STMicroelectronics NV, Europe’s largest semiconductor maker, which has a facility in Malta, predicted that first-quarter revenue will fall by as much as 10 per cent from the previous three months because of lower sales at its wireless business.
Revenue will decline to within a range of $1.97 billion to $2.1 billion from $2.19 billion in the fourth quarter because of “a very significantly weaker revenue performance from ST-Ericsson”, its wireless-chip joint venture with Ericsson AB, the Geneva-based company said in a statement.
Last year’s fourth-quarter results showed deep problems at its mobile joint venture that analysts warned could force it to miss out on a tech sector revival.
The unit, ST-Ericsson, is struggling to cope with a steep drop-off in demand from its biggest customer, handset maker Nokia. “ST-Ericsson continues to struggle in its transition to its new products,” said Jon Erensen, an analyst at research firm Gartner Inc. “The outlook for 2012 is disappointing and ST-Ericsson will need to turn the business around quickly or it may find it difficult to get into serious engagements with customers worried about its financial situation.”
ST-Ericsson has not been profitable since its formation in 2009. The venture, which is moving on to new products, said its fourth-quarter net loss widened to $231 million from $177 million a year earlier. Net sales fell to $409 million from $577 million.
“Last year, the ST-Ericsson joint venture suffered unprecedented challenges in terms of their major customer and its change of strategy,” STMicroelectronics CEO Carlo Bozotti said in a Bloomberg Television interview, referring to handset maker Nokia Oyj.
ST-Ericsson “is focusing on improving execution and an important priority for this year is lowering the break-even point for the operations.” The rest of STMicroelectronics “is pretty solid,” he said.
ST-Ericsson is a key supplier for Nokia’s Symbian platform. It has been hit hard as the Finnish vendor loses out to Apple Inc. and Google Inc. in the smartphone market and by a decision earlier this year to exchange Symbian for Microsoft Corp. software.
“We see the opportunity to continue to grow in selected markets during 2012, but we remain concerned about the macroeconomic uncertainty,” said Bozotti. Pointing out that the company is running its plants at less than full capacity, he said: “Based on current visibility, we believe bookings have bottomed.”
The company is “confident about the recovery” of the chip market, “but we’re not clear on the speed of such recovery”, he said in a briefing.
Asked whether ST-Ericsson may make further job cuts, Bozotti said: “We’re not in a position to give any details. There are many things that can be done but it’s premature to comment on them.”
ST-Ericsson named Didier Lamouche as its new CEO in November to help it gain its share in the growing market for smartphone chips. Lamouche has been asked by the parent companies to carry out a review of the venture’s strategic plan and financial prospects. Even as STMicroelectronics is “firmly committed” to supporting ST-Ericsson, it may consider “additional actions” to accelerate ST-Ericsson’s path to profitability, according to the statement.
“In such an event, or in case of a significant worsening of business prospects, the value of ST-Ericsson for ST could fall to a value significantly lower than the current carrying amount of ST-Ericsson on our books and we may be required to take an impairment charge,” the company said.
In June, ST-Ericsson announced cost cuts aimed at saving $120 million a year and dropped its target date to become profitable. The venture previously predicted it would break even in the second quarter of this year.
Bozotti said that the new management at ST-Ericsson is reviewing the business plan – “the roadmap to sustainable profitability” – as there are opportunities such as “extracting more synergies in cooperating with the two parents, working on the products and expanding the customer base”. The new plan will be formalised during the first quarter, he said. He pointed out that the problems were deep-rooted and would take time to resolve.
“A few years ago, sales to Nokia accounted for about 20 per cent of our revenue. Today it is around 10 per cent and we think it will go lower,” he said. “We are focusing on expanding our customer base, but it’s hard to cope with sudden, brutal cuts in volumes at your biggest customer.”
Investment bank Natixis said STM’s cautious guidance for the first quarter of 2012 showed how problems at the joint venture meant it could miss out on the recovery in the sector.
“Even though the companies in the sector all seem to agree that the inventory correction ended in the fourth quarter, we don’t think STM is the stock to bet on to capitalise on the beginning of the recovery in the market,” the analyst wrote.
Lionel Pellicer, analyst at Alphavalue, said STMicroelectronics’ prospects this year were tied to the mobile joint venture.
“There was no improvement at ST-Ericsson this quarter, which remains the group’s weakest point. As long as there is no progress at ST-Ericsson, there will be no improvement in STMicro’s profitability,” he said in an interview.