National Semi's Good Quarter: Inventory Reduction More Positive than Bookings Growth

Just as I finished reviewing Texas Instrument's (TXN) guidance revision (see earlier article), National Semiconductor (NSM), another semiconductor major announced its quarter (May09) results. Revenue came in at $281M, ahead of the guided range of ~$263-277M.

While bookings growth is welcome, the sharp inventory reduction is a big positive

Management's commentary on bookings improvement month-on-month in the last quarter was encouraging:

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...

Source: Seeking Alpha transcript of NSM earnings call

And most of these new bookings is coming from the mobile devices market, more specifically the Smart Phone category.

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...

Source: Seeking Alpha transcript of NSM earnings call

But, in my opinion, the most encouraging commentary was the significant inventory reduction achieved in the last quarter.

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

Source: Seeking Alpha transcript of NSM earnings call

The significant inventory reduction caught my eye more than the bookings growth and I will explain why.

Inventory 'burden' has passed to the semiconductor manufacturers from OEM's over the years

For broadline semiconductor manufacturers like NSM and Texas, the three large OEM/ODM segments are Mobile devices, Computers, Networking equipment . At this juncture, I would like to introduce a graphic which could provide some insight.

Exhibit I: Days inventory outstanding (quarterly) for semis and select OEM's

Source: Gridstone Research

I chose four OEM's representing mobile devices (Nokia (NOK) and Motorola (MOT)), Networking (Cisco (CSCO)) and Computing (Hewlett Packard (HPQ)). What is interesting is that barring Motorola, none of the other OEMs had a spike in inventory days while both Texas and NSM had a visible spike in inventory in December quarter when end-market demand took a real beating. These bigger OEM's probably have enough muscle to 'push' the pain of excess inventory to suppliers and they seem to have been exercising it significantly over the last 5-6 years and continued that over the testing period between Oct08 and Mar09. Take a look at how the inventory days data changes for OEM's and the semis over the last 5-6 years in the chart below.

Exhibit II: Days inventory outstanding (yearly) for semis and select OEM's

Source: Gridstone Research

Note how visibly the inventory days figure has reduced over the years for the OEM's while Texas Instruments and NSM have seen a sharp uptick in inventory days since 2003. The OEM's have reduced their 'inventory risk' over the years by simply transferring it down the supply chain. So any contraction in demand affects the semiconductor group more severely than the OEM group compared to the prior years.

End-market demand has improved better than expected?

Putting these two charts together, my inference is that the inventory reduction at the semis is driven by end-market demand rather than just OEM's re-stocking their inventory to 'normal' levels. The OEM's seem to have hardly had any issues in terms of inventory (again, barring Motorola, which has a host of other issues) and in such uncertain circumstances, the OEM's are probably ordering more based on end-market demand.

And with most of the renewed demand coming from 'growth' categories like smart phones, the semiconductor manufacturers could heave a sigh of relief and probably believe that demand uptick should continue over the next few quarters at least.

Front-line semiconductor manufacturers should see much improved bottom-lines

In summary, the inventory reduction coupled with bookings from growth categories is great news for the front-line semiconductor manufacturers. More than the top-line, the bottom line should see significant improvement in the quarters to come following the significant cost reductions in the last two quarters and the improvement in Fab utilization.

Disclosure: No Positions.

Comments

[IsThisRight:]

Your article clarifies the statement made by NSM that they have lowered their inventory, in this cycle, from above 11 weeks to 9 weeks.

3 comments :

1/Thru your chart, this is a level reached SINCE DEC 2004!

2/ Since their goal is to keep this level of inventory flat WHILE THEY SEE INCREASED ORDERS, this is good.

3/ Nine weeks ( 65 days) is also the lowest level for TXN back in Dec 03.

Just-in-time manufacturing has the benefits of lower capital ( ie Debt) needed to run the business!!!

Jun 12 02:19 PM

[PhillyDan:]

Besides working the inventory reduction magic, my old friend from days past, Brian Halla needs to get some more magic out of R&D efforts for NSM to have better longer term growth prospects. Otherwise, they will continue to lose market share to LTC, Maxim, ADI and T.I. Look for a upswing at T.I. in the analog/linear market. T.I. has some really good engineering and marketing minds in this realm. NSM still has great minds, as well, but needs to redouble their efforts to stop losing ground. In addition to the handset market, what other markets is NSM focused on for future growth, hopefully they are looking at the medical device market since this will be poised for large growth over the next 3 to 5 years.

Jun 12 02:21 PM