Texas Instruments' Texas-Size Investments Pay Off

VC returns padded its earnings, but the recent selloff shows the fragility of such income sources.
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SAN FRANCISCO -- "All Hail Tech (Again)" or "Tech Recalls Former Glory" will be the main headlines about

Tuesday's action. But the subhead of the story, which featured a 7.2% rise by the

Nasdaq Composite

, will no doubt be "Earnings Matter" or "Earnings to the Rescue."

So what to make of

Texas Instruments

(TXN) - Get Report

? The chipmaker recovered from its intraday low of 137 to close off a measly 0.3% to 148 1/2. But despite the late-day comeback, it clearly lagged its peers. The

Philadelphia Stock Exchange Semiconductor Index

jumped 4.2% and the

Morgan Stanley High Tech 35

leapt 5.6%.

T-I's struggles came despite reporting what were generally considered

solid earnings Monday night.

"It's like Bizarro world in

Superman

comics ... everything is backwards," one hedge fund manager (and apparent

Seinfeld fan) said of the action in Texas Instruments.

The easy explanation for T-I's seemingly mysterious decline is that its stock rose nearly 20 points

Monday. The familiar "buy the rumor, sell the news" trade.

Another theory is that Texas Instruments demonstrated better relative strength during the selloff and investors saw greater "bargains" in its more whipsawed and non-bellwether semiconductor brethren such as

C-Cube Microsystems

(CUBE) - Get Report

, which leapt 22.3% Tuesday.

But they don't pay me to stop at the easy answers.

Texas Instruments reported first-quarter earnings of 55 cents a share -- excluding one-time items -- up from 34 cents a year ago and 2 cents better than the consensus estimate. Total revenue rose 27% from the prior year while gross profit margin rose to 49.5%, up 3% from first-quarter 1999.

So far, so good.

Texas Instruments also posted solid improvement across its major operating segments -- semiconductor revenue rose 30% over the prior year and analog chip revenue climbed 25%, while revenue for digital signal processors and the wireless business jumped about 50% each.

No problems there.

Additionally, the company said it expects "accelerating sequential revenue growth" overall in the second quarter and "robust growth" for the year.

May we all be so blessed.

"The company's only black eye was its struggling hard-disk-drive business, which declined 19% year to year," said Charles Boucher, chip analyst at

Bear Stearns

. Boucher raised his earning estimates on T-I and reiterated his buy rating. (His firm hasn't performed recent underwriting for T-I.)

A host of other analysts issued similar actions, although some expressed mild disappointment in the pace of revenue growth in the semiconductor business. David Wu at

ABN Amro

said the semi revenue of $2.2 billion was about $50 million short of his estimate, but called the difference immaterial.

"The quarter was good but it was not blowout so the stock went down," he said. "You have to blow away the numbers before the stock goes up."

One other possible explanation for the stock's lagging performance is that Texas Instruments generated $105 million in "other income" in the quarter, accounting for 22.3% of its $470 million of pro forma net income, or about 12 cents per share.

Jamie Anderson, a spokesman for the company, said the bulk of the "other income" came from the company's venture capital effort, dubbed

TI Ventures . The addition from other income was about 2 cents more per share than T-I averaged on a quarterly basis during 1999, the spokesman said. But most analysts had increased the amount in their models in anticipation of the boost, he added.

Indeed, ABN's Wu called the issue of investment income "hardly material" to Texas Instrument's quarter, although over 20% of income and 22% of earnings per share seems pretty material to me.

There's nothing untoward or unusual about "other income" boosting a company's balance sheet; indeed, it's becoming more common by the quarter. But I wonder if the whole concept is tainted since the

controversy over

Intel's

(INTC) - Get Report

fourth quarter, when investment income greatly improved its results.

(Meanwhile, Intel reported its first-quarter earnings

tonight. Investment income totaled $640 million -- again, higher than the company had led analysts to expect. Now, as then,

Herb Greenberg

is on that

story.)

Perhaps something did change last week, when the Comp plummeted 25%. Maybe investors able to look beyond the rubble of their own portfolios realized the investment income that has so benefited the bottom lines of many companies can potentially slice the other way too.

Among TI Ventures' publicly traded investments,

DigitalThink

(DTHK)

is down 44% for the quarter to date and 61% off its 52-week high while

InterNAP Network Services

(INAP) - Get Report

is down 21.1% for the quarter and 66% off its 52-week best.

Of course, there's a long way to go in the quarter, and investors are suddenly acting like there's a short time to buy.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com .