Semiconductor Earnings Scorecard: INTC, TXN, XLNX, LRCX, ASML

There are signs that the semiconductor cycle has peaked driven by softening in smartphone and PC demand. The next wave of growth for semiconductors will come from things like cloud computing, artificial intelligence, smart cities, IoT, 5G and auto. Some of the current demand is already aligned with expansion in these markets, but we’re just beginning to scratch the surface of that potential.

Whether the demand from these markets can offset the cyclical slowdown is an open question and the answer will unfold through this year and the next. In the meantime, the current slate of earnings shows that there are few safe bets with Xilinx being an outlier.

Intel (NASDAQ:INTC) : Zacks Rank #3 (Hold)

Revenue of $18.657 billion was short of the estimated $19.01 billion. EPS of 1.28 was ahead of the estimated $1.22. By segment: CCG up 9.7% (52.6% revenue share), DCG up 8.7% (32.5%), IOTG down 7.2% (4.4%), NSG up 24.5% (5.9%), PSG up 7.7% (3.3%), other up 27.6% (1.2%).

The revenue miss, weaker-than-expected DCG revenue, cautious tone and disappointing guidance were concerns. The lower-than-expected revenue was attributed to weaker orders coming out of China because of a slowing economy. But management also said that macro issues including the trade war with China, the government shutdown and Brexit made them incrementally cautious for the rest of the year although a relative improvement should be expected in the back half when new products including the first 10nm chips are scheduled to ship.

CCG wasn’t in the spotlight but the business which accounts for more than half of Intel’s revenue, benefited from stronger ASPs that more than offset the impact of softer volumes.

Result: The Zacks Consensus Estimates for the March and June quarters are down 4 cents (9.4%) and 4 cents (3.8%), respectively.

Texas Instruments (NASDAQ:TXN) : Zacks Rank #4 (Sell)

Texas Instruments topped the Zacks Consensus Estimate on the bottom line while slightly missing on the top line. Management attributed the miss to slowing demand for semiconductors overall (not unexpected given waning demand for smartphones and PCs and ongoing trade tensions with China).

The earnings beat was mainly because the high-margin analog business remained strong, helped by 5G deployments at telecom customers. Industrial and auto were also good. Plus the company continues to transition from 200mm to 300mm, which helped it lower cost. An offsetting factor was lower factory utilization to maintain optimal use of cash in the softening demand environment.

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One of the more popular measures management takes is returning 100% of FCF to shareholders. In 2018, FCF jumped 30% to $6.1 billion and management returned $7.7 billion in share repurchases and dividend.

Guidance disappointed, sending the Zacks Consensus Estimate down 10 cents (8.1%) and 9 cents (7.1%) for the March and June quarters, respectively.

Xilinx (NASDAQ:XLNX) : Zacks Rank #1 (Strong Buy)

Xilinx beat the Zacks Consensus on both top and bottom lines helped by double-digit growth across business segments. In Data Center, The FPGA-as-a-Service (FaaS) model is gaining momentum with AWS, Huawei and Alibaba (NYSE:BABA). New design wins for its FPGA products included Samsung (KS:005930). In Communications, 5G related spending helped revenue across Korea, China and North America.

SoC revenue is benefiting from the Zync platform that offers ARM technology (software programmability), Xilinx FPGA (hardware programmability) and I/O programmability. Strength in Advanced Products came from 28nm and 20nm categories. What’s more, it also guided better than expected. Result: The Zacks Consensus Estimates for the March and June quarters are up 12 cents (14.6%) and 8 cents (9.6), respectively.

The reasons for particular optimism around Xilinx that will continue in quarters ahead are first, with Intel snapping up Altera, the only other major FPGA player, all rivals feel affinity to Xilinx; second, the company has a solid strategy based on some compelling products that will drive continued expansion in its revenue and profits, even in a difficult market such as this.

The recently announced 7nm Versal, for instance, is the first product in its adaptive compute acceleration platform (ACAP), which is a highly integrated multi-core heterogeneous compute platform enabling hardware-level flexibility suitable for machine learning, big data applications, cloud computing and more.

On the discrete level, its recently-launched Alveo enables acceleration in industry standard servers. Throw in the Zync platform and wrap it up with the FaaS model, and it’s clear that this company is going places.

Lam Research (NASDAQ:LRCX) : Zacks Rank #3 (Hold)

Lam’s reported revenue and earnings of $2.52 billion (in-line with the Zacks Consensus) and adjusted earnings of $3.87 (beat by 5.5%) are illustrative of a slowing semiconductor cycle. New CEO Tim Archer’s commentary supports the view: "While near-term market trends reflect adjustments after a period of tremendous growth in semiconductor demand, I am confident that our focus on Deposition and Etch technology leadership as well as growth in our installed-base business positions us well for the long term."

Memory, which accounts for more than half its revenue, will be meaningfully lower this year, as Chinese spending tapers off after a period of strong builds. The memory business will be driven by the need to lower cost: DRAM shifting to lower nodes, NAND shifting to 96-layer devices. Foundry and logic, weighted to the first half, will be stronger.

The Board of Directors approved a $5 billion share repurchase program, and given its low valuation both with respect to the S&P 500 and peer group, this might be a good time to buy back some shares.

Result: The Zacks Consensus Estimates for March and June quarters are down 21 cents (6.2%) and 65 cents (16.5%), respectively.

ASML Holding (AS:ASML) N.V. (NASDAQ:ASML) : Zacks Rank #3 (Hold)

This European maker of advanced lighting systems used in the semiconductor manufacturing process beat on both the top and bottom lines. The good news is that demand out of China remains strong according to management. The bad news is that some customers pushed back orders from the first half into the second because of end market softness. Result: The Zacks Consensus Estimate for the March and June quarters are down $1.47 (73.1%) and $1.00 (49.0%), respectively.

While management expressed confidence in its growth in 2020 and said that 2019 would also be a growth year albeit backend loaded, order pushouts due to end market softness is never a good thing. There could be more pushouts, who knows? That said, the company has some pretty big customers in Intel, Samsung, TSMC and the like; management said that the first DRAM customers would be using its systems this year; and China is very unlikely to ramp down its semiconductor capacity builds. So let’s see how the year shapes up.

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Written By: Zacks Investment Research