National Semiconductor (NYSE:NSM) may have moved into the black, but this quarter has a sodden, muggy lining if you ask me. The company has stepped on the brakes way too hard in response to last year's economic shenanigans.
The upside for National Semiconductor is easy to see: The whole semiconductor sector is on the rebound from moribund lows, and a rising tide lifts all boats. Earnings in the just-completed first quarter came in at $0.13 per share, up from a loss of $0.28 per share in the previous quarter. Sales rose 12% sequentially to $314 million thanks to strong orders from the industrial sector. And orders booked are now more plentiful than the delivered and billed products, which puts the vital book-to-bill ratio above the 1.0 waterline for the quarter. So far, so good.
But I don't think the good times can last very long. Here's why.
It's one thing to adapt a little bit, cutting the occasional corner and reducing costs where you have to. IBM (NYSE:IBM) did it, and Intel (NASDAQ:INTC) too. Even Google (NASDAQ:GOOG) was found in the backyard, kicking a few superfluous hires out the back door. Cost-cutting happens.
But National Semi is doing it all wrong. Management has been cutting too deeply into the very veins that carry this high-tech chip designer's lifeblood. Over the past year, National has cut its research budget by 27% and reduced its capital expenditures by a staggering 73.5% to $5.9 million in the last quarter. In doing so, I fear that National risks becoming a dinosaur of the technology world -- a walking wounded that can only live off of glories past.
Yes, it's risky to be a leader. But followers that simply copy whatever Texas Instruments (NYSE:TXN) and Analog Devices (NYSE:ADI) might come up with next will never lead the next revolution. They will only plod along behind the true innovators, competing on ever-lower prices more than on the strength of their products.
And that is where National appears to be headed today. The company has been cutting the wrong corners, and that decision could come back and bite National hard in the long run.
Is it too late to reverse course and get serious about research again? Maybe not. But fattening up the operating expenses section of the income statement is not a popular thing to do, even when it's the right thing to do. So I don't see that happening for the foreseeable future, and National is digging itself a shallow grave.
Am I right -- or just overreacting to an everyday cost-cutting maneuver? Let me know in the comments box below.
