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Texas Instruments (TXN)
Texas Instruments Forced to Revise Outlook on Decreased Demand
Major chipmakers were either collectively left out of an important memo or the tech sector has been bamboozled by a sudden and surprising turn downward. Following last week's announcement by Intel (INTC: Charts, News, Offers) that it would be revising its financial forecasts, Texas Instruments has now also had to lower its earnings estimates following unexpected weakness. The company has been facing new obstacles lately with the loss of some big name customers as new competitors chip away at its stronghold on the market. It is mere coincidence that Texas Instruments' news came in such close proximity to that of its rival or does TI's position make it poised to drop farther if industry weakness continues?
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Texas Instruments had its sights set high for this quarter's financials but a sudden and disappointing reality check has forced the chipmaker to revise its forecasts significantly downward. The company's earlier figures estimated that sales would increase substantially, leading to a revenue range of $3.27 billion to $3.55 billion and earnings per share between 43 cents and 49 cents. Analysts had predicted revenue of about $3.4 billion and earnings per share of 46 cents. In the announcement released late yesterday, however, TI has cut those estimates drastically and now predicts sales growth of one percent to five percent over last year. The new revenue range has been set at $3.21 billion to $3.35 billion with earning s per share coming in between 41 cents and 45 cents.
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The leading cause of TI's negative revision is weakness in the wireless sector, where business has been slowing. Over the course of the last week alone, demand for the chips used in the 3G cell phones, a higher-end model, dipped substantially as an unidentified customer reduced its orders. Texas Instruments has already lost longtime customers Nokia (NOK: Charts, News, Offers) and Ericsson (ERIC: Charts, News, Offers) as it faces increased competition by rivals who have threatened its grip on the wireless market. As a result, the company has refocused more of its attention to the higher-margin analog chips. Ron Slaymaker, TI's investor relations manager, reassured investors that the other segments of the company, including lower-end cell phones, analog chips and calculators, are on track to achieve the results initially expected. He further emphasized that it is slowing demand in the wireless business, as opposed to defeat by rivals who are stealing sales, that has led to the revisions.
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Texas Instruments may be best known for the calculators produced by its educational unit, but the chipmaker is also responsible for the chips in about half of the world's cell phones. Aside from chips in the high-end 3G, or third generation, cell phones, the company also sells low-end chips to developing countries in emerging markets. These opportunities have the potential for a large payoff as strong initial sales volume leads to upgrades by these customers who may shift to the higher-end technology in the near future. The fact that TI has taken a hit to the high-end portion of its business poses a larger concern, however. Under the current market conditions, it would be more likely for troubles to strike the low-end customers as opposed to the higher-end 3G business. Once Texas Instruments reveals the company responsible for the devastating reduction in orders, a clearer picture on overall industry strength will be more evident. In the meantime, investors have reacted by selling off shares since yesterday's announcement.
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