Updated from 10:34 a.m. EDT

Shares of TexasInstruments ( TXN) surrendered early gains Thursday even asanalysts hiked their earnings estimates in the wake ofa strong financial report.

Separately Thursday, investors at TI's annual shareowners' meeting voted in favor of a measure requiring the company to expense options, by a margin of 57% to 41%. Two percent of shareowners abstained from the vote.

"The board takes shareholders' opinions very seriously and will give it quite a bit of thought," said spokesperson Chris Rongone.

After trading as high as $29.10 early on, the chipmaker's stock was recently down 56 cents, or 1.9%, to $28.13.

Late Wednesday, TI posted a slight upside onfirst-quarter revenue, even after hiking its guidancein a midquarter update, while meeting Wall Street'sexpectations for profits. The company sweetened thepicture by issuing a guidance range for sales abovecurrent expectations for the June quarter and sayingit's on track to surpass the peak profit margins ofthe last upcycle.

TI's wireless business "has surprised even themost optimistic investors, showing strongyear-over-year growth even off a very large revenuebase," wrote CIBC analyst Rick Schafer.

Referring toan April earnings warning from handset maker andleading TI customer Nokia ( NOK) that jarred the wirelessmarket, he noted that TI managed to absorb theshortfall and still deliver upside; meanwhile, itspush into the CDMA chip market starting last yearoffers more opportunity down the road.

"We remain confident that TI will exceed peakmargins from the last cycle; the only question, in ourview, is how long it will take to get there," wroteSchafer. "With a cyclical peak expected in 2005, webelieve TI will need to show continued upside to EPSfor the stock to move significantly higher. The biascontinues to be positive, however, as TI continues toexecute." (CIBC has done recent investment banking forTI.)

At A.G. Edwards, analyst Rick Faust nudged up hisJune revenue estimate to $3.2 billion from $3.058billion and his earnings estimate to 25 cents from 23cents. TI's sales guidance was "significantly betterthan our forecast, indicating that the broad-baseddemand experienced in the prior quarter is likely tocontinue, if not improve further," he wrote. The second quarter "should also benefit from a resumption of growth(albeit mild) in TI's wireless DSP business," in linewith normal seasonal trends.

"We believe that as theindustry recovery continues, TI can generate materialmargin expansion as factory utilization rates increasecombine with an improving pricing environment," Faust concluded. (Hisfirm hasn't done banking for TI.)

Gaining Share

TI saw sales rise 34% to $2.936 billion in its first quarter, slightly above the consensus estimate for $2.901 billion.

Gross profit margin of 45% of revenue was up 5.7 percentage points from last year's levels.

Net income totaled $367 million, up $250 million from last year's levels. Per share profit was in-line with the consensus estimate at 21 cents per share.

"TI's strong wireless growth from the year-ago period continued to outpace the industry's handset shipments, which we believe reflects the company's increasing content per phone," said CEO Tom Engibous. Part of the strength was due to TI's application processors, which power multimedia functions on high-end smartphones and 3G handsets.

TI also believes that it continues to gain share in the digital signal processor and analog markets where it ranks as the leading supplier.

"Customers are increasingly optimistic about their own outlook," said Chief Financial Officer Kevin March on a postclose conference call. "We see that in terms of the backlog they're putting on us and the forecasts they're providing us independent of that outlook."

One source of major potential margin upside, he added, is TI's commodity chip business. In March, the company first signaled that prices had begun to firm after a three-year slump.

CFO March said today that TI saw some positive impact in the first quarter from stronger prices for standard linear chips. But the second quarter should see an additional benefit, as commodity pricing also strengthens in logic chips, which claim twice as big a market as linear semiconductors, he said.

Further commodity price increases should help TI surpass its prior peak operating margin of 22%, which it reached in 2000, said March. Right now, prices remain at less than half the level of the prior peak, leaving much room for upside. Plus, TI has gained market share in commodity semiconductors.

"We now ship considerably more units, so as prices begin to increase you will see a multiplier effect. It has yet to contribute to the bottom line in any meaningful way," said March.

For the second quarter, TI predicted sales in the range of $3.085 billion to $3.325 billion, above the consensus estimate for $3.066 billion. Earnings should range from 23 cents to 26 cents, the firm said, compared to the average Wall Street forecast for 23 cents.

Chip sales grew 38% from last year's levels and 5% from the prior quarter, driven by strong demand for digital light processors and high-performance analog, which more than offset a decline in revenue from wireless applications. TI said its wireless revenue was the second highest on record despite the combination of a normal seasonal downtick in cell-phone sales and lower demand from its biggest customer Nokia, which triggered alarm when it recently issued an earnings warning.

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