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Texas Instruments Investors Upbeat in Face of Slow Recovery

(Bloomberg) -- Texas Instruments Inc. gave a disappointing sales forecast for the latest quarter on Tuesday, but broader optimism that the tech industry is poised for a rebound helped bolster the stock.

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Though the company carefully avoided saying whether the current chip slump has reached a low point, investors and analysts have been betting that a recovery is coming this year. They stuck by that upbeat scenario after Texas Instruments’ mixed report, sending the shares up as much as 2.3% after an initial tumble.

It helped that Alphabet Inc. and Microsoft Corp. both gave upbeat quarterly reports Tuesday afternoon, dispelling some of the gloom surrounding chip demand.

“In the long term, we are very much bullish on this industry and the end markets and Texas Instruments,” Chief Financial Officer Rafael Lizardi said in an interview. Still, he said, the company won’t “engage on” the exact state of the market — and when it may turn around. “No one really knows. People can have models and can speculate, but at the end of the day, they don’t really know.”

Texas Instruments has one of the most diverse lists of customers in the chip industry, making it a bellwether for the broader semiconductor market. Its latest outlook, at least in the short term, suggests that demand remains sluggish. Revenue in the second quarter will be $4.17 billion to $4.53 billion, the company said. The midpoint of that range represents a 16.5% decline from a year earlier — worse than the 15% drop analysts were estimating.

The implication: Even the chip industry’s bright spots, such as the industrial market, are getting swept up in a broader slowdown. Texas Instruments receives a large portion of its revenue from factory equipment, and that had helped the company sidestep a sales slide suffered by personal computers and smartphones.

The automotive industry, which has had an insatiable demand for chips in recent years, remains a robust market for the company. But everything else is suffering, Chief Executive Officer Haviv Ilan said.

“During the quarter we experienced weakness across our end markets, with the exception of automotive,” he said in the statement.

The shares closed earlier at $169.39 in regular New York trading, leaving them up 2.5% this year.

Read More: Texas Instruments Promotes Operating Chief to CEO Role

On a conference call, executives said it’s more difficult to predict a rebound these days because various markets are behaving in different ways.

While the personal electronics market went into decline four quarters ago, that hasn’t happened yet in the automotive sector. Texas Instruments’ other major units began to experience weakness about two quarters ago. In general, customers are cutting orders to draw down their stockpiles of unused parts. That will continue in the current period, executives said.

The company also has reduced the amount of product that it sells through distributors, helping it better control inventory. Texas Instruments’ in-house stockpile went up in the quarter, and it expects that to continue.

Profit will be $1.62 to $1.88 a share in the second quarter, versus an analysts’ prediction of $1.83.

Revenue in the first quarter fell 11% to $4.38 billion, in line with the $4.36 billion analysts projected. Sales of analog chips dropped 14%, while Texas Instruments’ embedded processors gained 6.4%. Other revenue declined 16%.

Earnings amounted to $1.85 a share in the period, down from $2.35 a year earlier. The results included a 3-cent benefit that wasn’t in Texas Instruments’ original guidance, the company said.

Texas Instruments executives generally prefer not to make broad projections about where demand is headed. Instead, they concentrate on telling investors that their products have a long shelf life and will remain valuable when the chip industry emerges from one of its periodic down cycles.

Texas Instruments’ chips typically perform simple but vital functions, like registering button presses, detecting changes in temperature and controlling motors in everything from space hardware to domestic appliances. Such chips generally require less advanced production than digital products.

That focus has allowed the company to invest less in expensive factories and gear than peers, boosting profit margins and allowing it to offer attractive dividends and buybacks. But executives have warned investors that they will spend more on factories over the next few years to build more in-house capacity.

“We’re holding our nerve,” Lizardi said in the interview. “We’re not getting scared by short-term fluctuations.”

(Updates with finance chief’s comments in third paragraph.)

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