National Semiconductor Corp. (Qtr End 05/31/09) Earnings Call Transcript

Jun.11.09 | About: National Semiconductor (NSM)

National Semiconductor Corp. (NSM) Q4 2009 Earnings Call June 11, 2009 4:30 PM ET

Executives

Brian Halla – CEO

Don Macleod – President & COO

Lewis Chew – CFO

Mark Veeh - IR

Analysts

Ross Seymore - Deutsche Bank

Sumit Dhanda – Banc of America

Chris Danely - JP Morgan

Terence Whalen - Citi

James Schneider - Goldman Sachs

Douglas Freedman - Broadpoint Amtech

Stacy Rasgon - Sanford C. Bernstein & Co.

Tore Svanberg - Thomas Weisel Partners

Uche Orji - UBS Securities

Adam Benjamin - Jefferies & Company

Operator

Good afternoon, at this time I would like to welcome everyone to the National Semiconductor quarter four fiscal year 2009 conference call. (Operator Instructions) At this time I will now turn the conference over to Mr. Mark Veeh; sir please begin.

Mark Veeh

Welcome to National Semiconductor’s fourth quarter fiscal year 2009 earnings call. Joining me on the call today are Brian Halla, Chairman and Chief Executive Officer, Lewis Chew, Chief Financial Officer and Don Macleod, President and Chief Operating Officer.

In today’s call I will provide a recap of the fourth quarter financial results. Brian Halla will give an overview of the business environment and an update on the company’s focus and priorities moving forward. Lewis Chew will expand on the fourth quarter results and provide the background to our outlook for the first quarter of fiscal year 2010. Lastly, Don Macleod will then discuss market trends and products in more detail. We will then take questions until approximately 2:30 pm Pacific Standard Time.

As a reminder, this call will contain forward-looking statements that involve risk factors that could cause National’s results to differ materially from management’s current expectations. Please review the Safe Harbor statement contained in the press release published today as well as our most recent SEC filing for a complete description of those risks.

Also in compliance with SEC Regulation FD, this call is being broadcast live over our Investor Relations website. For those of you who have missed the press release or would like a replay of the call, you can find it on National’s IR website at www.national.com.

Now moving on to our fourth quarter results as follows. Sales for the quarter came in at $281 million, down 4% from $292 million in our third quarter of fiscal year 2009. As a quick reminder our Q3 quarter did include one extra week compared to our just completed 13-week quarter. Year over year sales were down 39% from $462 million in last year’s fourth quarter and total revenues for fiscal year 2009 came in at $1.46 billion.

Gross margins for our fiscal fourth quarter came in at 58.3%, up from 57.5% in the prior quarter and down from 65.9% in last year’s fourth quarter. This improvement in gross margin was primarily driven by headcount reductions and cost savings.

Also included in the gross margin number was approximately $3 million for stock compensation this quarter. Gross margin percentage for fiscal year 2009 as a whole was 62.7%. Operating expenses in the fourth quarter came in at $117 million. Included in the operating expense number was approximately [$13] million in stock compensation, $5 million for R&D, and $8 million for SG&A.

Net interest expense for the quarter was $16.2 million and the effective tax rate for the quarter was 20%. As a result National posted a GAAP net loss of $63.7 million or a loss of $0.28 per fully diluted share in Q4 of fiscal year 2009. The fully diluted share count for the fourth quarter was 230.1 million shares.

Included in our GAAP financial results this quarter was approximately $116 million pre-tax dollars of expense for severance and restructure associated with our previously announced actions on March 11, 2009. The break out of the $116 million of expense were as follows. Approximately $60 million of expense was related to costs associated with severance, and approximately $56 million of expense was related to the impairment of assets and other exit costs.

So with that, I will now turn it over to Brian.

Brian Halla

Thank you Mark and good afternoon everyone. While this call caps off our fiscal year 2009, I’d like to spend the bulk of my comments on the quarter just ended and on some of the relatively positive if unexpected changes we saw during the quarter.

In my brief commentary therefore I’ll cover (1) what happened in the quarter relative to our expectations; (2) can we take the quarter as an inflection point that perhaps business is getting better; and (3) if so, what’s behind our outlook for Q1. And last I’ll briefly discuss the core analog business and touch on the status of a couple of the new initiatives driven by our analog power management advantages.

Later Don will get into the specifics of how the company’s products are doing and some of the end markets that they serve. So Q4 in summary, though I’ll steer clear of using a word like recovery, I will say that the theme of the quarter was improvement. Revenues in the quarter were a little bit better then the high end of the range we gave you in our outlook last quarter coming in 4% below the prior quarter.

I’ll remind everyone that the prior quarter was a 14-week quarter. The turns in the quarter were solid and the cancellations that characterized our third quarter were minimal. We lowered inventory internally as well as in our distribution channel. Our gross margins and operating expenses were both better then last quarter helped by cost control measures and also by one-time year end savings.

And our earnings both with and without the restructuring charge were better then we originally projected. So how do we define improvement? Our bookings in the quarter grew for the first time in four quarters. This growth was up 30% from Q3 and resulted in a positive book to bill.

As a result our backlog entering Q1 is higher then it was entering Q4. As I said before cancellations in the quarter subsided noticeably. Much of the bookings increase was driven by order rates from the handset suppliers that at up 50% grew actually faster then the corporate average. Much of the order activity here seemed to be in preparation for several launches of new Smart Phone models that are scheduled to take place over the next couple of quarters from various handset suppliers we all know and love.

Our distributors are still cautious and though turns in the channel were up in the quarter the backlog in distribution is still relatively flat with the Q3 level. Our European distributors continue to remain skittish with more positive signs coming out of Asia Pacific. So let’s take a look at the outlook, even though normal seasonality would have us down a couple of points, the higher opening backlog does give us a bit of a tailwind so our guidance for Q1 revenue is in a range up 2% to up 9%.

I should point out that the higher end of the range is achievable if turns in the quarter are roughly the same as they were in Q4. The turns have actually been coming in pretty steady and again with inventories further down in the channel and with no apparent inventory builds at the OEMs, this should bode for a relatively stable turns outlook.

Having said all of this and as all of you well know, end demand will be determined by the overall economy and the level of corresponding consumer confidence. In summary the slowdown in the inventory burn rate and the accompanying improved turns activity combined with renewed strength in the wireless sector, in our case in apparent preparation for what appears to be a new fully featured handset product cycle, give us reason to believe that there could be continued improvement.

So let me touch on the business model, in addition to our rigid control of expenses which were down about 30% in Q4 compared to the beginning of the year, we’re also on schedule with our previously announced plant closures. Our assembly plant in Suzhou, China, will cease production around the end of the quarter.

And we’re on track to end production at our Texas facility by the end of this fiscal year. When completed this plant restructuring will have the net positive effect of generating an additional 500 basis points of gross margin over where we were prior to taking this action.

So how about a couple of the new National 3.0 initiatives, the product groups have been doing a great job and getting more and more of our power management circuits into those new product cycle Smart Phones and the rest of the core business is relatively healthy. In addition as we discussed at the last earnings call, we have been leveraging our core analog expertise, particularly our power management, power wise capabilities into some of the new energy markets where power electronics can add tremendous value.

One of those initiatives is our SolarMagic Power Optimizer module which two weeks ago received the prestigious Intersolar 2009 Award in the Photovoltaics category out of 76 applications. Intersolar is the world’s largest solar event. Our SolarMagic Power Optimizer when combined with the Photovoltaics panels in an array of panels can recover up to 10% to 20% of the energy loss due to mismatches like shade or dirt or panel degradation.

We also announced over the last couple of weeks several partnerships with panel suppliers, solar panel distributors, and energy service providers to potentially incorporate the SolarMagic capability into their business offerings. Over time we believe that our SolarMagic power management circuits will find themselves enabling the smart panel market and will become an emerging growth opportunity I believe for our industry.

Another area where we’re ramping production is in the high brightness LED driver area. This also compliments our already proven capability in LED drivers for handsets and laptops. We’ve had over 4,500 designs completed in the last month for the LED driver circuits as recorded by our online Webench PowerWise LED design tool.

So, today we’re commenting on improvement in our business and we’ll leave it up to someone else to call a recovery. In the meantime what we’ve seen in the way of inventory depletion, renewed wireless orders particularly for the new Smart Phones, combined with our discipline on expense controls gives us a measure of confidence.

If turns continue at their current steady rate, the high end of our 2% to 9% up is achievable.

Lewis Chew

Thanks Brian, during my part of the call today I’ll concentrate my comments on a few areas, first I will provide some details underlying our revenue projection for Q1 and then I’ll go over the company’s operating expenses and gross margins and give you some insight on what effected Q4 and how we transition to Q1.

And as part of that I’ll incorporate the status of our plant restructuring and how that impacts our numbers. And then I’ll finish up with some comments on the balance sheet and operating metrics. As Brian mentioned, we are projecting that revenue in Q1 will grow sequentially by a range of plus 2% to plus 9%.

In past years it has been most typical for our revenues to decline slightly during the summer quarter. However this year we entered Q1 with a higher opening backlog then we did in Q 4, and this was enabled by the increase in bookings that we saw during Q4.

If you remember during our last earnings call on March 11, we said that our monthly bookings rate had improved after January. We saw a continuation of steady bookings improvement throughout Q4. The weekly run rate of bookings was a little better as each month went by during the quarter; May bookings were better then April, and April was better then March and all of this normalized to four weeks.

A portion of the increased bookings came in the form of higher turns orders which ultimately drove our Q4 revenue to be slightly higher then the top end of the range that we had projected at the beginning of the quarter. And speaking of turns orders, we saw a steady flow of turns throughout Q4.

In general the majority of our turns orders usually come from our distributors and that was certainly the case in Q4 but we also saw better then expected turns from direct customers and we didn’t have the cancellation and push-outs that we saw during Q3.

We also burned off quite a bit more inventory dollars at distributors during Q4. We went from over 11 weeks of inventory at the end of Q3 to below 10 weeks by the end of Q4. Our distributor resales were up slightly in Q4 and we are modeling resales to be somewhat flattish in Q1.

So our revenue range of up 2% to 9% is based mainly on our higher opening backlog along with a reasonable level of turns in the context of summer seasonality. The low end of our range requires lower turns then we had in Q4 and if our turns end up similar to what we had in Q4 that would push us towards the higher of our revenue range.

Let me move on to gross margin and operating expenses, gross margin in Q4 was 58.3% which was higher then the 57.5% in Q3 despite the fact that sales and inventories were both down in the quarter. We benefited from the headcount reductions that were launched at the beginning of the quarter and we also had some cost savings in Q4 from end of year incentive reductions that was worth over a point of margin, and this particular item does not repeat in Q1.

Our fab utilization in Q4 was approximately 38% and it should rise slightly in Q1. So we are projecting that Q1 gross margin will increase by 50 to 100 basis points depending on the revenue that we achieve. And to reconfirm what I have said previously about our gross margin leverage model, there are two main drivers.

First the plant restructuring actions when completed will allow us to generate above 60% gross margin at below $300 million in revenue per quarter. And second our gross margin fall through percentage on incremental revenues would typically run in the 80’s. The plant restructuring plan is on track for the following.

Last production in the China assembly plant should be completed by around the end of Q1 fiscal 2010, and last production in the Texas fab should be completed by the end of Q4 fiscal 2010. In both cases the plants will be fully closed down shortly after last production is completed subject to normal decommissioning and final asset disposals.

We are actively transferring our manufacturing processes from Texas to our remaining fab sites and we estimate that $5 million to $6 million will be incurred during Q1 for these activities plus another $1 million or $2 million for tool removal and other exit costs. We will show these amounts separately as restructuring expenses when we report to you our numbers.

Now on to operating expenses, in Q4 the significantly lower R&D and SG&A expenses we achieved included savings from end of year incentive comp reductions that do not repeat in Q1. The expenses that I’m guiding to for Q1 reflect a new base level of structural spending that is consistent with the permanent cost reduction plans that we announced three months ago.

As part of these plans we eliminated nearly 500 non-manufacturing positions so that our expenses would be more in line with current business level. The majority of these eliminations were completed during Q4. In Q1 we anticipate that R&D expenses will range from $65 million to $68 million, SG&A expenses also expected to range from $65 million to $68 million, and included in the figures I just provided, is stock compensation of approximately $17 million in Q1 and here’s a break out by the various line items that are impacted; cost of sales $3 million, R&D $5 million, and SG&A $9 million.

Other income and expenses estimated to run at a $1 million of expense in Q1 and interest expense net is expected to range from $15 million to $16 million. And the effective income tax rate in Q1 is estimated to be 30% to 31%. If I look at the Q4 tax rate which was unusually low, and net out the notable items a more normalized rate would have been around 28% or so.

Also a quick comment on weighted average shares outstanding, since Q4 was in a net loss position, the average share count that we show for Q4 of 230 million, does not include the usual [adder] from outstanding stock options and this is standard practice under GAAP.

If Q4 had been positive net income the average share count would have been about 234 million and I’m highlighting this so that you have a reasonable basis for your forward-looking models.

Let’s move on to the rest of the balance sheet, our capital expenditures in Q4 were about $5 million and we estimate that Q1 capital spending will be around $12 million to $16 million. Our days of inventory at the end of Q4 were about 103 days, down from 118 days in Q3. The actual inventory dollars were down about $15 million at the end of Q4.

Our days of receivables at the end of Q4 was around 23 days due to strong collections in the quarter and our cash reserves ended Q4 at $700 million, down from $777 million at the end of last quarter. Now the Q4 ending balance is very healthy considering that we paid off $141 million of debt in the quarter which includes the $125 million of early repayment on our term loan as we disclosed that we would at the end of last quarter.

Operating margin in Q4 was about 18% and return on invested capital in the quarter was about 10%. For the full fiscal year 2009 return on invested capital was about 15% and all of these include stock comp expense but not restructuring.

Moving forward we are aiming to get our ROIC consistently back above 20%. We have gross margin improvements under way and we have reset our expense structure at much lower levels compared to three quarters ago. The fall through to operating profits from incremental revenue should be very high and so to talk more about markets and revenue growth, let me turn it over Don Macleod.

Don Macleod

Thank you Lewis, I will now cover business trends, first by the major market segments and then by our analog product categories and I’ll finish by discussing our business model. So first let me talk about trends in our major market segments.

The mobile device market was the most significant positive driver of our business in the quarter, albeit from a weak prior quarter. Our sales to the mobile phone handset market grew by about 6% sequentially this quarter and bookings from these mobile phone handset customers also grew by about 50% sequentially and we enter the first quarter of our new fiscal year with a higher shippable order backlog for this marketplace.

So what is driving this increased demand from the mobile device market? We’ve targeted our analog products to enable new features, higher performance, and more power efficiency in the Smart Phone portion of this market and this is now reflected in many of our customers’ new models which will be launched over the next two plus quarters.

Our focus in this market is strategic. We work with the leading mobile phone OEMs, we work with ODMs who supply complete solutions to these OEMs, and we work with RF power amplifier suppliers who supply reference designs. In this reference platform space, we are in a number of Smart Phones coming to the market in the second half of this calendar year.

Some of these design wins are with Taiwanese and other Asian ODMs who are now growing their share of mobile phone development as the major OEMs outsource more. We’re also designed into a number of new android based phones to be introduced into the market over the next few quarters. We are in several new models from Korean handset manufacturers with our audio subsystems.

And our next generation audio amplifiers which drive very thin ceramic speakers are also designed into upcoming mobile consumer devices and networks. So in summary the mobile phone and portable mobile device market segment is gearing up for a new Smart device product cycle in the second half of this calendar year and the initial orders are now showing up on our books.

This market by the way represented about 30% of our sales in the quarter. Moving on to our related market, communications and networking, at about 125 of our sales in the quarter. Sales to cellular base station providers were flat in dollars with Q3, again driven by China-related infrastructure build out while sales to the communications networking portion of that market declined.

For the very broad industrial market which includes medical, automotive, aerospace, military, and the general industrial segment which typically accounts for 35% to 40% of our sales, here we saw no real signs of recovery in the quarter. Our sales were down about 10% sequentially.

As Lewis mentioned earlier we shipped less into our distributors in the quarter and these shipped out in the resales. And our overall distributor resales for the quarter were up a few percentage points over Q3. Since we channel almost all our sales to these industrial customers through our distributors, arguably end demand in that market was a little better then the revenue recognized by us in the quarter.

So now let me move on to talk about activity in our analog product category, overall standard linear or as the category is now described by the WSTS Trade Statistics Organization as general purpose analog sales were down by 4% sequentially in the quarter, the same as the overall company.

The amplifier or now called signal conditioning category and the interface category showed better then overall company sequential comparisons with sales in the quarter down 2% and up 4% respectively driven by mobile devices and the China infrastructure market. The data converter category now called signal conversion, sales declined 7% sequentially, and this was impacted by the industrial market.

And the largest of our analog product category which is power management at 46% of our sales or really nearly half the company, our sales were down about 7% sequentially while bookings were up about 40% sequentially.

To drive future revenue growth in power management we as a company have five major thrusts, these are in order, first, expanding our well established Simple Switcher family of easy to use power supply solutions. Second, growing our portfolio of LM5K high voltage, high power regulators and controllers. And third, leveraging our power management and other analog IP for building block subsystem and system level solutions to the fast growing LED lighting market.

And fourth application specific power management building block subsystem and system level solutions for mobile devices which are focused on powering features such as lighting, display, RF, GPS, and other user driven functions.

And lastly, driving new energy generation and management solutions in new markets and applications such as solar energy and electric vehicles, again using our power management and other analog IP to provide chip level and system level solutions.

In the first of these power management thrusts, our Simple Switcher range of easy to use power supply solutions here National is the go-to brand for power supply needs for system designers. As an example of the diversity of our customer base, we’ve shipped products to more then 25,000 different customers over the past 12 months and most of this is through our distribution channel.

And these customers are in the communications, industrial, medical, automotive, consumer, and other segments of the market. And we launched our fifth generation of this Simple Switcher family of products in October of 2008. Since October we’ve seen the number of designs completed by our customers on our online power Webench design tool grow from about 15,000 designs completed per month to 25,000 in each of April and May of this year.

In the upcoming fiscal year we’ll be creating a new benchmark for our Simple Switcher products. We’ll be offering a whole new family with even higher levels of integration and enhanced customer design tools.

The second of these power management thrusts which is expanding our portfolio of LM5K high voltage, high power regulators and controllers, here our PWM controllers are used by five of the top 10 DC to DC converter module manufacturers. But also well placed with power supply design wins for suppliers to the China 3G mobile base station infrastructure market. And this is the major driver and enabling the sales of this LM5K family of products to be up fiscal year 2009 over fiscal year 2008, the previous year, and actually up 10% Q4 of this year versus Q4 of last year.

And there aren’t many product areas that can show growth like this year on year in this business environment. The third power management thrust for our switch is powering and enabling LED lighting is a business that’s ramping up very quickly from a small base in fiscal 2009. The market size for driving power to LED is about $300 million this calendar year 2009 and should grow to about a billion dollars by calendar year 2012.

That’s a 50% CAGR according to Strategies Unlimited’s 2008 report and our own input. This market opportunity covers from general illumination through display back lighting, projection, and automotive applications. For National our early entry into this market with our first catalogue DC to DC converters and now with our application specific products such as our TRIAC dimmable LED driver launched in February of this year have been very well received.

And we have a lot more new products with power management capabilities coming into this market in our design pipeline. We had 4,500 customer designs completed on our LED Webench online design tool last month and that’s up from a third of that level six months ago. Also each of our three major worldwide distributors now have a dedicated sales and business development organization exclusively focused on this LED lighting area.

And each of them leverages one of the three leading LED suppliers which are Cree, Philips Lumiled, and [Auguwan] and we are very attached to those with our power management products. Our fourth power management thrust which is application specific power management solutions for mobile devices, I’ve already covered our progress on new Smart Phones, consumer entertainment devices, and other portable devices and again, we’re looking forward to incremental revenue growth in the second half of this year as customers launch their new models.

The last of our five thrust areas for our power management focus which is creating new power electronic solutions for solar energy and electric vehicle energy storage, here as Brian already mentioned our SolarMagic Power Optimizer was launched at the end of May. This first product is the module packaged with a number of our analog chips with the main IC as a derivative of our LM5K higher power density family of products that I just mentioned earlier as one of our power thrusts.

The value proposition of our SolarMagic Optimizer is that when included in a solar panel installation that is impacted by shade or debris or aging or other degradation, it can recover between 10% and 20% of the lost energy over the course of the day. We made our first sales of this product in May and we are working with solar panel manufacturers and solar utilities on both co-selling and marketing of existing SolarMagic products and integrating our power electronics capability into their future systems.

So to summarize on our power management positioning we’re focusing our R&D and business development in these five major thrusts, two of which cover very broad market ease of use, Simple Switcher, and LM5000 higher voltage, higher power switchers and controllers into a very extensive broad customer base.

Here our best in class engineering web tools enable customer ease of use with a low touch, sales and applications overhead. Another thrust powering LED lighting is also focused on a very extensive customer base. One that’s not used to working with integrated circuits, hence our leverage of our ease of use design tools, new channels, and reference design.

For power opportunities in mobile devices, we go to market strategically with reference design partners, a narrow set of large ODMs, and now new ODMs who are adding analog capabilities to Smart Phones and other portable products such as personal navigation devices, and mobile internet devices.

And lastly for the new energy generation in management areas such as solar and electric vehicles, we are leveraging our power management IP to be the leader in this as yet unclaimed space that’s available for power electronics. And we are very well placed as a power management leader to cover all of these growth opportunities.

So now let me move on to talk about my last topic, a discussion regarding our business model and how it performed in the quarter. Our gross profit as a percent of sales held up very well despite slightly lower sales in the quarter. Two factors contributed to this, spending management in our factories, and ASP or average selling price improvement.

Our ASP increased year on year by between 1% and 2% and this increased ASP was driven by an increase in the proportion of our sales represented by new products in the quarter. Our operating expenses are also down significantly. By this upcoming Q1 of fiscal 2010 our operating expenses should be down 22% to 25% from the actual level we incurred in the first quarter of fiscal year 2009.

We have significant leverage in our business model. The factory closures will benefit our gross margin by an incremental four to five percentage points at today’s revenue run rate from the gross margin base of Q3 of fiscal 2009, i.e. before we started these actions. Add in the lowered expenses going forward at the operating level and the potential to grow our top line revenue both in our base analog business and in particular with new growth opportunities for our power management, and we have the opportunity to translate all of that into earnings growth going forward and that is our objective.

We are now ready for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ross Seymore - Deutsche Bank

Ross Seymore - Deutsche Bank

Just a question on the inventory internally and in the channel, what are you expectations of what that’s going to do in the next quarter in both places.

Lewis Chew

Internally we’re looking to hold it flat to maybe slightly down, some of that will depend on what happens with our bridge build for the transfers and within the channel, we’re looking for that to be flattish. That will depend a lot on the resales.

Ross Seymore - Deutsche Bank

On the OpEx side of things, what do you think that does going forward as revenues grow and the cost cutting if you’ve been through a portion of the total restructuring and the benefits on the OpEx side, you talk a little bit about how much more is left to come there and how and when we’ll see it in OpEx please.

Lewis Chew

The OpEx guidance that I gave for Q1 does reflect the majority of the savings we get from the headcount reductions. And then going forward the first part of your question, I suppose it would be safe to say that we absolutely expect to grow the OpEx slower then the revenues grow but in the short-term here until we see more significant signs of recovery which Brian alluded to in his comments, we’re going to try to hold those OpEx numbers relatively under check.

So we’re not really planning on any significant growth in OpEx subject to just kind of quarterly fluctuations if you will.

Operator

Your next question comes from the line of Sumit Dhanda – Banc of America

Sumit Dhanda – Banc of America

A couple of questions, just to clarify you indicated that you expect the channel inventory to be relatively flat, or sorry, based on flattish resales, so the growth that you’re seeing on the overall top line, is that more driven by your OEM customer base.

Lewis Chew

It is fair to say that, yes. When we came into the quarter I think all three of us mentioned the fact that our opening backlog is up which is certainly a nice place to be considering the last couple of quarters where its been down and a large chunk of that opening backlog up is reflected in our OEM base.

So with our distributors, I would say that they obviously burnt off quite a bit of inventory the quarter we just came off of so we’re still waiting to see some signs of a more sustained snap back if you will.

Sumit Dhanda – Banc of America

And then could you remind us as you close down the China fab and then the Texas fab, the projected benefit to your COGS line both at the end of Q1 and then at the end of Q4 respectively.

Lewis Chew

Q1 actually doesn’t get a huge benefit yet from the COGS line because we are still producing in both facilities in Q1. In Q2 if we’re successful in finishing production in China by around the end of Q1, then we should see, we had said before that we should see a one point benefit subsequent to that closure of China.

And then when we close Texas we figure that would be another four-ish type of points if you will.

Operator

Your next question comes from the line of Chris Danely - JP Morgan

Chris Danely - JP Morgan

It sounds like you want to hold the internal inventory flat to down, can you just talk about your ultimate inventory goal of the company and then when we could expect a meaningful increase in utilization rates.

Lewis Chew

There’s two halves to that because you kind of co-mingled those. First of all I do think our utilization rates will climb this quarter because what we’re doing is we’re not, we just finished coming off a quarter where we burnt off $15 million. So in terms of days of inventory model, we’re still trying to figure out how to model at these lower revenue levels.

I think we’d like to see it first get down below 100 days and we are in fact ramping up some activity this quarter to accommodate the increased revenue and so did you have a piece of that on the [disti] side too our just internally.

Chris Danely - JP Morgan

Really just internally was more what I was concerned about.

Lewis Chew

Yes, so trying to get it below 100 days but we are starting to ramp some activity to match the increased sales for this next quarter.

Chris Danely - JP Morgan

And then as my follow-up I’ll just open it up to all three of your, what are your impressions on demand out there. Do you think its stable, is it going down, is it popping up. Are you seeing any green shoots out there.

Lewis Chew

Rocking, they’re hitting me over the head. Its not rocking.

Brian Halla

I think the word stable is probably the best one to use. I think actually the most positive sign we saw in the marketplace was that where our OEMs virtually all of them were cancelling in Q2 and Q3, the cancellations pretty much came to a halt and so that’s a real good indicator. The distributors are always a little slow on the swing.

So what’s happening there is maybe a positive indicator as well. But certainly we’re seeing stabilization and with a guidance of up 2% to 9% we think that we can see some improvement and that improvement as I said in my commentary, we can hit the high end of the range if we just see the turns that we’ve been seeing.

And so far in the quarter everything looks really good.

Operator

Your next question comes from the line of Terence Whalen - Citi

Terence Whalen - Citi

I think to build off the prior question, but focus a little bit more on the channel inventory, can you specify how much channel inventory went down this quarter. I think you said from 11 weeks to 10 with resales up slightly so does that imply something like down 8% for channel inventory. What would that be in dollar amounts.

Lewis Chew

Actually we went from a number that was over 11 to a number below 10 so actually just the inventory dollars for us, if you just look at dollars quarter over quarter, was down more than 10% in the quarter.

Terence Whalen - Citi

Okay so if I recall correctly, you are sell-in, and you think there’s going to be a cessation of dollar inventory work [down] in the channel, wouldn’t that imply that your sales would step up by the amount that they had formerly been suppressed last quarter by the work down.

Lewis Chew

Yes, there is a connection between those two and as I said in our guidance we are currently modeling that just the resales will be slightly down over the summer for seasonality but yes, if what you say is correct then there’s no way to avoid the fact that that provides sort of a positive boost to National.

Because if just the, let’s follow through your train of thought, if just the resales continue to let’s say strengthen as opposed to be softer over the summer, we do think there’s a direct connection between that and the turns that we will get.

Terence Whalen - Citi

Okay and then just my last follow-up and I’ll let it go is that, so there’s a specific number built into the guidance, what is that after the 10% work down last quarter.

Lewis Chew

Specific number for what.

Terence Whalen - Citi

For your expectation for the amount that, just the inventory will decline in the August quarter.

Lewis Chew

That’s a level of detail I don’t want to get into. Like I said, we’re anticipating that inventories will be somewhat flattish and that resales will be down slightly. So you can, if you want to attach your own numbers to those words.

Operator

Your next question comes from the line of James Schneider - Goldman Sachs

James Schneider - Goldman Sachs

I guess to start off with, maybe to ask the question a little bit differently, are there any end markets where you think you are shipping at end consumption levels or any that you are shipping still above end consumption levels. It seems like mostly you’re still shipping below from your comments.

Don Macleod

You look at the main marketplace that we serve today, which is the mobile phone and related portable device market which is about 30% of our sales, I would say that for more then half the customers in that marketplace, we’re today shipping products into what we call vendor managed inventory hubs and the way we recognize revenue on these is that we ship into these hubs and then the OEM customer pulls out the product and the point he pulls it out we recognize the revenue.

So its kind of a just in time situation so I would say that in those markets we’re actually shipping at the level they’re consuming and building products. Now we couldn’t have said that for the third quarter which is the quarter before the one we’re reporting today because many of the customers in that mobile phone space were moving production and moving products and inventory around their factories and in fact, pulling in production from the contract manufacturers that they previously used.

And that clearly impacted our shipments in. In other words our shipments in were in the third quarter a lot below what they were using up themselves. So when I look at that major market I feel very comfortable that we’re shipping in and they’re using the products. So we’re directly aligned there.

And in general I would say that’s the same for everything else. If you look at National in particular about half of our sales going into distribution and 30% go to these major customers in the mobile phone market and overall more then half of what we ship into the phone marketplace is on these vendor managed inventory programs.

Its pretty self explanatory that we’re shipping into very visible end use markets that are using the products. All were public about the inventory situation as for example in distribution where the inventories have actually come down over the quarter by quite a significant number.

James Schneider - Goldman Sachs

Would you say that in general there are spaces where we’re still probably shipping in less then end demand, right, because there’s still some inventory burn going on.

Don Macleod

Clearly in some of the other peripheral industrial markets, that’s the way we understand it at this point the customers for example, in markets relating to automotive which is not a big part of our business, we are still in a situation where customers are using up inventory and we’re not shipping very much in.

James Schneider - Goldman Sachs

On the industrial market itself, it sounds like your comments about weakness in industrial are pretty much broadly consistent with what the rest of the industry has talked about during these calls, do you see any signs of a turnaround in that market, or do you think it will be relatively stable to kind of a grind [higher] from here.

Don Macleod

Well I think the way we look at that marketplace is that very broadly its serviced by our distributors and the indications they’re giving us and we kind of talked about this, we’re seeing a I would say a flattish market even though for our resales, grew by a few percentage points in the quarter we just finished, we’re not looking at resale growth in that particular marketplace.

In other words resales being what they sell out to their customers over the summer quarter, so we’re not getting any indications for them at this point that they’re seeing any improvement in that broad industrial market. But I would have to say that we would see normally in the summer a slowdown in our resales through the distribution channel and this year at this point doesn’t look any different to that.

Operator

Your next question comes from the line of Douglas Freedman - Broadpoint Amtech

Douglas Freedman - Broadpoint Amtech

If we could start off with, it sounds like you still have some restructuring actions in front of us, can you give us some guidance on what those restructuring charges are going to look like for the balance of the year.

Lewis Chew

Yes I can, the bulk of the activity is transferring the processes from Texas to our other fab sites because as I said last quarter on the call, we manufacture more then 95% of our product in house and we’re retaining all of our analog processes for all intents and purposes so for the next couple of quarters, I would say I’m roughing it out at $5 to $6 million a quarter in process transfer costs and then it will drop off in Q3.

And then probably in the neighborhood of $1 to $2 million a quarter for costs we incur for removing tools and some decommissioning and that’s probably the bulk of our ongoing restructuring charges you’ll see on our P&L.

Douglas Freedman - Broadpoint Amtech

And would you be able to comment on ASP trends in the quarter, and what you expect as we sort of start to see demand or shipment rates at least recover, if you’re seeing any changes in the pricing environment.

Don Macleod

I did mention in the call that we saw year on year improvement in our ASPs that, between 1% and 2%. That’s a fairly consistent message that we’ve had. We did not see improvement in our ASPs this fourth quarter over the third quarter and I would say that one of the drivers of that improving ASP over time is just an increasing portion of these newer products that are more application specific in some of these vertical markets that we talked about.

That drove the improvement in the ASP we saw in the fourth quarter and I would expect that to continue in the second half of this calendar year particularly in the sense that many of these as we called new Smart Phone type devices that are coming out, have new products from National in them and we would look to continue our ASP improvement.

If you’re talking about the broader market ASP situation, I really don’t think that’s an issue that we can intelligently comment on at this point in time. I don’t see anything in that market that impacts the ASPs we have as a company.

Douglas Freedman - Broadpoint Amtech

If we think about these fabs when they close and the impact its going to have on gross margin, how should we think about it. How much inventory are you going to have and are we going to have to work through that inventory before we see the gross margin improvement or is it going to be as soon as this fab closes we lose that cost to the cost of goods line.

Lewis Chew

Its probably more the latter, we’re actually being very measured about how much inventory we built up. For example at the beginning of this quarter I mentioned maybe as a little bit of an umbrella cover for me, that we would likely build some bridge inventory but at the end of the day it only end up being a few million dollars and we were able to burn off other inventory to cover that.

So when we’re done, and actually just to clarify too, its actually only one fab. The other one is an assembly plant. So when we’re done closing the fab and the assembly plant, we don’t view inventory as being an overhang. We should see a direct impact and in terms of the actual savings, there’s obviously the piece of savings that comes from eliminating equipment and depreciation but then there’s a big chunk of savings that comes from all the personnel that are working in these factories and the reason we get that net savings is because we’ll shift that production to another factory and leverage the fixed costs there and not have to repeat that.

So there’s a good [re] chunk of those savings that really is a true cash savings, its not just depreciation rolling off.

Douglas Freedman - Broadpoint Amtech

And again we expect to see that in the November quarter, correct.

Lewis Chew

Yes, you’d see roughly, at least right now for modeling purposes, without getting into guidance for Q2, we expect somewhere in the neighborhood of a point in that quarter and then when we’re done with Texas, which is more like the end of this fiscal year and into the beginning of next fiscal year another roughly four points [all else being equal].

Operator

Your next question comes from the line of Stacy Rasgon - Sanford C. Bernstein & Co.

Stacy Rasgon - Sanford C. Bernstein & Co.

I have a question just firstly on the R&D, so it sounds like you’re talking about a $65 to $68 million range for next quarter. That sounds like an even with that on the SG&A, it sounds like that’s a little even lower level of OpEx then you were talking about previous quarters. I’m actually curious on the R&D where the additional incremental cuts are coming from in terms of the areas of the business.

Lewis Chew

First of all we didn’t make any more incremental cuts. Some of the cost profile I’m giving you for Q1 does reflect the fact that we still have some but not as many of the temporary measures in place that we had a couple of quarters ago when things were really, really bad. But we’re a lot closer to a fully loaded spending. But we have not made any further incremental cuts to R&D programs or spending beyond what we announced in the restructuring that was at the beginning of this quarter.

Stacy Rasgon - Sanford C. Bernstein & Co.

How much of the remaining is still temporary versus permanent.

Lewis Chew

You know, its always hard to size that up because for example this is a summer quarter where we would normally expect employees to take vacation or whatever, so we do have some days off and things like that. But its probably in the neighborhood of call it a few million dollars.

Stacy Rasgon - Sanford C. Bernstein & Co.

And for my follow-up I’d like to see if we could talk a little bit about SolarMagic, I’d like to see if you could talk about what your revenue goals are for that product in 2010 and your thoughts on the current ASP which I think is around $199.00, how you’re thinking going forward about playing off pricing and margins for the project versus penetration into the space.

Brian Halla

The ASP is currently an MSRP which is a price that carries with it the ability to give discounts to various distributors and installers. The net back to National for the early part of this program is $150.00. And over time we see major opportunity to reduce costs in that product and over time we also see opportunity to get rid of the bulk of the cost when the technology is integrated into the panels.

And that’s kind of the roadmap. In terms of revenue, I’d say it’s a little too soon to say. As you point out its got a pretty hefty price on it. And the philosophy on that is based on National celebrating a 50 year history of getting whacked on commodities and it doesn’t make any sense to get whacked when you’re the only game in town.

So the pricing right now is where it needs to be until we start to see some competition.

Stacy Rasgon - Sanford C. Bernstein & Co.

Any comments at all on the margins of the system products versus your corporate average.

Brian Halla

We, since I’d say 2002, we haven’t accepted putting R&D into anything that couldn’t be at or better then the corporate margin goal and at that time I think we said that 60% was the minimum we’d accept. So you should see all of those margins north of our corporate average.

Stacy Rasgon - Sanford C. Bernstein & Co.

And so SolarMagic today being sold has a margin, gross margin higher then the corporate average.

Brian Halla

We don’t get into that level of specifics but we don’t start any projects or put R&D into any projects that can’t meet or beat the corporate margin goals.

Operator

Your next question comes from the line of Tore Svanberg - Thomas Weisel Partners

Tore Svanberg - Thomas Weisel Partners

First question, I assume customer lead times are still very short so what do you need to see in order to maybe crank the fabs up a little bit more.

Lewis Chew

Well I’d like to see us continue this positive trend we started with order rates and you know, we’ve talked in the past when you guys have asked me, hey what do you look for for things turning the other way, and I’ve consistently said in the past that we need to see the order rates turn around. And so we clearly saw some of that, not just this quarter but you noticed in my prepared comments I reminded you that we saw the beginnings of that at the end of Q3.

We just didn’t know if that would continue. So if we continue to see order rates move forward as they have been, that would give us more confidence to ramp a little bit. And secondly as Don mentioned, we saw a lot of our growth really coming from one or maybe two markets. But at some point here we think there will be some recovery in the broader markets and I think one of the earlier questions may be it was Terrance was, hey are we still burning off inventories in some of those areas and I think Don said yes.

I think there’s still some areas where they’re still burning off inventory but the order rates would be the first thing we would look for.

Tore Svanberg - Thomas Weisel Partners

And as a follow-up as the Texas fab gets shut down, and let’s assume you’re doing around $200 million, what would the utilization rate look at at that point.

Lewis Chew

Say that again, what were your numbers.

Tore Svanberg - Thomas Weisel Partners

If you were around $200 million revenue and you now basically shut down with the Texas fab, what would the utilization jump up to.

Lewis Chew

It would probably be in the neighborhood of seven to eight points. And the way I give you that is, if I look at the quarter we just finished, the Texas fab was about 14% to 15% of our capacity this quarter.

Operator

Your next question comes from the line of Uche Orji - UBS Securities

Uche Orji - UBS Securities

Can I just ask you two questions, one is you talked about all this new power management initiatives, and also when you responded to an earlier question you talked about not starting any projects that would not meet or beat the corporate gross margins, but if I look at like the LED back lighting, how does that kind of project fit and if I can just back into the big operation, if I look through all these initiatives can you just tell me what you expect from a gross margin perspective from each of the five you outlined.

Don Macleod

I don’t think the answer I would give would be any different to the answer you got or somebody else got earlier which is the criteria that we put into our market and product selection is that we on a portfolio level look for margins that add to the company’s overall objectives and that objective has been to increase our gross margin over time obviously subject to the [vagaries] of fab capacity utilization and I think we’ve shown you a pretty good track record in doing that.

All of those markets that we pick provide us with margins that get to that corporate average or better so we don’t view that for example, your example of LED lighting, we don’t view that as a compromised margin proposition for the company. On the contrary we still continue to introduce products that nobody else has, our TRIAC dimming devices, the best in the market out there today with performance.

If the customers pay us prices that get us to those corporate average gross margins, I don’t think there’s any transition or change in the attitude we have to this list of power management capabilities versus what we might have talked to you about a year or two ago here at National.

Uche Orji - UBS Securities

If I look at the sell throughs you have in the cell phone area, again if you look at your competitors like Maxim who are talking about analog base band which is like an integration of all kinds of components within the analog area, how much of a threat is that strategy to your continued success in power management within the cell phone market. And is it something you consider doing yourselves and if so, do you have all the blocks in place to do the fab.

Don Macleod

We don’t have a strategy to produce integrated solutions in the cell phone marketplace. On the contrary our solution, it our focus to producing highest performance products for the different attributes and over time quite often the lower end phone models and others require integration for their cost and we don’t compete in that space.

We differentiate for example I talked about our audio products where we have the best in class ceramic speaker drivers out there today. These are not integrations, these are unique. If you look at lighting features that we enable in phones, if you look at in the power management space for example we have expertise in managing the power relating to the RF block of the mobile phone.

So the areas we focus on tend to be fairly specialized and we’re fairly selective in terms of leveraging our IP. Integration isn’t one of the attributes. Integration always gets down to a discussion on silicon cost and the customer calls the shots because the integration is often defined for his solution and you’re effectively performing a custom product for his capability.

That’s not the way we go to market. If the customers don’t pay us value for the unique solution, we don’t go there. We move on.

Uche Orji - UBS Securities

If I look at your utilization rates of 38%, obviously that was [inaudible] by the fabs you are closing, I wanted to ask you where [inaudible] utilization rates did you mean those fabs were already out of the process, what would that number be, would that be, I just wanted to understand to what extent how much of that 38% was influenced by the ongoing closures of the fabs.

Lewis Chew

If I understand you correctly, are you saying how much of the 38%, what would it have been if we had not taken out some of the capacity—

Uche Orji - UBS Securities

That is correct, yes.

Lewis Chew

Okay, it would probably have been a couple of points because you know the bulk of the elimination of Texas capacity is still yet to come because we’re still busily transferring the processes so it is true that we did take down a little bit of Texas capacity in Q1 which then had the effect of pushing that 38 to a slightly number.

But going forward the bulk of the Texas capacity will go away and as I mentioned as of the end of Q4, which we just completed, they represented about 14% of our total capacity and that’s going to go away when the closure is done.

Operator

Your final question comes from the line of Adam Benjamin - Jefferies & Company

Adam Benjamin - Jefferies & Company

If you look at your business and the capacity that you’ve taken offline and you plan to take offline over the next couple of quarters, you were running at about a $450, $500 million business, you’re at $300 today, how should we be looking at where you were targeting the business going forward and what kind of capacity you have in terms of revenue run rates over time.

Don Macleod

When we look at the capacity, the wafer fab capacity that we will have in place after the Texas fab closes, we are capable with today’s capacity and today’s installed capital of revenue numbers above $500 million per quarter. And if I look at the backend capacity, assembly and test, after we take out our China facility, we have the same kind of parameters, i.e. we are capable of $500 million or more of revenue with the current installed capacity.

So we’re a long way away from having a constraint tied to our resized wafer fab capabilities.

Adam Benjamin - Jefferies & Company

And then just following up with that, obviously its hard to predict when you think you can get back to those run rates and everyone has seen their business recover here as you are and you pointed out, but what kind of timeframe do you think that’s achievable for you and what incremental new products will you need to do that in terms of just comparing what’s new and what’s the steady run rate of the organic business.

Lewis Chew

We’re all smiling here because we like it to happen tomorrow if you don’t mind. That’s a pretty tough one to answer.

Don Macleod

Good note to end the call on.

Lewis Chew

Yes, I think the reality is is that we want to take it one step at a time and having one quarter of growth in front of us is good for now and the one thing I’ll, in the first part of your question that you asked, I’ll make it clear for everyone else on the call, that in this latest restructuring we did not exit any businesses.

So to the extent that there is an economic recovery that gets us back to where we were, there isn’t anything that we’ve gotten out of in this restructuring. Its more to take out cost.

Mark Veeh

So with that we’re going to end the call, let me remind you today that the replay is available on our website. Thank you for joining our call.

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