Non-AI chip indicator warns, Texas Instruments Q3 beats expectations but Q4 guidance disappoints, still fluctuating after hours｜Financial report insights

The barometer of chips in the field of artificial intelligence (AI) - Texas Instruments issued a warning. The financial report of this American analog chip giant showed that the overall revenue and profit in the last quarter were lower than expected. The demand for chips in the industrial sector continued to be weak, and the sales guidance for this quarter did not turn into positive growth as expected by Wall Street, but will continue to decline, causing concerns that the demand for the chip industry is still sluggish.

After the U.S. stock market closed on Tuesday, October 22, Texas Instruments announced the financial data for the third quarter of 2024 and provided performance guidance for the fourth quarter.

1) Key Financial Data

Revenue: The operating income in the third quarter was $4.151 billion, a year-on-year decrease of 8.4%, with analysts expecting $4.12 billion, and a 15.6% year-on-year decrease from the second quarter.

EPS: Earnings per share (EPS) in the third quarter was $1.47, a year-on-year decrease of 20.5%, with analysts expecting $1.37, and a 34.8% year-on-year decrease from the second quarter.

Operating Profit: Operating profit in the third quarter was $1.554 billion, a year-on-year decrease of 17.9%, with analysts expecting $1.46 billion, and a 36.7% year-on-year decrease from the second quarter.

2) Segment Data

Analog Chips: Revenue from analog chips in the third quarter was $3.223 billion, a year-on-year decrease of 3.9%, with analysts expecting $3.17 billion, and a 10.7% year-on-year decrease from the second quarter.

Embedded Processing Chips: Revenue from embedded processing chips in the third quarter was $653 million, a year-on-year decrease of 26.6%, and a 31.2% year-on-year decrease from the second quarter.

3) Performance Guidance

Revenue: Revenue for the fourth quarter is expected to be $3.7 billion to $4.0 billion, with analysts expecting $4.08 billion.

EPS: EPS for the fourth quarter is expected to be $1.07 to $1.29, with analysts expecting $1.35.

After the financial report was released, the stock price of Texas Instruments fell more than 0.9% on Tuesday and the post-market decline quickly expanded, dropping more than 2% at one point, then rebounding, with an increase of over 4% at one point.

Revenue in the third quarter increased by 9% quarter-on-quarter, while chip demand in the industrial sector continued to decline quarter-on-quarter

The financial report shows that in the third quarter, both revenue and EPS profit of Texas Instruments slowed down compared to the second quarter, and the slowdown exceeded market expectations.

Analysts expected a nearly 9.1% year-on-year decrease in revenue in the third quarter, while the actual decrease announced by Texas Instruments was 8.4%. The third-quarter revenue slightly exceeded the midpoint of Texas Instruments' previous guidance range of $4.1 billion. Analysts expected an EPS decrease of nearly 26%, but the actual decrease was less than 21%. The third-quarter EPS was close to the high end of Texas Instruments' guidance range at $1.48 In the third quarter, Texas Instruments' top business, analog chips, saw a revenue decline of less than 4%, a significant easing from the over 10% decline in the second quarter.

Texas Instruments CEO Haviv Ilan stated in the earnings announcement that,

Revenue in the third quarter decreased by about 8% year-on-year, with a sequential growth of about 9%, "industrial (revenue) continued to decline sequentially, while other end markets all (sequentially) grew."

Ilan's comments above indicate that the industrial chip market remained sluggish in the third quarter.

Fourth-quarter revenue guidance indicates a potential year-on-year decline of over 9% with EPS potentially decreasing by up to 28%

The most disappointing aspect of the financial report data is that the performance guidance for the fourth quarter is all below expectations. Texas Instruments expects fourth-quarter revenue to continue to decline, possibly even more than in the third quarter, while analysts expect a rebound in fourth-quarter revenue. Analysts anticipate a further narrowing of the decline in EPS in the fourth quarter compared to the third quarter, but Texas Instruments forecasts a potential expansion in EPS.

Based on the performance guidance provided by Texas Instruments, the company expects fourth-quarter revenue to decline by 1.9% to 9.2% year-on-year, while analysts expect a slight increase of less than 1% year-on-year. Texas Instruments also anticipates that fourth-quarter EPS will decline by 13.4% to 28.2% year-on-year, while analysts predict a 9.4% decrease in EPS.

Overall, Texas Instruments' guidance suggests that chip demand is still in a recovery phase.

Some comments point out that the chips produced by Texas Instruments play a simple but crucial role in various electronic devices, with industrial equipment and automobiles being the company's two main sources of revenue, contributing to over 70% of its sales. While Texas Instruments typically avoids providing long-term forecasts for the entire industry, investors see the company as an indicator of overall chip industry demand.

Other comments suggest that inventory clearance by automakers previously affected Texas Instruments' orders in the automotive sector. The ongoing soft demand in the industrial market for tasks such as factory automation using chips has also impacted the company's orders in the industrial sector. Although the rise of electrification and autonomous driving technologies has driven growth in related chip consumption, softer automotive sales have offset this growth as consumers face uncertain economic prospects