National Semi cuts 3Q targets for 2nd time

A disappointing holiday season for the PC and wireless handset sales hit National Semiconductor (NYSE: NSM) even harder than the company originally expected.

After market close Thursday, the maker of chips for computers and communications told analysts to lower their third quarter expectations for the second time in as many months. National Semiconductor now sees third quarter earnings of 20 cents to 22 cents per share, on revenue of $475 million to $480 million.

Analysts surveyed by earnings tracking firm First Call were predicting a profit of 31 cents per share on revenue of $558.4 million for National Semiconductor's quarter ending Feb. 25.

Company executives blamed the third quarter letdown on fewer orders slated for same-quarter delivery. National Semiconductor sees uncertain demand and a glut of product.

"These slow turns clearly tell us that our customers and the channel are still working through their inventory reductions," CEO Brian Halla told analysts during a Thursday afternoon conference call.

Shares of National Semiconductor traded at $26.50 in afterhours activity on the Island ECN, following the analyst call. National Semiconductor fell $1.39 to $27.31 in Thursday's regular trading ahead of the third quarter preannouncement.

The chipmaker's latest estimate revision makes sense, given the multitude of warnings from other companies in the industry, analysts said.

"Fundamentally, I don't think this should be a surprise," said Nimal Vallipuram, analyst with Dresdner Kleinwort Wasserstein. "For the past month or so, we've been hearing the same thing from one company after another."

National Semiconductor's disappointment comes on the heels of disappointing near-term forecast from the largest cell phone maker, Nokia, (NYSE: NOK) and an announcement from another wireless giant, Ericsson (Nasdaq: ERICY), which plans to stop making handsets.

"The number of handset sales expected by many of our key customers in the fourth quarter (of calendar 2000) did not materialize," Halla said, adding that some of the company's largest clients still have weeks of components to work with.

There's not much National Semiconductor could do to avoid being affected, said Vadim Zlotnikov, analyst with Bernstein Investment Research and Management. "Inventory corrections tend to violent and very difficult to predict," he said.

PC-related business is even more uncertain. "There it (reduced sales) is not so much inventory, as much as a softness in demand and the whole Christmas market not materializing," Halla said.

About 50 percent of National Semiconductor's business in the previous quarter came from makers of PCs, wireless handsets, and imaging devices such as printers, displays and scanners.

Gross margins could fall into the 47 to 48 percent range because of lower factory loadings, the company said. National Semiconductor reported a gross margin of 50.5 percent in the second quarter.

Technology distributors -- who generated about 30 percent of the company's second quarter business -- remain the most difficult field to predict, executives said.

"I think our distributors don't have enough visibility about resale activity going forward," said Donald Macleod, National Semiconductor's CFO.

The company plans to cut its capital spending for the remainder of its fiscal year, which ends in May. The company now expects $275 million of capital spending for the year, down from an earlier target of $350 million, Macleod said.

Thursday's announcement marks the second time the chipmaker has reduced third quarter expectations. National Semiconductor first lowered third quarter estimates on Dec. 7, when the company reported second quarter results.

Shareholders shouldn't worry too much about Thursday's announcement, said Zlotnikov, who described National Semiconductor as "attractively valued" compared to its peers. National Semiconductor's future is out of its hands to a large extent, Zlotnikov said. "The real issue is the rate of recovery and the magnitude of recovery," he said. "It's much more a macroeconomic call, rather than a company-specific call.">