Texas Instruments: What Caused the Outlook Revision?

On Monday, Texas Instruments (TXN), reduced its first quarter revenue and earnings outlook, citing weaker than expected demand for its wireless semiconductor products. As the numbers fell below analyst estimates, the worried market pulled down the company's share from $29.65 to as low as $27.75 before closing at $28.76 the next day.

The company, reduced its Q1 EPS forecast to $0.41 - $0.45 on revenues between $3.21bn and $3.35bn. It had earlier issued EPS estimates of $0.43 - $0.49, and a revenue target of $3.27bn to $3.55bn. Correspondingly, the Q1 semiconductor business revenue targets have been reduced to $3.14bn - $3.26bn. These numbers fall below the analyst estimates of $0.46, according to a poll by Thomson Financial.

The company executives cite that there is a weakened demand for high-end phones, especially from one 'large' customer. This large customer, is most likely Nokia (NOK). Nokia alone accounted for 15% of TI's revenues in 2006 if indirect sales are also accounted for. So, like we are probably seeing now, any fluctuation in demand from the Finnish company, is likely to affect TI's fortunes. Also on a related note, last year, Nokia announced among other new relationships, that it was going to source 3G from ST Microelectronics as well. But TI has taken great pains to reassure investors that this does not change its own 3G prospects.

Motorola (MOT), with its struggling wireless business, is also a very possible candidate. Last January, Motorola and TI announced that they were teaming up for 'high-volume' 3G, WiMAX and OMAP devices with the earliest handsets expected as early as 2008. It could well be that Motorola's continuing market share woes are seeping into TI'S fortunes.

The next couple of months will give us a clearer picture of who caused this 'significant downward reduction' in demand. If it is indeed Motorola, the situation is fairly explicable given all the recent developments. If, on the other hand, Nokia is found wanting, several interesting questions come to my mind.

Is Nokia losing market share in the high-end smartphone segment? If so, who are the likely winners? What are the factors and trends? How does this affect the long-term chipset vendor landscape? All these are complex questions with equally complex answers given the nature of the wireless value chain and its geo-political environment. At the moment, it is best not to speculate and point fingers at Nokia without having any concrete evidence.