By Chris Rugaber (TMF RFK)
June 8, 2000

National Semiconductor (NYSE: NSM) reported solid quarterly and full-year earnings this afternoon, with fourth-quarter EPS of $0.68 beating estimates of $0.62, and $1.59 EPS for fiscal year 2000 walloping estimates of $1.50. These numbers compare nicely to last year's earnings losses, as do the company's fourth-quarter sales of $595.3 million, a 22% jump from a year ago. Sales for fiscal 2000 reached $2.1 billion, 6.8% over last year's $1.97 billion.

The company has been executing well since its restructuring last May, when it began cutting costs and sold off Cyrix, its cash-hogging PC microprocessor division. The company instead focused on analog chips, which are used in products ranging from cell phones to flat-panel displays, and which provide 71% of sales. National has also experienced fast growth from its "system-on-a-chip" processor, known as "Geode," which the company is targeting at the so-called information appliance market. Information appliances are smaller, cheaper, easier devices that more and more people are using to access the Internet, such as set-top boxes, "thin client" computers, and wireless devices.

Investors wondering what a "turnaround play" looks like should check further into National's recent history. The company provided an excellent buying opportunity, especially those willing to pick up shares at their nadir of $8 7/8 last April. For those who wanted a greater margin of safety, tracking National's growth in sales, and especially its increase in gross margins, would have revealed that the company was on to something. Gross margins improved from 31% last February, to 48% in February of this year, to a record 51% in the quarter just concluded. In addition, investors checking the Fool's Beat Estimates screen would have noticed National when the company did just that by 13.3% last quarter.

Things are likely to continue going National Semiconductor's way. Bookings for analog chips are 40% above last year's level, and 20% higher than the previous quarter. Orders for the company's Geode chip have tripled over last year's level, and bookings from cell phone companies for National's power management products have soared 80%. The company is ready to profit from our wireless, Internet-enabled future.

One question mark on the horizon may be the impact of Transmeta, a much-hyped competitor in advanced chip technology. In today's conference call, National did not sound worried, arguing that Transmeta's chips are more expensive and memory-intensive than National's. Regardless, National Semiconductor is certainly worth a further look.

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