Earnings: Fiscal 1Q profits of $0.36 vs. estimates of $0.34 and $0.13 in 1Q last year.
Revenue: Up 31% YoY to $412 million vs. management guidance of $410-$418 million.
“Our business model is working well with another quarter of revenue growth, 70 percent gross margins and over 36 percent operating margins,” said Don Macleod, National Semi’s chairman and chief executive officer. “However, in the near term, slower growth in our end markets and distribution channel, along with some likely inventory reduction, will mute the seasonal growth that we would normally see in our business during this time of the year.”
Comment: Despite nearly tripling profits YoY, shares of National Semiconductor Corp. (NYSE: NSM) are trading down nearly 6% during the after-hours session. The pressure seems to have been derived predominantly from weak 2Q revenue guidance of $390-$415 million vs. estimates of $421 million, but after-hours news out of Texas Instruments (NYSE: TXN) stating that the fellow chip maker is narrowing its sales and earnings forecast for the current Q definitely didn’t help. NSM’s total bookings were also down 10% QoQ.
Business at NSM, which makes chips for use in cell phones and industrial/communications infrastructure equipment, had been increasingly steadily since the depths of the recession. Demand is expected to hold up for the most part in the industrial segment, which accounts for nearly 1/2 of NSM’s revenue, as well as in cell phones due to continued strength in the market for smartphones. However, other segments are expected to lag.
Glum outlooks out of NSM and TXN are not nearly the beginning of bad news out the semi space. On the contrary, since hitting all-time highs in terms of gross margins over the summer, the entire space has been hit hard due to growing sentiment that those margins implied that the sector was at a cyclical high. If recent news out of big players in the space is any indication, that sentiment looks to be correct. Indeed, ever since Intel (NASDAQ: INTC) took down its numbers in early August, shorting semis has been a popular play, and the Philly Semi Index (SOX) has traded down as much as 14%.
NSM last changed hands at $12.16. If it opens there tomorrow, it will have established a new 52-week low. This is not the time to get bullish of semis, as more bad news likely remains in the pipeline. Wait for the sector to flush itself of the excessive supply it built while it was generating out-sized margins, and only then begin to toe the water. Until then, feel free to sift amongst the semis for good shorting opportunities.
Disclosure: No holdings in NSM, TXN, INTC.