TXN: Texas Instruments Inventory Correction Not Corrected
Presented at the IBN Stocks and Investing Festival.
Texas Instruments Incorporated (TXN - Annual Report) reported revenue of $3.42 billion for the second quarter of 2007. According to the company, revenue increased 7 percent compared with the prior quarter as demand for the company’s semiconductor products began to rebound following an inventory correction in the semiconductor market.
That statement, of course, led me straight to the balance sheet to see how much the correction improved their inventory situation. Imagine my surprise when I saw that inventories were actually up during the quarter, to $1.42 billion. The sequential increase of 1% was smaller than the increase in sales, but the year/year increase of 7% was against a similar decrease in sales. Looking at it from a longer term perspective, the days sales in inventory rose to 75.3, the highest they have been in the post-bubble period. Given that the high operating leverage inherent in semiconductor production means each chip produced costs less than the prior, it is no surprise that gross margins were a record - that is what should happen when inventory is being built.
Not being that gullible, investors realize that the boost to this period’s margins will mean a drag on the period in which the inventory is actually corrected. And that, I believe, is why the stock is down after the report - not because guidance was “only in line.”
Disclosure: William Trent has a long position in SMH.
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The inventory correction that TXN talked about is with their distribution customers (Arrow and Avnet) and their end customers. Take a look at those companies balance sheets and I beleive you will see how much they have brought down their inventories over the past 6-9 months.
Sean, thanks for the correction.
That is a good point, but knowing that these customers had too much inventory wouldn’t it have made sense for TXN to cut down on their own production?
they did cut back on their production and more importantly cut back production at their foundry partners. the best thing about txn’s mfg model is that they do about 50% of production in-house and 50% external thru Asian foundries. hence they usually keep their own production close to 100% utilization and tweak their external production. to me what was missed in the initial discussion was TXN’s comments that they shipped/sold less into the channel (how they recognize revenue) vs their sell-out (from disti partners). hence their revenue is understating actual demand. i believe that this qtr TXN should actually sell more into the channel than sell-out as their partners now have too little inventory onhand which will allow TXN to show upside.
Yet the stock was rising while the distributors were building inventory and revenue was overstating actual demand. I could be wrong, but I don’t recall TI going out of their way to point that out.
You are absolutely correct that the “true” measures to look at are the disty sell-through and the combined company/disty inventory. But most investors have little way of knowing how much of Arrow/Avnet’s inventory and sales were TXN related.
Perhaps TXN could join the rest of the analog companies in reporting disty sales on the more conservative sell-through basis rather than sell-in. Then they would keep the inventory on their own books and the sales and inventory would all properly reflect end demand. In the meantime, investors just have to take their word for it. And I hate taking management’s word for anything.
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