Texas Instruments, Gartner: Bad Chip News

The maker of semiconductors issues an earnings warning, following a report showing rising inventories

Evidence that the U.S. economic slump is taking a toll on chipmakers came on Mar. 10 with a forecast of a sales-and-profit shortfall at Texas Instruments and news of a jump in stockpiles of unsold semiconductors.

Texas Instruments (TXN) said its first-quarter revenue and earnings won't be as high as previously expected, citing disappointing wireless demand. That followed a Gartner Group (IT) report showing that semiconductor inventories rose to their highest level in two years in the last three months of 2007. "We started hearing rumors of a recession and indicators of a weak fourth quarter during the middle of 2007," says Gartner analyst Gerald Van Horn. In the second half of last year, "we saw [inventories] rise on exuberant hopes for a strong holiday season. But the strong fourth quarter didn't materialize."

As a result, Gartner's inventory index, which measures inventory throughout the chip industry's supply chain, rose to 1.16 in the fourth quarter. According to the researcher, 0.95 indicates a slight shortage amid heavy demand, while 1.10 suggests slackening demand with a slight excess inventory. A higher reading falls into what Gartner calls the "caution zone," where chipmakers should seriously consider cutting their inventory.

More Than a Holiday Hangover

While the index is nowhere near the early 2001 peak of 1.7, it still comes as bad news to an industry dealing with a slump that's crimping demand for electronics of many stripes as well for the chips and other components that run them. On Mar. 3, Intel (INTC) trimmed its margin forecast, citing falling prices for a type of memory known as NAND flash (, 3/5/08) that's widely used in consumer electronics. Analysts speculated that Intel, the world's No. 1 maker of chips, also is suffering from an inventory buildup.

Mounting inventory levels indicate that manufacturers of finished electronics are cutting back on chip orders, leaving chipmakers little choice but to cut prices or write down the value of inventory. It's not uncommon for chip inventories to grow during the first quarter of the calendar year. Electronics manufacturers, especially those that make consumer products and PCs, often order more chips than they need ahead of the busy holiday season. That usually leaves a sizable batch of unused chips in the pipeline. But Van Horn says the current inventory glut is larger than the seasonal norm.

Shares of Texas Instruments slipped 1.20, to 28.45, in extended trading after the announcement. The stock had closed at 29.65. Texas Instruments cited reduced orders from a customer it wouldn't identify, fueling speculation that it might be Nokia (NOK), the world's biggest maker of mobile phones. "The takeaway here is that the wireless market is tough for component suppliers," says Robert Burleson, an analyst at Canaccord Adams.

More Signs of Stress

The inventory buildup may be widespread, says Gartner's Van Horn. Stockpiles are on the rise at foundries, which handle manufacturing for other chipmakers. "Their inventory is considered work in progress," Van Horn says. "We saw a sizable increase there. The fact is, these chips simply haven't been delivered."

Other analysts have noticed the slowdown at foundries, too. Mehdi Hosseini, an analyst at FBR Capital Markets, said in a research note issued on Mar. 10 that Taiwan Semiconductor (TSM) has started to see a drop in its shipments but the level hasn't fallen enough to prevent a net increase in its inventory. This trend, coupled with weaker sales by National Semiconductor (NSM), constitute "warning signs that orders at Taiwan Semi will mostly be cut sooner rather than later."

How long will it take for the inventory picture to brighten? Van Horn says the worst already may be over. But even he doesn't expect Gartner's closely watched index to fall out of the caution zone until the second half of the year.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE