Updated from 5:09 p.m. EDTTexas Instruments ( TXN) said sales growth in the last quarter of the year will be less than seasonally expected, as the wireless market that has propelled the company all year shows signs of cooling off. Monday's anemic outlook is the first time that Texas Instruments, the world's No.1 maker of chips for cell phones, has acknowledged any significant weakness in that key market. Over the course of the summer, several of TI's competitors cut their sales projections citing their customers' rising chip stockpiles. TI officials stressed that the company was not seeing any fundamental drop in demand for cell phones, adding that their expectations for the industry's total handset unit sales in 2006 had not changed. Rather, TI said its weak outlook was the result of a slowdown in adoption of the high-end, so-called 3G cell phones, which account for roughly one-third of TI's wireless-chip sales. "What we're seeing here in the outlook is the mix between the low-end, or relatively inexpensive cell phones, and 3G has shifted," CFO Kevin March said in an interview. "The expectations will be more weighted toward the low end than previously anticipated." March described the pause in 3G sales as a normal "growing pattern" in the adoption of new cell-phone technology, as demand moves in fits and starts.
In the meantime, TI's orders are down sharply from the previous quarter, and the company is sitting on a stockpile of unsold chips for 3G phones. Shares of TI slid 1.1%, or 35 cents, to $31.53 in extended trading. TI's financial results for the recently ended third quarter were more or less in line with analysts' expectations. The company reported sales of $3.76 billion, up 13% year over year, with net income from continuing operations of $686 million, or 45 cents a share. Analysts polled by Thomson Financial were looking for $3.79 billion in revenue with EPS of 45 cents. CEO Rich Templeton said third-quarter revenue reached an all-time high, as TI continued to gain share in its core markets. Gross margin during the third quarter was 51.4%, compared with 49.3% in the year-ago period, reflecting TI's increasing mix of high-margin DSP and analog chips, Templeton said. High-performance analog chips sales increased 37% year over year, while DSP revenue rose 12%. Sales of TI's DLP chips, used in large-screen televisions and digital projectors, ticked up 6% year over year. But orders stalled during the third quarter, leading TI to expect that semiconductor sales growth in the fourth quarter will be "below the seasonal average," and prompting TI to tighten its expenses and manage inventory levels. Orders in the third quarter were $468 million less than the second quarter, due to flagging orders in TI's semiconductor division. At this time last year, TI's orders increased $351 million sequentially.
TI CEO Rich Templeton in a statement cited the following factors for the slowdown: "First we believe customers have broadly replenished their own inventory and are confident in operating with lower backlog now that chip supply has improved. "The second factor is wireless, where we expect that unit mix will be more weighted towards low-priced cell phones and inventory correction will continue in Japan," said Templeton. TI said it now expects fourth-quarter sales of $3.46 to $3.75 billion, with EPS between 40 cents and 46 cents. Analysts were looking for $3.8 billion in sales with 45 cents EPS. To reach the upper end of its guidance, TI officials said the company will need its fourth-quarter turns -- new orders to be shipped during the quarter -- to be much higher than they have been in recent quarters. Even with the slow fourth quarter, he said TI's semiconductor business to post total revenue growth for the year in the upper teens. "We have a responsive manufacturing model and we believe distributor inventory levels remain lean, both of which should serve us well," said Templeton. "We are competing from a position of strength with leading products and with customers who are gaining share." Several chipmakers who play in the wireless handset market, including National Semiconductor ( NSM) and Maxim Integrated Products ( MXIM), have pared back their financial expectations in recent months.
TI executives said that unlike many of the company's competitors, the company did not experience any inventory build of high-performance analog chips in its distribution channel. TI's own internal inventory, however, is a different story -- with days of inventory up from 67 days to 72 days, and the value rising $156 million sequentially to $1.49 billion -- above the company's desired level. CFO March said the buildup owed to TI building too many high-end cell phone chips while the market demand shifted to low-end phones. But he said the increase represented only a "slight imbalance" in inventory levels and did not present a write-off risk.