NEW YORK (CNN/Money) -
Texas Instruments reported a quarterly earnings increase of 27 percent Monday, better than expected.
The semiconductor company, which is the largest supplier of chips for cell phones, earned $121 million in its second quarter, or 7 cents a share, up from $95 million, or 5 cents a share, a year ago. Analysts were expecting earnings of 6 cents a share.
Sales came in at $2.3 billion, 8 percent higher than the same period last year and in line with lowered forecasts. Texas Instruments warned in June that its sales would be lower than expected due to an inventory buildup of cell phones in China.
Shares of Texas Instruments (TXN: Research, Estimates) fell 4.3 percent, to $17.88, in regular trading on the New York Stock Exchange Monday, but the stock jumped nearly 3 percent in after-hours trading, according to Instinet. The stock has fallen more than 12 percent since its warning.
Wireless getting better
Texas Instruments said that sales of chips to wireless customers fell 5 percent from the first quarter but that there was strong demand for wireless chips in the last few days of the quarter. That could be encouraging news since cell-phone manufacturers Nokia and Motorola both reported mediocre results last week, causing some concerns about whether TI would have more bad news.
"Like it or not, even though Texas Instruments is pretty diversified, handsets are the determining factor for Wall Street," said Eric Rothdeutsch, an analyst with Friedman Billings Ramsey. TI also makes analog chips, which help to process things such as light and sound waves into digital signals and vice versa, as well as broadband chips for DSL and cable modems.
Bill Aylesworth, CFO of Texas Instruments, said during a conference call that signs of a slowdown in Asia due to the outbreak of SARS seemed to be abating but that there were still some issues of excess inventory of cell phones in China.
Looking ahead to the third quarter, Texas Instruments said that it expected sales to be between $2.29 billion and $2.49 billion. Analysts are expecting revenue of $2.41 billion, according to earnings tracker First Call.
Krishna Shankar, an analyst with JMP Securities, said that he was not expecting Texas Instruments to raise its guidance. He added that Texas Instruments, like microprocessor powerhouse Intel, has benefited from market share gains as of late, and not from a broader pickup in demand for semiconductors.
But concerns about inventory buildup linger
The company was less clear on earnings guidance, however. TI said that third-quarter earnings would be in a range of 19 cents to 23 cents a share but that this includes a 13-cents-per- share gain from a sale of 24.7 million shares of Micron Technology (MU: Research, Estimates). Backing that out, earnings would come in at 6 cents to 10 cents a share, below Wall Street's consensus of 11 cents per share.
Adam Parker, an analyst with Bernstein, said he was worried about the potential impact that an increase in inventory could have on profit margins. TI said that its inventory increased by $113 million, or 13.4 percent, to $1 billion from the end of the first quarter. Sales, on the other hand, were only up 6.7 percent from the first quarter. "The inventory buildup could be a potential impediment," said Parker.
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Typically, when inventory growth is outpacing sales growth, that could cause problems if excess inventory is not sold for some reason, which was the case in the second quarter in Asia. Texas Instruments attributed the increase in inventory in part to a shifting of wireless shipments from the second quarter to the third quarter.
Texas Instruments also announced that it was not changing its current capital expenditure plans for the year. Intel made a similar announcement last week.
Analysts quoted in this story do not own shares of Texas Instruments and their firms have no investment banking relationship with the company.
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