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Montgomery Tech Conference: National Semi CEO Gives LAN Program Intensive Care
By Marcy Burstiner
Staff Reporter
2/3/99 7:00 PM ET
SAN FRANCISCO -- National Semiconductor's (NSM:NYSE) "LAN Get Well" plan, named "Corporate Priority #1" at its annual shareholder meeting in September, is in critical condition.
Two weeks ago, CEO Brian Halla quietly took the Local Area Network division under his personal charge and announced internally the retirement of Robert Penn, the head of the telecom division that was previously home to National's LAN business. This came just two weeks after the division pulled back samples of its latest Ethernet chip because of a lukewarm response from potential customers.
You can't find these news tidbits in a Jan. 20 press release that announced Jean-Louis Bories was named the new head of National's Cyrix division as well as other executive shufflings. And don't expect to hear much about LAN at the company's financial presentation at the Nationsbanc Montgomery Tech Week conference Thursday.
Investors "don't care to hear any more about it until we do something," says an investor relations spokesman who asked not to be named. Instead, he says, you'll hear Pat Brockett, executive vice president in charge of the analog division, talk about wireless products. (At the September annual shareholder meeting CEO Brian Hall named analog "Corporate Priority #4".)
When TSC asked, the spokesman did acknowledge that potential telecom equipment customers showed a "lack of enthusiasm" for the company's Quad PHYter -- a four-port transceiver for local area networks, deemed crucial to the LAN division's recovery.
The company had met its own deadline for sampling the Quad PHYter. But potential telecom equipment customers have been buying similar products from Broadcom (BRCM:Nasdaq) and Level One Communications (LEVL:Nasdaq) for six months, which puts National's product pretty far back on the curve. Even SEEQ Technology (SEEQ:Nasdaq), a company with a history for being late to market, began shipping quad PHYters last year.
To sell customers on National's Quad PHYter, the product would have to have features the others don't, the spokesman says. "We are now reviewing the Quad PHYter for launch with adjustments," he says.
It was for the Quad PHYter that National spent $122 million last April to buy ComCore Semiconductor. "They paid through the nose for it," says Cowen & Co. chip analyst Drew Peck, who has a neutral rating on the stock. (Cowen is not an underwriter for NSM.)
National can tinker with its Quad PHYter all it wants, but the company has missed its chance, analysts say. "The quad design-win cycle has already peaked," says Dataquest telecom analyst Jeremy Donovan. "The Octel [the next generation, 8-port transceiver] design win cycle is likely to peak in Q3 to Q4 of this year." Moving from a two-port chip to a quad, and again to an Octel reduces manufacturing costs.
National isn't ready for the Octel, even though SEEQ announced an Octel product in November. When Broadcom followed with its own Octel announcement Jan. 5, its stock shot up 41% over the next three days. Asked about plans for an Octel, National's spokesman says, "Let's see how successful we launch a quad."
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"We haven't seen much competition from National in a long time," says Phil Salisbury, CEO of SEEQ Technology. "At this point they will have a lot of trouble breaking into the market."
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The longer National takes to penetrate the PHY market, the harder the task will get, says Phil Salisbury, CEO of SEEQ, who knows how tough it is to come from behind. "We haven't seen much competition from National in a long time," he says. "They don't have a part now that compares. At this point they will have a lot of trouble breaking into the market. Within the next three to six months the Octel design wins will get solidified."
These days National has just a tiny piece of the LAN market. But it wasn't so long ago that National was the Intel (INTC:Nasdaq) of LAN transceivers. In 1997, it held a 65% market share with a product called Twister, which helped generate about $279 million in PHY revenues, according to Dataquest.
National's stock hit its all-time high of 42 7/8 in Oct. 1997, just before Level One came out with a single-chip PHY that gave it the crown as market. These days, National stock hovers around 13 -- 69% off its '97 high. On Monday, it closed at 13 5/16, up 3/8 for the day on volume of 4.5 million shares.
Donovan, for one, isn't ready to write off National on LAN. "They aren't a start-up and they have manufacturing cost advantages," he says, not to mention the good will built up from past relationships.
Meanwhile, the National spokesman downplayed the changes at its LAN division, saying the focus should be on wireless. LAN only makes up 6% of the company's $2.5 billion in sales, he says, compared to about 17% for wireless.
Merrill Lynch analyst Joseph Osha says that for the company to deemphasize LAN marks a change in strategy that he had not expected. (Merrill is not an underwriter for National Semiconductor.)
"They have clearly identified 'LAN Get Well' as a major initiative and the Quad PHY as a major part of it," he says.
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