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Tepid Forecast Trips Up Texas Instruments

The chipmaker reins in its second-quarter outlook due to the economic uncertainty.

Updated from 5:13 p.m. EDT

With a slowdown in demand pinching one of its key product lines,

Texas Instruments

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is planning for more tough times ahead.

The Dallas chipmaker said Monday that it is dialing down manufacturing activity at its semiconductor factories and will hold the line on operating expenses in the coming quarters.

TI described the moves as prudent steps to see the company through a period in which revenue is now forecast to fall below the company's -- and Wall Street's -- expectations.

"We're becoming more concerned about the economic environment and near-term demand," CFO Kevin March said in a post-earnings conference call Monday.

TI said sales in the current quarter will range between $3.24 billion to $3.5 billion. The $3.37 midpoint of the range was short of the $3.44 billion expected by analysts.

The company forecast second-quarter EPS between 42 cents and 48 cents. The Street was looking for 48 cents.

So far, the problem is limited to high-end smartphones. Last month, TI lowered its sales outlook for the first quarter, citing an order cancellation by one of its major customers.

But TI's March acknowledged in an interview with

Monday that other smartphone customers are now showing similar signs of trouble.

"Since then there has been several other customers discussing the fact that high-end cell phone sales growth rates not as strong as previously expected," said March.

A slowdown in smartphones is particularly painful for TI, since the company derives significantly more revenue from chips designed for feature-rich handsets than it does from chip sales for lower-end models.

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And TI said the sudden change in demand was responsible for a good chunk of the $160 million increase in its internal inventory, which the company must now try to drain down over the coming quarters.

As TI adjusts to the changing economic conditions, it is also facing increased competition to supply chips to


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, Ericsson and other cell phone handset makers.

Earlier this month, European chipmakers

ST Microelectronics

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announced a plan to merge their wireless chip businesses into a single, yet-to-be-named company, creating the world's third-largest cell phone chip provider, behind TI and


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For the three months ended March 31, TI had sales $3.27 billion, just shy of the $3.28 billion expected by analysts.

Sales of TI's wireless chips were down 3% year over year and 18% sequentially due to lower sales into cell phone applications, the company said. The typical sequential decline for wireless chips in the first quarter is 5%, executives noted.

TI's high-performance analog chips, which are used in everything from automobiles to industrial machinery, experienced a 20% increase from this time last year. TI credited its analog products, which command beefy profit margins, for the increase in the company's gross margin to 54.3%, from 51.3% at this time last year.

Texas Instruments earned $662 million, or 49 cents a share in the first quarter, vs. $516 million, or 35 cents a share at this time last year. TI's results included a 6-cent-a-share tax benefit.

The average analyst expectation, which typically excludes one-time items, called for EPS of 43 cents a share.

"Analog is making us stronger and will be a great growth opportunity for a very long time," said CEO Rich Templeton in a statement.

The company said it remains committed to its financial targets of a 55% gross margin and 35% operating margin.

Shares of TI were recently off 69 cents, or 2.3%, to $29.90 in after-hours trading.