NSM tanks on profit warning

2 min read

National Semiconductor plunged Tuesday following its warning that second- and third-quarter sales and earnings will fall short of estimates as sales in its PC and wireless divisions slow. The company cited customers' backlog as a reason for the slow-down.

National Semi (NYSE: NSM) shares fell 34 percent to a 52-week low of 24.31 as analysts downgraded the stock Tuesday. The profit warning was released after Monday's closing bell.

The company now expects second-quarter sales to fall between 6 percent to 8 percent from the $640.8 million it recorded in the first quarter. It also warned that the sluggish sales would clip gross profit margins by approximately 2.5 percent from the 53 percent margins it had in the first quarter.

On a Tuesday morning conference call, the company said customers were ordering products based on lead-times.

About two thirds of its wireless shortfall was driven by its two largest customers, who now have about 6-7 weeks worth of inventory. At one point, they had as much as 12 to 13 weeks worth of inventory. "We can blame ourselves for not knowing that 5 weeks ago," CFO Don Macleod said on the call.

In terms of PC customers, Macleod said business is still good, but the expected ramp-up for Christmas hasn't happened. Macleod also said it was two main PC customers who were ordering protectively over the summer which lead to their backlogs.

Now that supply constraints are easing, customers are less likely to "protectively order products," Macleod added. He said the company will be back on track by the fourth quarter, and gross margins guidance is still for over 50 percent.

Analysts downgrading the stock Tuesday included Mark L Edelstone at Morgan Stanley Dean Witter who cut the stock to "outperform" from "strong buy" and slashed its target price was to $55 from $110 a share. Terry Ragsdale at J.P. Morgan Securities downgraded the stock to "market perform" from "buy."