Are Handset Sales Set for a Fall?

Texas Instruments scales back its growth outlook, setting off a wave of speculation about an overall market slowdown

by Jennifer L. Schenker

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On Mar. 10, Texas Instruments (TXN), a leading supplier of semiconductors for cell phones, set off shock waves in the multibillion-dollar mobile industry by lowering its first-quarter growth estimates for sales of wireless chips. TI pinned the blame on weakening demand from a major customer for high-end chips used to power third-generation (3G) phones.

Investors made the assumption that the client might be Finnish giant Nokia (NOK), which accounts for nearly one-third of TI's wireless chip business. On Mar. 11, investors drove down shares in the world's top handset maker by as much as 4.75%. The key question: Did TI's warning signal a broader industry slowdown?

Consumers Curb Spending

Financial analysts clearly are worried. Although part of TI's retrenchment is likely due to a first-quarter inventory correction, there's growing concern that the handset market—especially for pricey high-end models favored in the U.S. and Western Europe—may be feeling the effects of economic downturn and slower consumer spending.

Consider Said Nafea, a Parisian shopper in his 30s checking out new handsets at the FNAC (PRTP.PA) electronics emporium on Paris' Champs-Elysées. He has a three-year old Samsung that fits nicely in the front pocket of his jeans. And while he'd like something newer, with more bells and whistles—especially an Apple (AAPL) iPhone—he has decided to wait until he can afford it.

Customers like Nafea are what worries experts. The typical pattern in first-quarter mobile-phone sales includes a relatively weak January and February, following fourth-quarter holiday purchases, and then a sharp uptick in March. All indications from sales channels in recent weeks were that everything was going as expected. So, TI's slowing chip orders in March hinted at deeper problems in the market.

Analysts Aren't Surprised

That's why "there was a heck of a lot of drama" after TI's announcement, says Mark McKechnie, an analyst at American Technology Research, a Greenwich (Conn.)-based independent research firm. "You don't see that kind of shift when there's a superhealthy end market."

In the wake of TI's news, McKechnie has trimmed his first-quarter profit forecast for Nokia by 2.4%, to $2.16 billion. He's not forecasting a meltdown, noting in a research brief that "we still view handsets, and Nokia specifically, as more resilient than most to global macro conditions." But, he adds, no industry or company is "entirely immune." Nokia declined to comment.

Indeed, indications of a slowdown are causing some analysts to rethink prospects for the entire year. Richard Windsor, an analyst at Nomura Securities in London, has lowered his estimate for 2008 global handset shipment growth from 11% to 8%—for a total of about 1.2 billion units.

Handset Outlook

As a result, he has sliced nearly 7% off his estimate for Nokia's first-quarter revenues and lowered his annual revenue target to $85.2 billion, down from an earlier forecast of $88.2 billion, though that's still up 7.5% from 2007 in constant dollars. Windsor also has lowered his revenue estimates for struggling Motorola (MOT) and Swedish-Japanese joint venture Sony Ericsson. "All players are likely to take a hit as a result of a lower overall market that has suddenly become unusually soft at the high end," Windsor said in a research note.