investments weighed on profitability. Operating margin declined from 43.5% to 32.7%, though remained healthy relative to peers. Inventory grew 2.7% sequentially, suggesting continued near-term demand uncertainty.
Strategic Initiatives and Operational Changes: TI maintained aggressive capital investment in new manufacturing capacity, with PP&E increasing 11.8% to $11.2B since December 2023. R&D spending rose 4.4% YoY to $498M (13% of revenue) as the company doubled down on automotive and industrial markets. Management's strategic decision to build inventory during the downturn positions TI for rapid response when demand recovers, though carrying costs impact near-term margins.
Market Position and Competitive Dynamics: TI's broad portfolio and manufacturing scale continue providing competitive advantages despite cyclical headwinds. Strong balance sheet with $9.7B in cash and investments enables continued investment through the downturn while peers may pull back. Customer inventory corrections appear ongoing but automotive and industrial end-markets remain long-term growth drivers. Market share in analog and embedded processing remains stable.
Operational Efficiency and Profitability: Gross margin of 57.8% reflects manufacturing scale benefits despite underutilization impact. Operating expenses remained well-controlled at 25.2% of revenue despite lower sales base. Working capital management remains solid with $1.71B in receivables (45 DSO). The company's 300mm manufacturing transition continues driving structural cost advantages versus competitors relying on older fabs.
Growth Catalysts and Material Risks: Near-term growth remains challenged by broad-based semiconductor industry weakness and customer inventory corrections. However, secular growth in automotive and industrial semiconductors provides multi-year tailwinds. Key risks include prolonged demand weakness, increased competition in analog/embedded markets, and potential supply chain disruptions. Management's vertical integration strategy helps mitigate supply risks but requires significant ongoing capital investment.

Revenue

$3.82B ( YoY, QoQ) with broad-based weakness

↓ -15.6%

Rd Spend

$498M (+4.4% YoY) at 13.0% of revenue

Net Income

$1.13B ( YoY) with net margin

↓ -34.6%

Gross Margin

(-570bps YoY) impacted by utilization

↑ 57.8%

Free Cash Flow

~$880M ( of revenue)

↑ 23%

Operating Margin

(-1080bps YoY) with fixed cost impact

↑ 32.7%

Growth Indicators

$1.35B in Q2 for capacity expansion

Inventory $4.11B (+2.7% QoQ)

Cash Position $9.69B including investments

Key Risks

Customer inventory corrections extending longer than expected
High fixed costs from new fab investments impacting margins
Automotive market concentration creating cyclical exposure
Increased competition in core analog/embedded markets

Key Opportunities

EV adoption driving semiconductor content growth in automotive
Industrial automation increasing demand for analog/embedded solutions
300mm manufacturing transition reducing structural costs
Balance sheet enabling opportunistic M&A during downturn

Bottom Line

TI's Q2 results reflect significant near-term headwinds, but the company's strategic positioning and financial strength remain intact. Management's willingness to invest through the cycle should drive competitive advantages when demand recovers. While visibility remains limited, automotive and industrial secular trends provide long-term growth tailwinds. Key metrics to watch include book-to-bill ratio, factory utilization, and customer inventory levels. The contrarian view suggests TI's aggressive capacity expansion could drive outsized share gains in the next upcycle despite near-term margin pressure.