Updated from Oct. 22

SAN FRANCISCO -- Texas Instruments' ( TXN) cell-phone chip business has been under siege by rivals for years.

Now the first signs of damage are starting to show.

The Dallas chipmaker served up lackluster financial guidance for the fourth-quarter Monday, upstaging its 2-cent beat on the bottom line in the third quarter and sending its stock tumbling. Shares dropped $2.22, or 6.5%, to $32.05 in early action Tuesday.

TI said revenue in the current quarter will range between $3.4 billion and $3.68 billion -- below the average analyst expectation of $3.71 billion.

Chief Financial Officer Kevin March attributed the soft outlook to customers striving to keep inventories in check heading into December, in order to avoid getting caught with excess chip stockpiles in the new year.

Perhaps more importantly to some investors, he said handset-maker Ericsson ( ERIC) will buy chips from another chipmaker in addition to TI for some of its most-advanced cell phones. The deal, announced almost a year ago, will take effect in the fourth quarter.

"We now have to share that revenue with that supplier," March said in an interview with TheStreet.com.

While TI's wireless revenue is typically up an average of 8% sequentially in the fourth quarter, the company said it will likely be flat this year.

TI can expect further hits to its cell-phone business in the months ahead.

In August, Nokia ( NOK), the world's No.1 handset maker, said it was adding Broadcom ( BRCM) and STMicroelectronics ( STM) to its list of chip suppliers , lessening its reliance on TI.

March stressed that TI is simultaneously broadening its wireless presence, striking deals to increase its business with Motorola ( MOT), as well as new opportunities with Ericsson that have yet to take effect.

How the deals play out on TI's topline is still too early to call, said March.

Investors appear to see more risk than reward in the trend. IT shares fell 4.1%, or $1.42, to $32.85 in extended trading Monday.

The company's stock is down 17% from its 52-week high of $39.63 in July.

The wireless woes come as IT is making an aggressive push to increase its market share for analog chips -- and bolstering its bottom line in the process.

The company's gross profit margin jumped in the third quarter to 54.2%, compared with 51.4% in the year-ago quarter, with TI posting a net income of $776 million for the quarter, or 52 cents a share, compared with $702 million, or 46 cents, at this time last year.

Analysts were expecting EPS of 50 cents.

TI said the profit included a gain of 2 cents from the sale of its DSL equipment business.

TI said sales of high-performance analog chips, among the company's most profitable products, jumped 10% year over year.

And TI also saw strength in mixed-signal chips for PC storage products and printers, echoing recent results from other PC-related names like Intel ( INTC).

Total sales in the third quarter were $3.66 billion, which was in line with analysts' expectations.

"What's very attractive to us is the growth opportunity in analog," March said, citing expectations of 8% to 10% growth in the market and the fact that the industry is fragmented among numerous companies with small market share.

"We believe that presents a tremendous opportunity both for the underlying growth of the market itself, plus our ability to accelerate our own growth by taking market share," said March.

TI also said it was taking steps to control costs by consolidating certain manufacturing operations. Over the next two years, TI said it will cease chip production in Tucson, Ariz. and incur a $35 million charge, with annualized savings of $20 million.

For the current quarter, TI pegged fourth-quarter EPS between 48 cents and 54 cents, compared with the consensus estimate of 50 cents.

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