National Semi Beats Estimates

But sales slump 20%.
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Updated from 4:52 p.m. EDT

National Semiconductor

(NSM)

posted a sharp drop in revenue and income in its fiscal fourth quarter, but strong sales of high-margin products allowed the company to beat Wall Street's bottom-line expectations.

The company's stock jumped more than 8% in after-hours trading Thursday to $27.99.

The chipmaker also announced plans for a $1.5 billion accelerated share buyback, which it will fund by taking on the same amount in debt.

With the semiconductor industry's latest downturn beginning to abate, and National Semi having pulled through without too significant of a dent in its gross margins, executives said the business was now "stress tested" and capable of taking on the debt.

"With the confidence we have in our business model and prospects for future growth, now is the right time to optimize our capital structure," said CFO Lewis Chew in a postearnings conference call.

National had revenue of $455.9 million in the three months ended May 27, down 20% year over year, but greater than the consensus estimate of $450.6 million.

But sales were up roughly 6% sequentially, marking the company's first sequential growth rate in a year.

Sales of chips for cell phones provided National with its biggest boost during the quarter, surging 16% sequentially.

National President Don Macleod said the company was benefiting from demand for new, feature-rich handsets with bigger screens and improved audio capabilities.

"We're riding a growth wave as consumers demand more and better quality audio reproduction, especially for music in handhelds," Macleod said.

The higher prices and higher profit margins for those types of chips did wonders for National's bottom line.

The Santa Clara, Calif., chipmaker reported $90.1 million in net income, or 28 cents a share, vs. $118.8 million, or 34 cents a share, at this time a year ago. Analysts polled by Thomson Financial were looking for EPS of 23 cents.

National's gross margin jumped to a record 62.5%, up from 59.8% in the previous quarter, and nearing National's target of 65%.

National achieved the better margin, even though its chip factories were significantly underutilized during the quarter -- a key factor affecting profit margins.

Macleod said National was preparing for a modest rise in factory utilization this quarter, as the company positions itself for improving conditions in the semiconductor industry.

Beginning in mid-2006, the chip industry entered a downturn, as inventory levels exceeded demand and slowed down sales at numerous chip companies.

In the third, or last quarter, National said business conditions appeared to be improving, as its bookings for future chip orders surpassed its billings. The trend continued in the current quarter, with National citing a 6% sequential increase in bookings.

The company forecast that sales in the current quarter will increase 1% to 4% from the fourth quarter, suggesting sales of $460.5 million to $474.1 million. Analysts had been expecting revenue of $460.6 million.

Gross margins in the current quarter should exceed 63%, National said.