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National Semi Leads Chip Sector’s Lowered Forecasts

Posted on Tuesday, Dec 9th 2008

Yesterday, National Semiconductor Corp. (NYSE:NSM) reported a weak second quarter. As the economic conditions deteriorated, the company saw demand for its products weaken. It has cut back its forecasts, as have leading semiconductor players, TI and Broadcom.

Q2 FY09 for NSM revenue was $422 million, down 15% y-o-y and 9% q-o-q, much less than its expectations of $470 million last quarter. Net income was $34 million or $0.14 per share versus $80 million or $0.33 per share last quarter. Excluding charges, EPS was $0.26. Analysts had expected earnings of $0.21 per share on revenue of $427.3 million.

Gross margin was 65.6%, down from 66.0% in Q1 mainly and up from 64.4% last year. National Semiconductor bought back shares worth $23 million in the quarter and is left with $127 million in its funds for stock repurchases. The company ended the quarter with approximately $786 million in cash and cash equivalents, up from $693 million last quarter.

During the quarter, total bookings decreased by 33% q-o-q. New order rates declined drastically in the wireless handset market from customers as well as from distributors.  Regionally, the bookings decline was most prominent in Asia Pacific and Europe.

Mobile phones and devices, which account for 30% of sales, were down 10-12% q-o-q and the usually strong seasonal pickup in demand was absent. National said in the earnings call that sales to the top five mobile phone customers were also down about 15% while sales grew to the two “most visible smart phone providers”. National’s power management unit has a design win in RIM’s recently released Storm. It also provides the display interface in the 3G iPhone.

Communications and networking, which accounts for 12% of business, was up about 13% y-o-y but flat sequentially driven by infrastructure build-out in China and outgrowing wireless station business with the two largest local Chinese customers.

The industrial, automotive, medical and military/aerospace markets, which make up about 35-40% of its sales, were down about 10% in the quarter. Sales to automotive customers in Europe were in particular affected by factory shut downs by customers.

Wafer fab utilization was about 66% in the quarter and the company plans to bring the idle capacity down further to less than 40% in Q3. Inventories grew by about $6 million in the quarter but NSM expects the inventory to be flat to slightly down in the next quarter. Gross margin is expected to decline to a range of 54-55% in Q3 mainly due to the lower capacity utilization.

For Q3 09, National expects revenue to be down by about 30% sequentially based on the lower-than-usual demand in the post-holiday season, especially for personal mobile devices.

NSM in November announced plans to save about $12 million per quarter through reductions in headcount and operating expenses. It is also going for selective shutdown and official vacation days. It wants, however, to focus on being a leader in power efficient solutions such as its PowerWise high performance circuits. The stock is currently trading around $10 after hitting a 52-week low of $9.02 on November 21. Annual revenue is $1.8 billion and market cap is about $2.3 billion.

Chart for National Semiconductor Corp. (NSM)

Chipmakers TI and Broadcom also downgraded their revenue guidance. Texas Instruments Inc. (TXN), with annual revenue of $13.8 billion, now expects earnings of $0.10 to $0.16 per share on revenue of $2.3 to $2.5 billion. It had earlier expected earnings of $0.30 to $0.36 per share on revenue of $2.83 to $3.07 billion. It is currently trading around $15 with market cap of about $19.2 billion.

Broadcom Corp. (BRCM), which had annual revenue of $3.8 billion, now expects revenue between $1.05 and $1.1 billion compared to the earlier forecast of $1.17 to $1.25 billion. It is currently trading around $15 with market cap of about $7.8 billion. Recent earnings coverage for TI and Broadcom is available here

Chart for Broadcom Corp. (BRCM)

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