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Continued ...

Analysts estimated that TI could be talking about a pullback in phone units of as many as six million, and assumed this was largely down to economic uncertainty and the consequent effect on handset targets - an assumption that sent Nokia's shares down as much as 3.5% to $31.75 in after hours trading last Monday. Fears that this was a macro economic issue, rather than just a loss of share by TI, were reinforced by comments from Ron Slaymaker, TI's investor relations manager, who said the weak demand his company was seeing was not down to market share losses at its customers.

However, he refused to be more specific about causes, something that hurt the stock last week. "We have other customers also that haven't fully lived up to initial expectations that we had, but it is mostly a particular customer," he said. Didier Scemama, an analyst at ABN Amro, joined most of the market in assuming Nokia to be that customer. "We estimate that the $130m revenue cut (at the mid point) announced last night is equivalent to a reduction of 4.3m- 8.6m third generation handset unit shipments, as Texas Instruments derives between $15 and $30 per 3G handset," he wrote.

A few analysts were looking for alternative culprits. "Although many will be tempted to blame the shortfall primarily on Nokia, based on our checks we are more worried about the pace of sales at Sony Ericsson, the other major wireless customer," wrote Matthew Hoffman of Cowen & Co in a note to clients.

Slaymaker said demand was on track for chips for low end phones, and for analogue chips used in many consumer and industrial products, and on which TI has been focusing more strongly of late. But the fact that 3G is the problem area worried analysts, as this is the sector where growth is most expected and where, despite TI's protestations about no loss of share, other players appear still to be making progress. Following its optimistic view of Qualcomm's 3G prospects, American Technology Research was particularly disappointed in TI. "Because it's 3G it really puts an overhang on the stock because that's a segment of the market we expect to be growing," analyst Doug Freedman said.

It will be even more serious for market prospects if TI's caution does turn out to be attributable to lower overall 3G demand at Nokia, rather than a shift towards other suppliers by the Finnish leader. The handset giant is not showing any jitters yet and has maintained its outlook for the year, which calls for 10% growth this year over the 1.14bn devices shipped globally by all players last year. Nokia will report first quarter earnings on April 17, when it could adjust its outlook, but it has offered no indication that it will do so, and most analysts are supporting the Nokia view, and an overall market growth of 8-11%.

"Our checks suggest that while some models are seeing mixed demand, Nokia's overall 3G portfolio is seeing solid demand in the first quarter," wrote Ittai Kidron at Oppenheimer, in a research note following the TI warning. Others were more bearish. "We are usually careful about comments from Nokia's supply chain, but the scale of the downgrade at Texas Instruments and the precision of the comments make us conclude that demand for Nokia's 3G/high end phones has decreased in the second half of the quarter," wrote Cazenove analysts in a note.

Given Nokia's habitual caution in public statements, we believe the absence of reaction from the Finn is a sign that it is not seeing major problems. If this proves over optimistic, the impact for TI - and any potential Qualcomm deal of the future - is serious, but perhaps the chipmaker that would be hit hardest would be STMicroelectronics. ST scored a major goal last year when it not only became Nokia's second source of UMTS/HSPA baseband silicon, alongside TI, but also netted a coveted joint development deal with the phonemaker, which will accelerate its R&D activities in this area and reduce its cost and risk. However, ST has thrown most of its handset eggs in the high end sector, largely on the back of the Nokia deal, and so weakness in 3G, especially in ST's native Europe - where the relative maturity of the market, with many users already approaching upgrades, makes it particularly vulnerable to slowdown - could be very serious.

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