SAN FRANCISCO -- Texas Instruments ( TXN) said it was preparing for sales to decline during the next two quarters amid a weakening global economy, and announced plans to offload a portion of its cell phone chip business. TI said Monday that it is in discussions with several companies about the sale of its so-called merchant cellular baseband business, which provides off-the-shelf modem chips for handsets. TI will continue to sell customized baseband chips, the largest segment of its wireless chip revenue, and said that it will focus its wireless efforts going forward on the applications processors used in high-end smart phones. The move is expected to shave one-third of the operating expenses, or roughly $200 million, from its wireless business, and is among a variety of steps TI is taking to weather the global economic downturn. TI said it will reduce its manufacturing activity in order to burn off excess chip inventory, while trimming capital expenditures and limiting new hires. "Our outlook for the fourth quarter is for revenue to decline substantially based on weak order trends over the past few months," said CEO Rich Templeton in a statement. The company projected revenue between $2.83 billion and $3.07 billion in the current quarter -- well below the $3.34 billion expected by Wall Street analysts. And TI said it was assuming a further decline in the first quarter of 2009. TI said EPS would range between 30 cents and 36 cents, vs. the 42 cents that the Street was looking for.
Shares of TI were off $1.10, or 6%, to $16.88 in recent after-hours trading. TI's net income for the three months ended Sept. 30 declined 26% year over year to $563 million, or 43 cents, one penny shy of the average analyst expectation. The company's gross profit margin fell to 48.5%, compared to 54.2% in the third quarter of 2007, due to lower revenue and to the decision to reduce factory utilization by roughly10% in order to work down existing chip stockpiles. The company's $3.39 billion in sales in the three months ended Sept. 30 were in line with Wall Street estimates. The decision to exit a portion of the cell phone business marks an important, but not wholly unexpected turning point for TI, which dominated the cell phone chip market for years. In recent months, TI has seen its wireless business come under pressure as rivals such as Infineon ( IFX), STMicroelectronics ( STM) and Broadcom ( BRCM)have made inroads among its stable of handset customers. Last year, Qualcomm ( QCOM) overtook TI as the world's largest provider of cell phone chips. TI has increasingly signaled that its main focus going forward will be less on wireless chips and more on analog chips and embedded processors, which carry richer profit margins. The merchant baseband business generates $350 million to $400 million in annual revenue and includes the LoCosto and eCosto products that TI developed in recent years to tap into the growing demand for low-cost cell phones in emerging economies like India and China.
TI's business developing custom baseband chips for handset makers including Nokia ( NOK) and Motorola ( MOT) generates about $2.3 billion in annual revenue. But TI said it expects that revenue to decrease over time, as business from key customers like Nokia becomes partitioned among various chipmakers besides TI. What's more, many handset makers have indicated a preference to buy the type of off-the-shelf baseband chips that TI is moving away from, which means that TI's orders for custom chips are likely to decline further in the future. The real focus of TI's wireless effort going forward will be the application processors that run software on high-end smart phones and handle graphics and video. "What we're looking at is, Where is the most attractive space inside phones going forward?" said CFO Kevin March in an interview with TheStreet.com. "Our customers are trying to differentiate those phones. So we believe the attractive space for revenue growth and profit inside handsets is moving from the baseband to the application processor," he said. The company said its move to sell the merchant baseband business will result in charges of $110 million during the next three quarters.