Asian Woes Spread Across Cellular Industry

Texas Instruments warned late Tuesday that sales and
earnings would be hurt in the current quarter and its outlook for the near
future is weak.

TI is the leading maker of chips for cell phones and said its sales have
slumped in Asia, partly because of the recent outbreak of SARS. TI follows
both Motorola and Nokia , which earlier
this week said that cell phone sales in Asia as the market have been hit hard
by concerns surrounding the spread of SARS.

Earlier on Wednesday, Nokia said it is sticking to its full-year growth forecast for
the global cell phone handset market to grow 10 percent in 2003 to close to
450 million units. This comes just one day after the Finnish cell phone
maker said it was trimming its sales growth forecast for the difficult
second quarter to below four percent.

TI said will be cutting 250 jobs in Japan and the reason for the warning was
because “sequential revenue growth in the second quarter will be at the
lower end of its previous expectations due to reduced sales of
semiconductors to wireless customers.” TI went on to say wireless chip
revenues are expected to slump by 10 percent in the second quarter, but
other semiconductors revenues are expected to grow by 5 percent.

On the financial front, TI lowered its forecast in sales growth from 7
percent to 5 percent, the new sales projection see sales for the first
quarter to reach $2.19 billion. As a result, TI expects to post 6 cents
earnings per share, instead of an earlier projection of 8 cents.

TI said a combination of factors contributed to its depressed financial
results, including slumping sales, a growth in inventories of cell phone
chips in Asia and higher than expected restructuring costs of $55 million,
rather than a previous estimate of $40 million.

On Wednesday, Deutsche Bank released a report saying that “we believe that
this profit warning has weakened the bull case on Texas Instruments —
strength in wireless drives significant earnings leverage.” The bank said it
is lowering its price target from $18 to $16, Texas Instruments’ stock has
gained 36 percent this year.

And Deutsche Bank is not alone in voicing concerns about TI, Banc of America
lowered it rating of the company to neutral from buy, and cut earnings
estimates for both 2003 and 2004 for the company. Additionally, Smith Barney
lowered its earnings estimate of TI and sliced its price target to $17 from
$18. Morgan Stanley also downgraded TI shares.

“As we noted in our April conference call, some inventory of wireless
semiconductors was built in Asian markets, particularly China, toward the
end of the first quarter. That inventory, which would have been successfully
worked through under normal conditions, instead stalled as demand has
weakened in those markets. We believe the weakness in demand is largely due
to the ongoing economic impact associated with SARS, and should abate as the
health concerns are resolved,” said TI CEO Tom Engibous, on a conference
call with analysts.

Just last week, Motorola also warned 2003 sales and earnings would be lower
than expected due to SARS and increased competition from as many as 40 of
its Chinese cell phone manufacturing rivals. China is a key market for
Motorola accounting for close to 14 percent of Motorola’s sales last year,
and the company also has significant manufacturing operations there.
Motorola said it will introduce more than twenty new cell phone models later
this year many with color screens and cameras.

Gartner, Inc. recently ratcheted down it estimates for cellular phone sales
in China to below 60 million up from 55 million a year ago. Gartner
originally said Chinese cell phone sales would grow to 62 million units this

In a related development, a report out Wednesday said the world’s chipmakers
will spend 13 per cent more on plant and equipment this year compared to
2002, according to Strategic Marketing Associates (SMA). Last year,
semiconductor companies spent $28 billion on capital expenditures, while
this year they are expected to spend $31.6 billion.

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