Components | January 24, 2012

ST's 4Q net revenues take sequential dive

ST’s fourth quarter (ended December 31, 2011) net revenues decreased 10.3% on a sequential basis, within our guidance, with all regions down sequentially.
The Americas decreased 4.6%, Japan & Korea and Greater China & South Asia each were down about 7.5% and EMEA decreased 20.7%. On a year-over-year basis, ST’s net revenues decreased 22.6%, with Analog, MEMS and Microcontrollers (AMM) and Automotive, Computer, Consumer and Communications Infrastructure (ACCI), led by Automotive, performing better than the other segments, in particular Wireless.

As expected, gross margin decreased 240 basis points compared to the prior quarter, principally due to lower volumes that were associated with the reduction in inventory that resulted in the underloading of ST’s wafer fabs. On a year-over-year basis, gross margin declined by 650 basis points also mainly due to lower volumes, and related charges for unused capacity.

Combined SG&A and R&D expenses of $894 million in the fourth quarter were substantially flat compared to the prior quarter. On a year-over-year basis, combined expenses decreased $20 million reflecting the restructuring at ST-Ericsson, among other factors. Combined operating expenses, as a percentage of sales, were 40.8% in the 2011 fourth quarter compared to 36.8% and 32.3% in the prior and year-ago quarters, respectively.

Due to market conditions driving lower volumes and the resulting unsaturation, operating margin before restructuring attributable to ST was about break-even in the 2011 fourth quarter compared to 4.3% and 12.4% in the prior and year-ago quarters.

Income tax in the fourth quarter includes a $92 million charge for a valuation allowance related to ST-Ericsson's accumulated Net Operating Losses. As this allowance does not relate to ST’s investment in ST-Ericsson, minority interests increases by the same amount of $92 million, with no impact to ST's consolidated income. Absent this allowance, the ST tax rate for the fourth quarter would be 15%.

Fourth quarter net loss was $11 million or $(0.01) per share, compared to net income of $0.08 and $0.24 per diluted share in the prior and year-ago quarters, respectively. On an adjusted basis, net of related taxes, ST reported non-U.S. GAAP net loss per share of $(0.01) in the fourth quarter, compared to net income of $0.09 and $0.27 per diluted share in the prior and year-ago quarters, respectively.

For the 2011 fourth quarter, the effective average exchange rate for the Company was approximately $1.36 to €1.00 compared to $1.40 to €1.00 for the 2011 third quarter and $1.34 to €1.00 for the 2010 fourth quarter.

President and CEO Carlo Bozotti commented:

“In 2011, our wholly-owned businesses delivered a solid performance throughout the year, within the backdrop of a severe slowdown in the broader semiconductor market as the year evolved. ST’s wholly-owned businesses delivered revenue of $8.2 billion and an operating margin of 11.4%.

“Moreoever, we expected to see strong growth during 2011 in two of our key strategic product areas and we are particularly proud of our achievements there. Our MEMS sales nearly doubled to over $600 million. Our automotive business reported record revenues, with sales up 18% during 2011, on top of sales growth of over 40% during 2010. In both areas, revenue growth was also accompanied by a significant expansion of the operating profitability of these product groups.

“We also continued to maintain a strong financial position and sharp focus on capital management. Exiting the year, our financial resources totaled $2.3 billion and our net financial position was about $1.17 billion, as adjusted, taking into account the 50% of ST-Ericsson’s debt. As anticipated, we saw an improvement in the fourth quarter in inventory levels and inventory turns and capital expenditures are back down to much lower levels as planned.

“For ST-Ericsson, managing the wireless joint venture’s shift from a legacy portfolio to the new product roadmap has proven more challenging than expected given the change in the business of one of their largest customers and its evolving plans. While the new portfolio is beginning to ramp, the current results of ST-Ericsson are still distant from the financial prospects we are envisioning. Therefore, ST-Ericsson is now in a crucial phase focusing on improving execution, lowering its break-even point and reviewing its roadmap to sustainable profitability. We are confident that the newly appointed Chief Executive Officer of ST-Ericsson is the appropriate leader to drive this turnaround.”

2011 Full Year Review

Net revenues for the full year 2011 decreased 5.9% to $9.73 billion from $10.35 billion in the prior year reflecting weak market conditions, particularly in the second half of the year, and ST-Ericsson’s transition from legacy to new products. ST wholly-owned businesses’ net revenues increased about 1% in 2011.

In 2011, AMM grew within the frame of a strong slowdown in the semiconductor industry recorded in the second half of 2011, while both ACCI and PDP decreased. AMM’s net revenues, mainly driven by strong growth in MEMS, increased 7.5%, accompanied by an increase in its operating margin to 20.3% from 18.8% in 2010.

ACCI’s net revenues decreased 1.4%, strong growth in Automotive and Imaging being offset by weak market conditions, particularly in Consumer, throughout the year, as well as the planned exit from hard disk drive system-on-chip and its operating margin decreased to 8.9% compared to 10.0% in 2010.

PDP’s net revenues decreased 6% and its operating margin was 11.2%, compared to 13.6% in 2010 due to weak industry conditions as well as a specific situation at one customer. Wireless revenues decreased 30% and the operating loss increased by approximately 68%.

Gross margin was 36.7% of net revenues for the full year 2011, compared to 38.8% of net revenues in 2010, mainly due to prices and lower fab loading and unused capacity charges incurred in the 2011 third and fourth quarters. Operating expenses were about flat.

Net income, as reported, was $650 million in 2011, or $0.72 diluted per share, mainly due to the after-tax gain of $308 million related to the cash payment from Credit Suisse as the full and final settlement of all outstanding litigation concerning auction- rate securities, compared to net income of $830 million, or $0.92 diluted per share in 2010. On an adjusted basis, net of related taxes, ST reported non-U.S. GAAP diluted net earnings per share of $0.41 in 2011 compared to $0.75 per share in 2010.

On a year-over-year basis, the effective average exchange rate for the Company was approximately $1.37 to €1.00 for 2011, compared to $1.36 to €1.00 for 2010.

First Quarter 2012 Business Outlook

Mr. Bozotti stated: “Based on current visibility, we believe bookings have bottomed. Looking to the first quarter, we expect billings to bottom, as we see stronger than seasonal billings for ST’s wholly-owned businesses offset by a very significantly weaker revenue performance from ST-Ericsson.

“Preliminary industry analysts’ forecasts indicate that the overall semiconductor market should stabilize in 2012. For ST, we see the opportunity to continue to grow in selected markets during 2012 but we remain concerned about the macro-economic uncertainty. Consequently, we plan in the near-term to continue to maintain reduced levels of loading at our facilities. We will continue to focus on capital management, taking a prudent approach with respect to inventory levels and capital investments, with the goal of maintaining and expanding our free cash flow. In addition, we are continuing to bring to market new innovative products to drive market share gains.”

Based largely upon a very significantly weaker sequential sales outlook for wireless, the Company anticipates total revenues to sequentially decrease about 4% to 10% in first quarter of 2012. As a result, and reflecting an improved, but still high level of unsaturation at our facilities, gross margin in the first quarter is expected to be about 33.0%, plus or minus 1.5 percentage points.
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