Analysts watch chip sales, European 3G market

When Texas Instruments Inc. lowered its revenue guidance last week for the quarter about to end, citing weakness in 3G sales to a large customer, analysts were quick to speculate on forecasts for global handset sales this year.
That’s because Nokia Corp. is TI’s largest customer for W-CDMA chips and with 40% global market share, Nokia’s fortunes say a lot about how the year will develop.
In other words, if Nokia’s appetite for W-CDMA chips slackens, does that signal a weak Western European market for 3G sales, critical to Nokia’s and others’ relatively bullish forecasts for the year?
Connecting the dots can be a perilous exercise.
“The jury is always out until it’s too late,” said Tero Kuittinen, analyst at Avian Securities L.L.C., with a wry chuckle.
But the analyst’s point is that he and his colleagues have little choice but to delve into the tea leaves, as it were, to figure out what’s happening to the market in real time.
The connection between chip sales and handset sales is as much art as science. Data rarely offers a complete picture – there’s always a missing piece in the jigsaw puzzle – and underlying the data are assumptions that may or may not be accurate. A crystal ball would help, but alas.
Will Strauss, principal at Forward Concepts, studies the semiconductor market for a living and he’s fond of saying that “when Nokia sneezes, TI catches a cold.”
TI’s lowered guidance was but one indicator that handset sales will cool a bit more this year than forecast, Strauss said. The World Semiconductor Statistics Group (WSSG) report from March 1 – released after the generally upbeat mood at the Mobile World Congress in Barcelona – reflected that, between December 2007 and January 2008, mobile phone-related chip shipments dropped a precipitous 22%, far steeper than historical, seasonal drops.
“My conclusion?” Strauss said. “I think there’s a drop in demand for Nokia in 3G products in Western Europe.” Yet Strauss readily acknowledged that the WSSG chip report glosses over some data and that TI’s reduced shipments to Nokia could have other causes.
Indeed, Nokia maintains its outlook for the year, which calls for 10% growth this year over the 1.14 billion devices shipped globally by all players last year. Nokia will report first-quarter earnings on April 17, when it conceivably could adjust its outlook, but there’s no indication yet that’s going to happen. (Strauss is forecasting about 9% growth this year, a figure he based on 13 individual forecasts for different air interfaces worldwide.)
And at least two financial analysts said last week that TI’s cautionary guidance did not cause them concern for Nokia’s guidance.
“Our talks with Nokia after the Texas Instruments conference call seem to confirm that Nokia may have been building some inventory of (3G) handsets to ensure proper supply of its new products,” said analyst Mark McKechnie at American Technology Research, in a research note.
“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 another research note.
Kuittinen is forecasting a very conservative 4% growth this year, which is derived from his caution in reading the tea leaves – a number of factors spell uncertainty, in his view – as well as a lack of visibility this far out from the crucial fourth quarter, he said.
“This year is a turning point in the market,” Kuittinen said. “There were 140 million new subscribers globally in the first quarter of 2007. This year it looks closer to 100 million. To get to 10% annual growth we’ll need to see massive handset upgrade sales.”
That’s why analysts are watching 3G sales in Western Europe, as well as upgrade sales in urban China, he said. Add in the softening economy in the United States, and you have to keep an eye on a number of tea leaves.
Kuittinen agreed with Strauss that the drop in mobile-phone chip sales between last year’s fourth quarter and this year’s first quarter is steeper than normal. “It’s a very interesting spring,” Kuittinen concluded.