May 10, 1999

MARKET PLACE

National Semiconductor Quits the PC Chip Business

By LAWRENCE M. FISHER

hares in National Semiconductor Corp. evidently got a lot more attractive last week, after the company announced it was quitting the personal computer microprocessor business. National shares gained 21 percent on Wednesday, another 12 percent on Thursday, and gave up just 6 percent on Friday to close at $18.75 on the New York Stock Exchange.

A half-dozen analysts upgraded their recommendations on the stock Thursday, and nearly all the analysts who follow the company raised their earnings estimates for the company's fiscal year, which ends in May, according to First Call Corp., which tracks corporate earnings estimates.

While most analysts had projected a loss, estimates for the year now range from a profit of 35 cents to $1.17 a diluted share. "We run the gamut from modest upgrades to the full Monty," said Chuck Hill, First Call's director of research. "Everyone is raising their numbers for next year, but there's still a fair degree of uncertainty."

National said on Wednesday that it would leave the PC processor business, and seek a buyer for the assets of Cyrix Corp., which it purchased less than two years ago for $550 million, as well as a related chip manufacturing plant in South Portland, Maine. National executives said that fierce price wars between Intel Corp. and Advanced Micro Devices Inc. had made the PC business unprofitable, and that National's losses from PC chips had kept the whole company in the red for the last year.

National said it would still pursue so-called systems on a chip, using the Cyrix technology, for information appliances like cellular telephones and television set-top boxes for the Internet. But the retreat from the PC business is at least a partial repudiation of the strategy laid out by Brian Halla, the company's chairman and chief executive, to move National out of commodity chips and into higher-priced, more profitable products, like microprocessors.

Analysts cheered the move as a recognition of the realities of the marketplace. "Buying Cyrix was a big mistake," said John Lazlo, an analyst with Paine Webber. "I know Brian Halla had a vision, and he articulated that vision well and there was some merit to it. But they clearly bought damaged goods." He reiterated a buy recommendation and raised his estimate for the year ending in May to 40 cents from 31 cents.

Lazlo said Cyrix had always lagged behind Intel and Advanced Micro, and put huge capital demands on National that siphoned off money better spent on other products. "Cyrix was a black hole" he said. "Now the wicked witch is dead. If they refocus on analog, they can turn this into a very successful business." Analog chips are used to process audio, video and other signals outside the digital domain.

Although National is ranked third in the analog market in some surveys and fifth in others, it is an established player that can take steps to gain share now that its resources are not drained by the PC business.

One counterintuitive effect of the digital revolution has been a surge in demand for analog chips, which are used in everything from PC monitors to cellular telephones. Analog companies like Analog Devices Inc., Linear Technology Corp. and Maxim Integrated Products have enjoyed strong growth and healthy profit margins, as have the analog businesses of companies like Texas Instruments Inc. and Motorola Inc.

Without the PC processor business, "of the residual portion of their business, 65 percent of that is analog, which is a good business," Arun Veerapan, an analyst with BancBoston Robertson Stephens, said. "It's healthy and growing at 15 to 20 percent." He added that National sells more than $200 million worth of analog chips a quarter.

"It's not new for them," he said.

Veerapan estimated that the PC processor business generated sales of $50 million a quarter and losses of $40 million, coupled with $35 million a quarter in manufacturing overhead costs. Without those losses, National's other businesses will be profitable, he said, raising his estimate for the fiscal year to 36 cents a diluted share from 8 cents and his recommendation to "buy" from "long-term attractive."

Drew Peck, an analyst with S.G. Cowen, retained his "hold" rating on National, cautioning that it would not be easy to achieve the goal of leadership in analog chips. "A lot of companies want to be No. 1 in analog," he said. "National has been a distant third. Can they make up some of that ground? It's certainly more likely now than in the past, but it's still a tall order. The good news is you don't have to be No. 1 in analog to make a lot of money."

Although National's exit from the PC business might appear to take some of the pressure off Advanced Micro, Peck said he doubted that would be the case.

"I don't think Cyrix was much of a factor in microprocessor pricing," he said. "What will happen is AMD will gain market share in an intrinsically unprofitable market."

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• National Semiconductor Corp.

• Cyrix Corp.