Updated from 5:23 p.m. EST

Slumping chip demand pressured Texas Instruments' ( TXN) sales in the fourth quarter, with revenue down 8% sequentially.

And while the Dallas chipmaker said it believed the chip market's current correction will be short-lived, TI guided first-quarter results below current estimates and said it plans to cut about 500 jobs to lower costs.

TI said revenue in the fourth quarter totaled $3.46 billion, slightly ahead of Wall Street's dampened expectations of $3.42 billion.

TI had net income of $668 million, or 45 cents a share, up from $650 million, or 40 cents a share, a year ago.

The results included a 5-cent-a-share benefit from the reinstatement of a federal research tax credit as well as a one-cent benefit from new patent license agreements.

Excluding those results, TI's EPS was 39 cents a share, a penny higher than Wall Street expectations, and at the high end of its guided range of between 37 cents and 40 cents a share.

TI credited its strategy of outsourcing some of its manufacturing to third-party chip factories, or foundries, for its stable profitability during a period of "unseasonably weak" demand.

TI pared back its expectations for the fourth quarter in December, citing a slowdown in demand and rising inventories among distributors.

On Monday, TI said that sales for analog and DSP chips -- the company's two largest businesses -- suffered in the fourth quarter. DSP sales fell 11% sequentially because of lower demand for wireless products, while analog chip sales were off 4% sequentially to a broad-based decline in demand.

Shares of TI were up 75 cents, or 2.6%, to $29.34 in extended trading.

Looking ahead, TI projected first-quarter sales between $3.01 billion and $3.28 billion with EPS between 28 cents and 34 cents. Analysts were looking for $3.30 billion in sales with EPS of 35 cents.

"Challenges continue in the first quarter as we operate in an environment where customers want lower levels of inventory and where growth in the wireless market is skewed to low-priced, basic featured cell phones, instead of higher-priced full-featured phones," CEO Rich Templeton said in a statement.

Sales of chips destined for feature-rich 3G cell phones declined 20% sequentially during the fourth quarter. This falloff offset the strong demand for TI's low-end cell phone chip, dubbed LoCosto.

According to TI, the company shipped more than 6 million LoCosto chips in the fourth quarter, with 12 different handset models using the chip. In the coming months, TI said it had as many as 50 different cell phone models committed to using the LoCosto chip.

But LoCosto, which integrates various cell phone functions like the radio and baseband processing onto a single chip, brings TI only about $5 of revenue per phone, vs. as much as $20 in revenue that TI often gets from chip sale for 3G phones.

While the company reduced its production in the face of slackening demand, its chip stockpiles in the fourth quarter ticked up to 75 days of inventory, vs. 73 days in the third quarter.

Orders in the fourth quarter were about $411 million below the year-ago quarter, and the company's book-to-bill ratio slipped to 0.89, meaning that TI received $89 worth of new orders for every $100 it shipped -- a sign of weak future demand.

TI CFO Kevin March said he expects the current slowdown in chip demand to be short-lived, lasting perhaps a few quarters, as customers appear to have acted quickly to reduce inventory levels.

According to March, inventory levels appear to have peaked in November and have been declining since then. As a result, TI has already begun increasing its production.

In the last downturn, between 2004 and 2005, TI cut back its production too much and wasn't prepared to meet demand when demand rebounded.

"The lesson we learned is that when it did turn around we didn't get an advance phone call," March said.

TI said it will save about $200 million annually by a series of moves including shuttering a digital factory and moving the manufacturing equipment into several of its analog chip plants, as well as collaborating on future manufacturing processes with its foundry partners. The moves will result in the company eliminating about 500 jobs by the end of the year.

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