UPDATE 3-National Semi beats Street, shares slip

Thu Dec 10, 2009 8:34pm EST

* Expects Q3 revenue "roughly flat" from previous qtr

* Shares slip nearly 3 pct in after-hours trading (Adds executive comments, more analyst comments, stock move)

By Ian Sherr

SAN FRANCISCO, Dec 10 (Reuters) - National Semiconductor Corp's (NSM.N) quarterly forecast and results beat estimates as demand bounced back and margins recovered, but its stock slid nearly 3 percent on worries about its ability to regain market share.

Analysts said investors in the volatile semiconductor sector were particularly concerned about intensifying competition from the likes of Texas Instruments Inc TXN.N, as well as higher than expected expenses.

Twice on the company's earnings conference call, analysts asked executives why its revenues were down 25 percent from their historic peak when competitors were down 15 percent on average.

"As good as the numbers were, they weren't good enough," Broadpoint Amtech analyst Doug Freedman said, adding that investors would have liked to see the company bounce back faster and regain market share as the sector begins recovery. "They have restructured to a high-margin mix of product, and clearly they exited a portion of the market as a result."

The company's shares, which have risen 18 percent since the start of November, also headed south as the results on Thursday failed to meet the even higher expectations of some investors.

National Semi forecast revenue to be roughly flat in the fiscal 2010 third quarter compared with the second quarter's $345 million, noting that the weakness was seasonal. Wall Street, on average, had been expecting revenue of $331 million.

"We will definitely not sacrifice margins to grow," National Semiconductor's Executive Chairman Brian Halla told Reuters. "All of the key strategic initiatives have a goal to beat or exceed the current margin goals of the company and we think that's entirely possible."

Analysts including Canaccord Adams analyst Robert Burleson had taken the company's bullish comments about revenue growth as an indicator of lost focus on margins.

National Semi's new chief executive, Don Macleod, said that because the company manufacture's virtually all of its products in-house, 80 percent to 85 percent of every dollar falls through to profitability.

"Our fixed costs are covered, our margins are great and the incremental fall-through is very positive here," he said, adding the company is currently running at 40 percent to 50 percent capacity. "When you look at that in the context of economically where we are at this point, potentially, we are the beginning of a recovery in the global economy and a recovery in the semiconductor business."

He added that National Semi could double its business without adding to capital expenditure.

OUT OF THE HOLE?

Analysts expect semiconductor makers to have fared well in general in the quarter, as the market and U.S. economy began to show signs of life, but investors await clearer signs on the outlook for 2010.

Many had also bet that the chip maker, whose analog chips are used in everything from cars to cell phones such as Apple Inc's (AAPL.O) iPhone and Palm Inc's PALM.O Pre smartphone, would offer a strong forecast for the current quarter.

Macleod said that typically the company sees a decline of 4 percent to 6 percent in the current quarter. This year is expected to remain flat, he said, because sales of National Semi's industrial products were growing faster than the seasonal decline for its consumer products.

Still, shares of the company slipped almost 3 percent in after-hours trading.

The company said net income rose to $47.0 million, or 20 cents a share, in the fiscal second quarter ended Nov. 29, up 29.5 percent from $36.3 million, or 16 cents a share, in the year-ago period.

That result surpassed analysts' average estimate of 14 cents a share, according to Thomson Reuters I/B/E/S.

Sales for National Semi fell 18.3 percent to $344.6 million from $421.6 million a year ago.

Its closely watched gross margins bounced to 65.3 percent from 61.1 percent in the fiscal quarter.

After an 18 percent run-up since the beginning of November, shares of the Santa Clara-based company fell to $14.84 in extended trading after closing down 22 cents at $15.28 on the New York Stock Exchange. (Reporting by Ian Sherr; Editing by Richard Chang, Phil Berlowitz)

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