National Semiconductor Corporation’s (NSM)
earnings for the fourth quarter ended May 2011 were 4 cents higher
than the Zacks Consensus estimate of 27 cents.
National’s revenues were strong, despite the disaster in Japan,
enabling the company to exceed the guidance provided on the last
earnings call. As a result, the gross margin remained steady and
operating margin actually improved slightly. Additionally, the tax
rate was again lower, helping the company deliver numbers ahead of
expectations.
During the quarter, National announced its decision to merge
with Texas Instruments (TXN). You can see our
detailed analysis here - TI Snaps Up National Semiconductor
Revenue
National generated revenue of $374.1 million in the fiscal
fourth quarter, a sequential increase of 8.8% and a year-over-year
decline of 6.1%, exceeding the high-end of management’s guided
range of $360-370 million (a 5-8% sequential increase).
National’s results were encouraging, particularly given the fact
that the Tsunami in Japan severely impacted its revenue in the last
quarter, resulting in a 15% sequential decline in revenues from
Japan. However, National benefited from a pickup in industrial
demand, particularly in Europe and China, which more than offset
the negative impact of Japan.
Revenue by End Market
Industrial, mobile phone, and communications and networking were
the largest contributors to National’s revenue in the last
quarter.
The industrial market, which generated 49% of total revenue in
the last quarter, was up strong double-digits on a sequential
basis. National generates most of its industrial business through
distributors, where strong sell-through helped the business in
Europe and China.
The mobile device segment made up 21% of revenue, which was a
sequential decline of 8.6%. National mentioned a few volume
customers that cut production in the last quarter, thus impacting
its results. However, Taiwanese and Chinese handset players started
ramping production, which partially offset this weakness.
Other mobile devices, primarily tablets are yet to gain critical
mass at all except Apple Inc (AAPL) according to
National. Management stated that there was no major pickup in IC
sales into these models.
The communications infrastructure and networking market grew
8.9%, but stayed at 13% of National’s quarterly revenue. Results
were driven by the two largest China-based infrastructure
companies. The situation in Japan actually helped National in this
respect, since customers built inventories in anticipation of
supply chain problems related to the disaster.
Analog products were 91% of revenue in the last quarter compared
to 92% in the preceding quarter. Power management products, with a
49% share of total revenue was the largest contributor, followed by
amplifier/comparator, with 22%, Interface 11%, Data converters 7%
and other 2%. The product lines grew 6.6%, 8.8%, 8.8%, 13.7% and
-19.4%, respectively, on a sequential basis. Non-analog products
brought in the remaining 9% of revenue, growing 30.5%
sequentially.
Orders
National said that orders were up around 21% sequentially and
down around 18% from last year. The book-to-bill was over unity,
after two disappointing quarters when it dropped below 1. National
stated that bookings were slow in March, picking up in April before
slowing down a bit in May.
Order growth was strong across geographies. Moreover, orders
through distribution increased yet again, while OEM order growth
declined due to softness at the handful of mobile phone customers
mentioned above.
Operating Performance
National reported fourth quarter gross margin of 66.5%, flat
sequentially and down 233 bps from the year-ago quarter. The
utilization rate dropped just slightly from 58% to 57%, as the
company burnt some inventory during the quarter. This was partially
offset by higher revenue growth, particularly in the industrial
business.
Operating expenses of $137.8 million increased 6.7% sequentially
and declined 13.2% from the May quarter of 2010. However, the
strong revenue growth resulted in a 7-bp sequential and 66-bp
year-over-year increase in the operating margin. R&D increased
very slightly as a percentage of sales, while S&A dropped
slightly.
Net Income
National’s pro forma net income in the last quarter was $79.4
million (21.2% of sales) compared to $67.6 million (19.7%) in the
preceding quarter and $79.2 million (19.9% of sales in the year-ago
quarter.
Including restructuring expenses of $1.1 million and
merger-related expenses of $14 million in the last quarter,
National’s GAAP net income of $67.1 million ($0.26 per share) was
up from $59.4 million ($0.24 per share) in the previous quarter and
down from $79.2 million ($0.33 per share) in the comparable
year-ago quarter.
Balance Sheet
National ended the quarter with cash and short term investments
of $1.13 billion, up $233.2 million during the quarter. However,
National has a huge debt balance, as a result of which the net cash
position was $90.7 million compared to a net debt of $142.3 million
at the beginning of the quarter. The debt-to-total capital ratio
also improved to 55.1%, down from 61.6% going into the quarter.
National generated $146.5 million of cash from operations and
spent $19.0 million on capex, generating free cash flow at
quarter-end of $127.5 million.
Guidance
Given the soon-to-be-closed merger with Taxes Instruments,
National did not provide detailed guidance for the next quarter.
Management simply stated that both revenue and gross margin were
likely to be in the same range as in the last quarter. Operating
expenses are also not likely to increase, other than the usual
seasonal variances. The weighted average share count is also likely
to increase.
Our Recommendation
National has a Zacks Rank of #4, which translates to a short
term Sell recommendation. We see a number of negatives, such as
weak demand and margin pressures impacting National’s business,
although some areas (such as industrial and communications
infrastructure) appear to be improving. Additionally, since share
prices are hovering around the takeover price of $25, further
appreciation is unlikely.
Although cautious, we are more favorably disposed toward peer
companies, such as ON Semiconductor (ONNN) – Zacks
#1 Rank (short-term Strong Buy recommendation), as well as
Fairchild Semiconductor (FCS) and
Microchip Technologies (MCHP), both of which have
a Zacks #3 Rank (short-term Hold recommendation).
APPLE INC (AAPL): Free Stock Analysis Report
FAIRCHILD SEMI (FCS): Free Stock Analysis Report
MICROCHIP TECH (MCHP): Free Stock Analysis Report
NATL SEMICON (NSM): Free Stock Analysis Report
ON SEMICON CORP (ONNN): Free Stock Analysis Report
TEXAS INSTRS (TXN): Free Stock Analysis Report
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