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(Image courtesy of Continental).

Texas Instruments Blames Weak Forecast on Trade Friction

"We are at the very end of a long supply chain," Rafael Lizardi, chief financial officer at Texas Instruments, said on a conference call with analysts. "And when the ones at the very front pull back, it becomes a traffic jam."

Texas Instruments reported on Tuesday that revenue declined 11% over the last quarter and warned that sales could fall even further in the fourth quarter, damping hopes that the global chip business finally hit bottom after a tough 2019. The analog chip manufacturer blamed the weak forecast on challenging conditions in its end markets, exacerbated by trade war uncertainties and slowing growth in the global economy.

The company said it expects revenue in the range of $3.07 billion to $3.33 billion in the fourth quarter, down from $3.72 billion over the same span last year, as customers pull back on purchases of the company's analog chips and embedded processors. The midpoint of that range represents a year-over-year sales decline of 14%, compared to the analyst average of 3%. That would be its largest quarterly sales drop in the last decade.

Shares of Texas Instruments have dipped close to 8% following the forecast. The company's shares have slowly gained ground in recent months on hopes that demand had bottomed out by the end of the second quarter and could start bouncing back in the fourth quarter of 2019. The hope was that growth could get restarted by the first quarter of 2020. Other players, including Intel and Nvidia, have also said to expect a second-half rebound.

"We are at the very end of a long supply chain," the company's chief financial officer, Rafael Lizardi, said on a conference call with analysts Tuesday. "And when the ones at the very front pull back, it becomes a traffic jam." Texas Instruments is often seen as a bellwether for chip demand due to its broad customer base and vast assortment of products. The company said its sales declines have worsened every quarter the last four quarters. 

"Our sense is that customers are just far more cautious than they were, certainly a year ago, but even 90 days ago, and many of them talk about the caution. They mentioned the trade tensions that we know have been happening, and have been kind of accumulating over the last three to four quarters," Lizardi said. The company, the world's fourth largest chip maker by market value, has also started to cut its production as demand wanes. 

Rich Templeton, chief executive officer of Texas Instruments, said revenue in the September quarter declined over the last year to $3.77 billion, down from $4.26 billion and falling short of the company's forecast of $3.8 billion. Texas Instruments said income in the third quarter came out to $1.43 billion, or $1.49 per share, on the high-end of the company's guidance. The company earned $1.57 billion, or $1.58 per share, in the third quarter of 2018.

Texas Instruments said it struggled with "broad-based weakness" in the third quarter that impacted all major customers, regions and product lines. The company's analog business declined 8% due to weakness in the global automotive and telecom markets, and embedded processing fell 19%. Sales of communications chips, which have surged over the last year due to early 5G deployments, fell 35% year-over-year and 20% quarter-over-quarter.

Texas Instruments is the global leader in analog chips, which are among the building blocks of nearly every electronic device. The company sells more than 100,000 different chips to almost 100,000 customers in automotive, industrial, telecom, consumer electronics and lots of other markets, lacking heavy exposure to any one customer or region. Texas Instruments noted that its best-selling product last year brought in only 0.8% of its revenue.

So the company's forecast is sending shivers through the semiconductor industry, which has been hammered over the last year by falling smartphone sales and inventory oversupply, on top of relentless trade friction. Broadcom, which has been hit hard by trade tensions with China and supply restrictions on Huawei, has seen shares fall 2% following the forecast. Analog Devices and Maxim Integrated have dipped about 5% and 2.5%, respectively.

The U.S. trade war with China, in which both sides have slapped tariffs on each other, has caused turmoil in the electronics sector both in the U.S. and globally. Shawn Dubravac, head economist at electronics manufacturing trade group IPC, said on Thursday that "rising tariffs are putting a painful squeeze on many U.S. electronics manufacturers." He said companies are facing tariffs on average of 30% of the total value of the products they import.

"Many are facing supply-chain disruptions and steeper costs from the tariffs that have been imposed to date, and the impacts will grow as the trade war drags on," Dubravac said.

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