Macleod changes focus to revenue growth at National

March 12, 2010 // Colin Holland

Don Macleod has risen through the ranks of National Semiconductor Corp. to take on the CEO role late last November and has become the man with a mission – growth in revenue.

Having joined the company, which now specializes in the design and manufacture of power, analog and mixed-signal ICs, at its Scottish operation in Greenock in 1981 he had been executive vice president and COO since 2001.  Before becoming COO, he had served as executive vice president and chief financial officer (CFO), a position he held for 10 years.

During his 30 years with the company he has covered the whole gambit of senior management positions in finance, operations and marketing.

His experience in the financial side of the company has seen him regarded as a safe pair of hands as National completes a restructuring which saw around 1,725 jobs, or 26 percent of its workforce lost and production at an out of date fab cut with closure of its facility in Arlington, Texas.

This has left the company lean but its wafer fabs are currently running at just 50 to 60 percent of capacity. However, there are no plans to trim capacity any further and investment is being made to upgrade its fab at Greenock in Scotland from 6 inch to 8 inch wafers. The company is also hiring staff there.

"We are in a very good position, the industry is picking up and we have lots of capacity," said Macleod. He sees this level of under-utilization of his fabs as a benefit and not a problem.

The surplus production capacity means that National is not being forced, unlike some other suppliers, to increase product lead times as demand picks up. "The capacity we have means that 80 to 85 percent of our products are on lead times of six weeks or better," said Macleod.

In December the company reported sales of $345 million for the quarter ended Nov. 29, topping Wall Street’s expectations and the company’s own guidance for the quarter boosted by increased demand in industrial markets. Gross margin for the quarter was 65.3 percent  up from 61.1 percent in the prior quarter, but down from 65.8 percent in the year-ago quarter. Sequential gross margin improvement was due to a combination of a stronger product mix, higher sales volume and improved manufacturing cost performance, including some earlier-than-expected savings realized from wafer fab consolidation.

In 2003 under former CEO and current chairman Brian Halla (who is due to step down at the company in May) an initiative called National 2.0 was launched, in which it adopted a 60-30-30 strategy. An aim of 60 percent gross margin, 30 per cent spending, leaving a 30 per cent operating margin. "This was the goal and the essence of our thrust to become a high performance analog company," said Macleod.

A couple of years ago this strategy changed with the adoption of the National 3.0 initiative. "We had done a good job at proving we are a good high performance analog company but that sector was highly competitive we needed to differentiate ourselves in that space," said Macleod. "The answer was to leverage the analog capability in to some new, high growth markets."

"My focus is now to concentrate more on revenue growth," added Macleod.

So why is revenue growth more important now. "In 2003 we had gross margins of 35 percent and were investing in the leading edge wafer fabs for digital technology such as x86 processors and communications devices. Our 0.18 micron technology was the second production line at this geometry in the industry. "When we changed to being an analogue company our capital investment dropped for 20 per cent to 5 or 6 per cent of sales and the investors liked this ‘careful with capital’ theme."

"So we focused on gross margins and these went from 35 to 65 per cent from 2003 to 2008. We did a good job but in doing that we compromised our growth and our priority was return on investment. We adopted a business model where revenue growth per se was not a premier objective".

"In pursuing margins we were selective in the business areas we focused on avoided opportunities where margin was not as rich such as the PC market segment."

"Our margin model going forward reflects that when you have 65 to 68 per cent gross margins you do not need to push the business model to discourage business to go above that and Wall Street does not give you credit for it, they are much more interested in you generating more top line growth. The way the markets treat the semiconductor industry today is that the companies that demonstrate revenue growth get the most multiples. That has changed, at the beginning of the decade the companies with the best margins achieved the best multiples, no longer is that adequate."

"While we are not focusing on margin growth, cost reductions such as the closure of the Arlington fab in May provide savings on the fixed running costs which will automatically give us a 3 per cent margin boost."

"We are a relatively unique semiconductor company in that we make most of our products in-house. We build near to 100 per cent of our own wafers and 95 per cent of our backend test and assembly. With our 50 to 60 percent wafer fab utilization it makes sense to pursue business opportunities to grow the top line. The benefits you have when you own your own manufacturing is that the incremental costs of running one more wafer is relatively low as opposed to having to go outside and buy the product from somebody which is what most of the companies in the industry do today. "If you have a wafer fab that is 50 per cent utilized for every extra dollar that we produce, 80 per cent falls through to the gross margin as you have already paid for the fixed cost."

"We have the unique opportunity to almost double the size of our company without building any more wafer fabs. Which means we can pursue business more aggressively.
So how do you now achieve revenue growth and what products can get National there.
The company first introduced its Simple Switcher power management devices in 1990 and is now on its fifth generation.

"Last year we shipped to 25 000 different customers, 90 percent through the distribution channel and each month 25 000 engineers do designs and simulations online. So now we are investing and reinvigorating one of the core competencies of Simple Switcher by introducing modules. Since we launched these in January the traffic on our website has increased by over 20 percent with over 32 000 designs a month being carried out.

"A second category that I see as an exciting growth opportunity is powering LED lighting for both industrial and consumer applications. Our goal in this is to position ourselves between the LED light source and the fixture provider and deliver as much of the sub system electronic design. This is an area today where the typical lighting fixture manufacturer has never worked with IC manufacturers and this provides them with a whole new set of challenges. Our web based design tools can offer a unique opportunity for these novices to go to market using our products."

"We are not just focused on general illumination but you will see our LED backlighting products in some high end notebook computers as well as automotive, street lights and theatre lighting, and backlighting for LCD TVs. Seventy per cent of the LED lighting business we do today is in China and we have set up a network of value added resellers – application specific middlemen that develop subsystems using our ICs.

Distributors have a key role to play here as the top three Cree, Osram and Philips lighting developers all work with specific distributors. "I see this as being a $100 million business for us in three years whereas last year it was $1 or 2 million opportunity. We have lots of competition but we believe we are a first mover in providing solutions."

"Another opportunity for tremendous growth is in power electronics for solar applications.  No one is providing power optimized solutions for this sector. We have produced the Solar Magic product which is a complete solution. This became sort of a reference design using our silicon, to demonstrate that a semiconductor supplier has a role to play.  We are working with one manufacturer in China to integrate electronics on to the back solar panels and this is another $100 million opportunity for us in three years time.

"There are other initiatives for growth that build on our power management legacy and expertise, things that we already have in our bag."

Other examples of potential revenue growth are in the signal path of wireless basestations, high performance audio, automotive Infotainment and sensing and detection. "I see a $50 million to 60 million opportunity in the next three years for the FPD link serializer/deserializer products used in audio infotainment for automotive where we have married out display drive IP with low voltage differential signaling technology."

"The time is right, the industry is picking up and we have lots of capacity, we have new opportunities to grow and we have a great business model, are highly profitable and it is a no brainer getting National back on a growth agenda."

See also: National's sales, earnings rise

This article was first published in the EE Times Europe print edition for March 2010 - see the full issue here.

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