National Semi Sees Brighter Future

The company suggests the inventory correction is over.
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Updated from 4:34 p.m. EST

National Semiconductor

(NSM)

saw its third-quarter profit cut nearly in half, but the chipmaker offered a hint that better times are coming.

"Looking forward, we are becoming more optimistic," said CEO Brian Halla in a conference call with analysts Thursday. "You might say that for National the decks have been cleared for growth."

According to National Semi, orders began to pick up in mid-January and held steady through the end of the quarter. For the first time in the past three quarters, National Semi said its bookings exceeded its billings, a sign that demand is on the rise.

"The bottom of our trough occurred sometime in early January," said Halla.

Investors sent shares of National up more than 5%, or $1.32, to $26.60 in extended trading Thursday.

The optimistic outlook is the latest sign that the semiconductor industry is pulling out of the downturn that has crimped sales at many companies over the past six months or so. Last month,

Analog Devices

(ADI) - Get Report

sparked a

rally in chip stocks after the company's CEO said business in January appeared to be strengthening.

The severity of the chip industry's recent malaise was underscored by National Semi's third-quarter sales, which plunged 14% sequentially to $431 million, as customers worked through an inventory glut.

National Semi earned $71.5 million in net income, or 22 cents a share, vs. $130.1 million, or 37 cents a share, at this time a year ago.

EPS was two cents ahead of Wall Street's dampened expectations, which called for National to earn 20 cents on sales of $433.5 million, following the

company's revised outlook in February .

The upside owed to National Semi's continuing efforts to focus on higher-margin standard linear chips, which now account for 84% of the company's sales. Average selling prices for those chips were up 10% year over year, and the company's gross margin came in ahead of expectations at 59.8%.

To hit its long-term 65% gross margin target, National Semi said it will need to fill up its chip fabrication facilities -- something which could take some time. Utilization at the company's fabs was 56% in the third quarter, vs. a higher-than-85% level a year ago.

Tellingly, despite the improving business conditions, National Semi executives said there were no plans to increase the number of silicon wafers processed in its factories in the current quarter.

President Don Macleod said the company was proceeding cautiously. "We're not saying that everything's onwards and upwards," said.

"We're looking to see what our customers start telling us about second half of year. At this point we don't think we'll see that until the May, June, July time frame."

But the 3% sequential increase in bookings at least suggests that the worst of the downturn may be over. Chips for cell phone handsets and infrastructure showed particular strength in the quarter.

The company projected that sales in the current quarter will increase 3% to 6% sequentially. Analysts polled by Thomson Financial were looking for a 4% improvement in revenue.

"Bookings from our customers and distributors improved through the latter part of our third quarter," said Halla in a statement. "This suggests that the inventory correction may well be behind us, and we anticipate revenues to rise modestly in the fourth quarter."