Fairchild Semiconductor's power products pulled it through Q3, but the company couldn't escape the affects of a full supply chain and saw lower than expected results.

Fairchild Thursday showed September quarter sales of $409.7 million, a 25 percent increase from Q3 2003, and a narrow 1 percent sequential decrease.

Net income of $13.4 million or 11 cents per share followed the same pattern, growing year-over-year compared to a net loss of $5.4 million or 5 cents per share in Q3 2003 and falling from net income of $17 million or 14 cents per diluted share in the prior quarter.

Gross margin was 30.3 percent, up 920 basis points from the third quarter of 2003 and up 100 basis points sequentially.

"We continued to improve our mix of power products in the third quarter," said Kirk Pond, Fairchild's president and CEO, in a statement. "We increased our power product sales to 77 percent of our business and extended our lead as the number one supplier of power semiconductors in the world. We continue to focus our investments on the development of new power management products, which have helped us to win a number of major designs in the last quarter. We've grown our power business 34 percent in the last 12 months and have a pipeline of new products that should build on this momentum and drive higher and more stable margins during all phases of the business cycle."

Fairchild, like many other semi players, was hit by an inventory glut this summer, and reported that while July and August were seasonally slow, demand in September was lower than expected, especially from Asian distributors who are trying to reduce inventories after three quarters of strong order rates.

"The industry appears to be working through a short-term inventory correction, which we expect will last about a quarter or so," Pond said. "We did see an increase in distribution re-sales in September which typically signals improving end market demand. Our discussions with key customers and our analysis of overall economic conditions lead us to expect the combination of holiday sales and lower inventories will drive sequentially better fourth quarter bookings. We expect the majority of these bookings will have customer due dates in the following quarter, which we believe will position us well to resume steady, reasonable growth in 2005."
 
Capacity utilization decreased during the quarter as the company focused on reducing inventories in the supply chain, Fairchild noted, adding that lead times decreased during the quarter to 10 to 12 weeks on average. Pond expects these to continue to decrease as long as the company is reducing inventory in the supply chain.

On that, Fairchild now believes Q4 revenues may be down as much as 5 percent to 10 percent and gross margins about 200 to 400 basis points lower sequentially, as the company reduces production levels.