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National Semi tops reduced 2Q estimates, lowers 3Q outlook

National Semiconductor topped analysts' reduced estimates in its second quarter Thursday, posting a profit of $106.7 million, or 56 cents a share, on sales of $595 million. However, it sees weaker sales and margins in its third quarter.

First Call Corp. consensus expected National Semi (NYSE: NSM) to earn 51 cents a share.

In October, it warned that inventory corrections in the mobile phone market would hurt its second-quarter sales and profit margins.

Analysts originally pegged it for a profit of 71 cents a share.

The stock was off $1.38 to $18.63 shortly after the earnings announcement.

The $595 million in sales represents a 16 percent improvement from the year-ago quarter when it pocketed $70.4 million, or 37 cents a share, on sales of $513.9 million.

Gross profit margins came in at 50.5 percent, a level it doesn't expect to see again for at least two quarters.

In the quarter, National said worldwide bookings fell 19 percent from the first quarter and 28 percent from the year-ago quarter. Analog bookings declined at a slower rate than the company as a whole and new orders for some wireless products actually increased.

It said new orders from the distribution channel fell significantly as distributors adjusted their inventories for slowing year-over-year growth in resales. PC-related orders also slumped with the rest of the industry, reflecting the difficulty companies such as Apple (Nasdaq: AAPL), Gateway (NYSE: GTW) and Micron Electronics (Nasdaq: MUEI) have reported.

"We'll take a little pain now to get on with a better spring quarter," CEO Brian Halla told analysts during a post-earnings conference call.

Halla said its wireless business actually showed signs of recovery in November when all of its top five customers rebounded from low orders in September.

"If the rest of the business was this stable, we'd be happy campers," he said.

However, orders from major PC customers were down significantly, part of what Halla called the second phase of an industry-wide correction that began with a drop in cellular phone demand.

"February is typically a strong a quarter for us, but it's too early to bet on it," he added.

Ahead of Thursday's earnings report, Merrill Lynch analyst Joseph Osha downgraded the stock from a near-term "accumulate" recommendation to near-term "neutral."

Osha was expecting a profit of 51 cents a share on sales or around $590 million.

"We want to discourage investors from trying to bottom-tick National here," Osha said in a research report. "We think that more problems are coming. We see no intermediate-term catalysts to move the stock upwards, despite its reasonable valuation."

National Semi is now trading at a price-to-earnings ratio of 5.32.

Looking ahead to the third quarter, National officials said that continuing inventory adjustments in the distribution channel and seasonal weakness in the PC market will result in a 10 percent sequential decline in sales.

"This may turn out to be conservative," said CFO Don Macleod "but at this stage it's too early to forecast."

Gross profit margins will likely fall to between 47 percent to 48 percent, off the 50 percent it had previously anticipated.

Halla said analysts and investors should expect only a 10 percent improvement in sales for fiscal 2001 and profit margins of around 50 percent even though it expects market conditions to improve at the end of the calendar year.

Last quarter, National Semi easily hurdled analysts' estimates, earning $149.4 million, or 76 cents a share, on sales of $640.8 million.

The stock rallied up to a 52-week high of $85.94 in March before falling to a low of $17.13 earlier this month.

Twelve of the 15 analysts following the stock maintain either a "buy" or "strong buy" recommendation.

First Call Corp. consensus expects it to earn $2.41 a share in the fiscal year.