Nat Semi to dump Cyrix - 550 jobs to go

National Semiconductor Corp. said Wednesday it will "cease slugging it out in the PC processor market" and sell its PC chip business. The company will also lay off 550 employees.
Written by Eric Fleming, Contributor

Investors gave National Semi's move a thumbs up as shares jumped 1 13/16 to 16 7/16, or 9 percent. Wednesday's gain was in addition to Tuesday's 11 percent jump. BancBoston Robertson Stephens upgraded National to a "buy" from a "long-term attractive."

National, which will also sell a fabrication plant in Maine, expects a charge between $250m (£152.4m) and $300m for its fourth quarter to pay for the exit. About $50m to $60m of that charge will be for its chip inventory.

There has been speculation that National was planning to sell Cyrix for the past several days. PC Week reported late Tuesday about this morning's conference call. "We will immediately cease slugging it out in the PC processor market, which has been dragging down our financial performance for several quarters," said CEO Brian Halla in a statement. "By contrast, the information appliance market is now on the launch pad."

Many analysts felt National Semi couldn't win in the PC market anyway. Intel Corp. has defended its turf on the low-end. Meanwhile, Advanced Micro Devices (NYSE: AMD) continual losses may have scared National Semi. "In retrospect, we had only a fraction of the resources to compete in the low-end (PC chip) market," said Halla. National also didn't foresee the stiff competition in the low-end market, the company said.

The Cyrix business is "long-term potentially fatal" for National, said Halla. The analogue market deals not with performance and clock speeds, as PC chips do, but with power. Also, appliances don't have the room to house the fan that is needed to cool the PC chips down, making integration of Cyrix chips into appliances nearly impossible.

To Nimal Vallipuram, analyst at Everen Securities, this means starting all over for National Semi. "They would have to articulate an entirely new business plan," said Vallipuram. "With the sale of Cyrix, that means they are dropping the model they have been following for the past two years." National cited revenue growth of the analogue chip in the mid-teens and plans more than 100 new products to focus on that market, making up about 70 percent of 1999 sales, excluding Cyrix operations.

Looking forward, the company expects double-digit sales growth fiscal 2000 sales to increase from 1999.Gross margins are seen rising to about 40 percent from cost cutting. The tax rate for 2000 and the following year are expected to be at 2000. Operating expenses are expected to drop 20 percent from current run rates and approach company targets of research and development between 15 percent and 16 percent of sales and selling, general and administrative expenses at about 12 percent to 13 percent of sales.

The new focus won't be as big, though. Terry Ragsdale, analyst at J.P. Morgan said on the conference call that the information appliance market as "quite small, and emybryonic." In response, Halla said its information appliance push was "in the design-win stage." He added that set-top box and Web pad products are ready.

National sees a return to profitability by the second half of 2000. The job cuts will save about $15 million a quarter starting in November and moving chip operations from Maine to Texas will save another $20m, the company said on the conference call. From the research and development budget, about $20m will be cut since there won't be money spent on Cyrix development and another $15m will be trimmed from operating a stand-alone chip business.

National is "fairly optimistic" that it will be able to sell the Maine plant, which is currently in production of 0.18 micron wafers. National may keep a minority interest in the plant to guarantee a supply to its customers that need those chips.

The company hasn't changed its guidance for its next quarter, excluding charges. National Semi will report fourth quarter earnings June 10. First Call is expecting a loss of 17 cents a share for the quarter.

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