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Texas Instruments executives urge caution on chip rebound

(Bloomberg) --Texas Instruments Inc. executives cautioned that a rebound in customer demand for its chips may take time to materialize, disappointing investors who had been encouraged by the company’s upbeat second-quarter forecast.

Earnings in the current period will be $1.12 to $1.32 a share on revenue of $3.46 billion to $3.74 billion, the Dallas-based company said Tuesday in a statement. On average, analysts predicted profit of $1.24 a share and sales of $3.66 billion, according to data compiled by Bloomberg. First-quarter sales declined, but the results mostly beat Wall Street projections.

The company’s shares rallied after the initial numbers were released, but lost ground later during a conference call, when Chief Financial Officer Rafael Lizardi offered a more subdued outlook. He said revenue declines are the result of customers cutting back on orders after a long period of stockpiling components. Typically, such a period of growth is followed by four or five quarters of declines, he said. He stressed that was historical perspective rather than a prediction.

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Workers prepare a silicon wafer machine at one of the Texas Instruments semiconductor clean rooms in Dallas, TX, on Tuesday, June 16, 2009.

“We’re going through a semiconductor downturn. That is normal. It happens every few years because of the way the industry works,” Lizardi said in an interview. "Others tend to speak more in hyperbole and get more excited about short-term trends.”

The world’s sixth-largest chipmaker reported first-quarter net income fell to $1.22 billion, or $1.26 per share, from $1.37 billion, or $1.35 a share, in the same period a year earlier. Revenue slipped 5.1 percent to $3.59 billion from $3.8 billion. Analysts had estimated a profit of $1.13 a share on sales of $3.48 billion.

As one of the first chip companies to report for the March quarter -- and with the biggest customer and product lists in the $470 billion semiconductor industry -- Texas Instruments provides investors with a view of demand across the electronics industry. The company’s chips are built into almost everything that has an "on" switch.

Texas Instruments shares climbed about 4 percent following the report, then shifted into negative territory following the comments by the executives. They were down about 2 percent at 6 p.m. in New York. The stock had gained 1.2 percent to $116.38 at Tuesday’s close, leaving it up 23 percent this year, compared with a 36 percent gain in the benchmark Philadelphia Stock Exchange Semiconductor Index.

Semiconductor stocks have rallied this year as investors bet on industry executives’ assurances that growth will return in the second half. Analysts have been less positive, and before Tuesday’s results, Texas Instruments’ management had also taken a more conservative approach, saying that they didn’t have the visibility into how demand would be affected by issues like the China-U.S. trade dispute.

The company experienced a general decline in demand in line with its expectations in the first quarter, the company’s head of investor relations, Dave Pahl, said on Tuesday’s call. That was partially offset by strong demand for chips used in mobile-phone networking equipment. Communications companies are ordering as they build out new networks with the technology known as 5G. Revenue in Texas Instruments’ communications division jumped 30 percent from a year earlier. Pahl said gains in this market can be "choppy."

When asked whether orders had picked up toward the end of the quarter, he said that they had followed normal seasonal patterns.

Texas Instruments, which has committed to returning all of its cash to investors, will stick to that even as sales decline, Lizardi said. The company has room within its budget and long-term plan to increase the amount paid out in dividends, he said.

After three years of growth, analysts are predicting Texas Instruments’ revenue will shrink this year as markets such as automotive slow down and customers work through a buildup of unused parts. Inventory sitting around for months can depress selling prices, and if there’s a rebound in demand it delays how that flows into new orders.

Two of Texas Instruments’ biggest markets, industrial and automotive, are currently "relatively weak," Tore Svanberg, an analyst at Stifel Nicolaus, wrote in a report before the results. The company is concentrating its research and design efforts in those businesses and counting on them for future growth.

Texas Instruments’ analog chips perform the fundamental task of translating real-world inputs, like sounds and touch, into electronic signals. Unlike chips from Intel Corp. and Qualcomm Inc., Texas Instruments’ semiconductors don’t cost tens of millions of dollars to develop and aren’t typically at risk of becoming obsolete quickly. That means the company is less vulnerable to sudden swings in demand or competitive pressure.