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TI meets estimates, warns of slower sales ahead

The chipmaker meets earnings estimates but indicates sales may taper off slightly in the fourth quarter because of excess cell phone inventories.

Texas Instruments met third-quarter earnings estimates Wednesday but indicated sales may taper off slightly in the current quarter because of excess cell phone inventories.

Texas Instruments
Stock price from October 1999 to present.  
Source: Prophet Finance
Dallas-based TI, which is the largest producer of chips for cell phones, reported earnings of 33 cents per share for the third quarter, a 27 percent increase over earnings of 26 cents per share in the same quarter last year.

Net income came to $591 million, a 31 percent hike over last year's third-quarter net income of $453 million. Revenue came to $3.1 billion.

Analysts expected the company to earn 33 cents per share, according to the consensus estimate from First Call/Thomson Financial.

But, like Intel's earning report Tuesday, TI's report isn't entirely upbeat. TI said it expects semiconductor revenue to rise only a few percentage points from the third quarter to the fourth quarter, in contrast to expectations among analysts for 7 percent to 8 percent sequential growth.

Overall, TI's revenue will likely be flat between the two quarters, the company said, and revenue from semiconductors for the wireless market will actually drop.

One of the problems is an excess of cell phones.

"The result of that is our wireless revenues are expected to decline somewhat from the third quarter to the fourth," TI chief financial officer Bill Aylesworth said in an interview.

Aylesworth added that some companies are continuing to burn off excess inventory, negating what is usually a seasonal jump in sales during the fourth quarter.

Ahead of the earnings report, Texas Instruments shares fell more than 8 percent Wednesday after Lehman Brothers analyst Dan Niles downgraded the stock to "neutral" from "outperform," due to a perceived slowdown in cell phone shipments.

"We believe TI saw some significant order cancellations occurring late in the (third) quarter from some, if not all, of the top three wireless handset vendors," Niles said in a research note. Before the call, Niles also indicated forecasts for the fourth quarter might have to be trimmed.

Although the cell phone market continues to grow, it is falling short of the optimistic predictions made earlier in the year. Motorola, Nokia and Ericsson stumped investors this summer when they each independently reduced sales forecasts.

In mid-September, TI trimmed its own forecast for the cell phone market. Earlier, TI said it expected industrywide handset sales to hit 435 million this year. The expectation now is for shipments to come in between 400 million and 435 million.

Along with reducing its estimates, TI said it was going to get out of the cell phone prognostication business, with CEO Tom Engibous noting that the company's main chips "are the core semiconductor drivers of a diverse mix of Internet-age applications."

Looking to next year, Aylesworth said TI sees the market for its products growing by 25 percent to 30 percent, as it did this year. TI's growth could be even greater as Aylesworth said operating margins should improve and the company will continue to try to expand its market share.

TI is also pouring money into chipmaking equipment to make sure it can meet demand. Aylesworth said the company could have sold more analog chips this quarter if it had more manufacturing capacity. The company plans to invest $2.8 billion in capital spending this year, and Aylesworth said next year's spending is "likely to be at about the same level."