National Semiconductor: Renewed focus

Shedding peripheral businesses, National Semiconductor sharpens its concentration on analog and its high growth potential.

by Drew Wilson -- Movers and Shakers, 8/15/2003

BRIAN HALLA, CEO of National Semiconductor Corp, speaks passionately against the perception of analog as outdated technology.

Back in the 1980s when the world was going digital, the belief was that analog was dead. But today, he points out, GSM digital handsets hold more analog content than analog AMPS handsets, DVD players have more analog than VCRs, and high-definition TVs contain more analog than regular sets.

Brian Halla, CEO, National Semiconductor

"Now we've come full-circle, where it's analog that differentiates all of the leading system products," Halla says.

National, a hallowed analog player, zeroes in on the standard linear market, which includes power management, amplifiers, interfaces, and converters. In fact, half of National's $1.67 billion in revenue comes from power management and amplifiers.

Analog comprises nearly 70 percent of company revenues,  though Halla quickly adds that National's success in other product areas stems from analog.

For example, National's legacy I/O for PCs is what most people would consider a purely digital product line. But the company dominates in this area because of the analog PLL (phase locked loop) that's embedded in that advanced I/O chip, Halla says. "Things National does well, it does because of its analog heritage," he says.

Nonetheless, in the past few years National has been criticized for spreading into too many peripheral projects that the company saw as hot market opportunities capable of driving high growth. Many have failed to pan out.

At one point, National was even competing with Intel in x86 processors after the 1997 acquisition of Cyrix. Recently, National was late to the handset market trying to compete with TI for baseband processors, an area outside the company's core competency, according to Jack Romaine, head of semiconductor research at SG Cowen Securities.

Halla has been putting the company back into fighting shape, shedding many peripheral businesses. Most recently the company announced plans to get rid of the information-appliance unit, consisting of the Geode family of processors.

In addition to trimming the corporate branches, Halla launched a series of profit-improvement activities designed to improve shareholder returns by prioritizing R&D spending on the company's higher-margin analog businesses. Moreover, some 8 percent of the workforce was cut, bringing the number of total employees to 9,200. The company has also limited capex spending to 10 percent of revenues.

Halla believes cost savings from the profit-improvement strategy will amount to $30 million per quarter, or about $120 million annually. "We're on a path to continually improve profits and we think it will be dramatic," he says.

Tore Svanberg, senior research analyst at US Bancorp Piper Jaffray, says National's renewed focus on its analog business makes the company attractive from a growth perspective. He cites in particular National's positioning in key growth areas such as wireless, notebooks, and displays.

"The company continues to drive toward a more profitable business model," Svanberg says. For fiscal 2003, ended in May, National showed a 12 percent annual increase in topline growth. The company reported a net loss of $33.3 million, which it says was largely related to the restructuring program. The previous year, National took a $122 million loss.

Looking at pure analog revenue, National's sales increased by about 5.2 percent to $1.25 billion in 2002, moving up to the fifth slot among the largest analog suppliers in the world, according to Databeans Inc. By comparison, the analog market grew only 3.2 percent, and half of the leading suppliers' revenue dropped from 2001 values.

National's main competitors are STMicroelectronics, Texas Instruments, and Analog Devices. Halla sets his company apart in several ways. For one, National has been a leader in microscale chip packaging, which has helped it into many system products, such as handsets, where the smaller form factor wins designs, he says.

Halla also cites a competitive edge in power-management system-on-a-chip (SoC) capabilities. In the power-management segment of standard linear, National is the largest manufacturer, with 12.1 percent of the world market. "Every appliance wants longer battery life, and if it plugs into a wall, no fan," Halla says.

He believes his company can grow further in the areas of power management and amplification. "We do it by increasing our content in systems," he says.

The semiconductor industry, Halla believes, bifurcated during the downturn. Now two groups of chip companies exist: Those who absolutely must chase Moore's Law, and those who don't. The good news is that analog doesn't need to. "We can do just fine with more exotic analog processes that don't require bleeding-edge technology," Halla says.

Going forward, Halla is in the camp that sees high single-digit growth for the overall semiconductor industry. "It used to be that the industry would grow 17 percent like clockwork," he says. "If it was flat one year, you could expect huge growth next year. Those days are behind us."

Therefore, the investment community will no longer pay companies in advance. "What they want to see is more focus on fundamentals, and National is focused on return on invested capital," he says.