September 19, 2000 1:35 PM PDT

Texas Instruments cuts estimates for cell phone market

Texas Instruments is joining cell phone makers in paring back its forecast for cell phone sales.

The largest maker of chips for cell phones, TI said industrywide sales will fall between 400 million to 435 million, down from its prior forecast of 435 million. However, the chip giant also reiterated that it believes its own third-quarter financial results will reach the targets outlined in its second-quarter earnings release.

TI shares climbed $4.50, or 7.6 percent, to 63.69 today.

More handsets have been built than demand calls for, but the extra inventory will be sold off in the third and fourth quarters of this year, TI chief executive Tom Engibous said today at the Banc of America Securities Conference in San Francisco. TI's wireless chip revenue will still equal or exceed that of last quarter.

TI customers such as Motorola, Nokia and Ericsson have all warned in recent weeks that sales would be weaker than some earlier forecasts. But even the pared back forecast for industrywide sales of 400 million handsets represents strong growth over the roughly 300 million units sold last year.

Engibous said TI revised its forecast to include both the worst-case and best-case scenerios for cell phone sales. Looking forward, Engibous said the next generation of handsets--2.5G networks will begin cropping up early next year in Europe-should boost handset growth and TI's revenue per phone.

Engibous, however, declined to put a number on prospective sales, noting a change in policy at TI. "We are going to get out of the handset forecasting business," Engibous said. "It's not viewed very positively by some of our major customers."

The warnings of weaker cell phone sales have sparked a debate over the future of the cell phone industry, with some analysts predicting that sales will continue to grow at current rates through 2001.

Others have said that growth will peak in the middle of 2001. Slowing cell phone sales will affect not only handset makers, but also component suppliers such as Advanced Micro Devices and Intel, which make flash memory, and TI, the leading manufacturer of digital signal processors.

A recent study from The Strategis Group asserts that the wireless industry will continue to grow, but at a slower rate than it did between 1993 and 1999. The number of mobile phone owners is expected to increase from 530 million worldwide today to 1.37 billion by 2007, or about one-sixth of the world's population.

A tough call Among the woes in the industry has been a shift in the way cell phones are made. Historically, companies like TI have sold individual chips directly to the top-tier cell phone makers. Recently, however, cell phone makers have increasingly outsourced manufacturing, as well as design responsibility, for phones to contract manufacturers.

Unlike some cell phone makers, contract manufactures don't want individual chips, but a complete package of chipsets. TI underestimated the shift in buying patterns, Engibous acknowledged.

TI is increasing capacity for chipset manufacturing but won't be able to fully meet demand for complete chipsets until the first quarter of next year.

"Our wireless growth this quarter would be several points higher if we could meet chipset demand," Engibous said.

Other challenges, however, also await TI. With the move to 2.5G phones, TI will eventually see a leveling off in the amount of money it gets for each cell phone produced, he said. That amount has been declining at a rate of 15 to 20 percent per year.

Despite the handset woes, TI expects that growth in its struggling hard drive business should resume this quarter.

However, TI is abandoning one area of the hard drive business, reassigning 100 engineers from that segment into telecommunications and networking chip efforts.

Engibous also said TI's calculator business will grow significantly from the second quarter and slightly year over year, but it will not be "quite as strong as expected."

 

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